PENN National Gaming, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing was issued under the name Penn National Gaming, Inc.; the company is identified in the request as PENN Entertainment, Inc.
Business context and reporting period
The company owned, managed, or held interests in 27 gaming, racing, and video gaming terminal facilities across 15 jurisdictions at quarter-end. On October 15, 2018, after the reporting period, it completed its acquisition of Pinnacle Entertainment, expanding to 40 facilities in 18 jurisdictions. The statements are unaudited and cover the pre-acquisition business.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $789.7 | $806.2 | $2,432.6 | $2,378.9 |
| Income from operations | $155.8 | $143.7 | $509.7 | $418.9 |
| Net income | $36.1 | $789.3 | $135.6 | $811.5 |
| Diluted EPS | $0.38 | $8.43 | $1.43 | $8.74 |
| Adjusted EBITDA | $229.7 | $225.2 | $719.4 | $680.1 |
| Adjusted EBITDA after GLPI master lease payments | $114.5 | $110.7 | $372.3 | $339.2 |
- Net revenue declined 2.1% in Q3 and increased 2.3% year to date. ASC 606 changed the presentation of promotional allowances, loyalty rewards, racing revenue, and Casino Rama reimbursable costs; reported revenue comparisons are therefore not fully like-for-like.
- Operating margin was approximately 19.7% in Q3 2018 versus 17.8% in Q3 2017, and 21.0% for the first nine months versus 17.6% in 2017. Management attributed operating improvement in part to its margin improvement plan and lower depreciation and amortization.
- Net income was substantially lower year over year because 2017 included a $766.2 million deferred-tax valuation allowance reversal. The 2017 net income comparison is consequently not representative of recurring operating performance.
- Cash from operations was $301.0 million for the first nine months, down from $355.3 million. Investing activities used $84.1 million and financing activities used $250.3 million. Cash declined $33.4 million from year-end 2017 to $244.5 million.
- At September 30, 2018, cash was $244.5 million; current assets were $348.4 million and current liabilities $472.6 million. Long-term debt, including current maturities and before debt discounts and issuance costs, was approximately $1.075 billion. The separate GLPI financing obligation was approximately $3.490 billion. No revolver borrowings were outstanding; disclosed availability was $678.2 million. The company reported compliance with financial covenants.
- Interest expense was $114.8 million in Q3 and $346.5 million year to date. GLPI master lease payments were $115.2 million and $347.0 million, respectively.
Changes, outlook, risks, and unusual items
- Q3 South/West and Midwest adjusted EBITDA increased year over year; Northeast increased modestly. Other segment adjusted EBITDA losses widened, reflecting Rocket Speed declines and corporate costs. Rocket Speed goodwill was not considered impaired at June 30, 2018, but management said further declines could require an impairment charge.
- ASC 606 adoption reduced opening retained earnings by $9.7 million. The company said adoption did not materially affect net income on a continuing basis. Prior-period statements were not restated.
- On October 15, 2018, Penn completed the Pinnacle acquisition for a stated purchase price of approximately $2.8 billion, including cash, stock, and repayment of Pinnacle debt. It sold four properties to Boyd for $604.9 million and completed related real-estate transactions with GLPI and Boyd. Management identified at least $100 million in annual run-rate cost synergies and expected first-year free-cash-flow accretion; these are expectations, not results. Integration, realizing synergies, and increased leverage are key risks.
- Following the Pinnacle transaction, the filing reported approximately $2.34 billion of indebtedness and annual GLPI lease payments increased by approximately $355 million to approximately $817 million. The company expected combined-company cash flow to service the added obligations but cautioned that cash generation and future borrowing availability are not assured.
- The company expected existing cash, operating cash flow, and credit-facility availability to meet foreseeable needs, but provided no numerical earnings or revenue guidance. Planned spending included approximately $100.5 million of 2018 maintenance capital expenditures, $20 million for Pennsylvania online gaming and sports-betting licenses, and development of the York and Morgantown casinos, subject to approvals.
- Sports betting began at certain properties in Mississippi and West Virginia during Q3; management anticipated Pennsylvania operations in Q4. Results depend on regulation, tax and licensing terms, partners, and competition. Other cited risks include new gaming competition, potential smoking restrictions, taxes, economic conditions, project approvals and costs, and Pinnacle integration.
- The company had agreed to acquire Margaritaville Resort Casino operations for approximately $115 million, with closing expected late in Q4 2018, subject to conditions. It anticipated approximately $95 million of Pinnacle transaction-related costs.
Most important facts for investors to verify
- How much of revenue and margin movement reflects underlying business trends versus ASC 606 presentation changes and discontinued management contracts.
- Whether the stated Pinnacle synergies and free-cash-flow benefits are realized, and the actual integration costs and acquired-business performance.
- Post-acquisition debt, GLPI lease commitments, covenant headroom, interest costs, and cash available for debt reduction and investment.
- Progress, total costs, approval timelines, and expected returns for York and Morgantown, Pennsylvania online gaming, sports betting, and the Margaritaville transaction.
- Performance of Rocket Speed and whether future earnings projections support its goodwill carrying value.