PENN National Gaming, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 3, 2017. The registrant’s name at the time was Penn National Gaming, Inc. (now PENN Entertainment, Inc.). Unless noted otherwise, amounts below are in U.S. dollars.
Business context and financial performance
The company operated or held interests in 27 gaming, racing, and video gaming terminal facilities across 17 jurisdictions, alongside management and interactive gaming businesses. Regional casino operations remained highly competitive; management cited limited industry revenue growth and increasing competition.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $776.2 million | $756.5 million | +2.6% |
| Income from operations | $140.3 million | $140.5 million | -0.2% |
| Net income | $5.1 million | $23.7 million | -78.5% |
| Diluted EPS | $0.06 | $0.26 | Down $0.20 |
| Adjusted EBITDA | $221.7 million | $212.9 million | +4.1% |
| Adjusted EBITDA after GLPI master lease payments | $109.3 million | $101.5 million | +7.7% |
| Cash flow from operations | $66.8 million | $72.0 million | Down $5.2 million |
Net revenue increased by $19.8 million. Gaming revenue rose 0.7%; food, beverage, hotel and other revenue rose 7.2%, including Rocket Speed’s contribution. Operating expenses increased 3.2%, including higher general and administrative costs and depreciation. Operating margin was approximately 18.1%, versus 18.6% a year earlier; net margin was approximately 0.7%, versus 3.1%. The net income decline primarily reflected a $23.4 million reported loss on early debt extinguishment, with lower interest expense and income tax provision partly offsetting the impact.
Segment adjusted EBITDA increased in the Northeast, Midwest, and South/West. Management attributed gains to improved property results, Illinois video gaming terminal acquisitions, and performance at Tropicana Las Vegas and M Resort; competition and softness in oil-dependent markets weighed on certain properties. “Other,” which includes corporate overhead and interactive gaming, reported an operating loss of $51.0 million.
Cash, liquidity, and debt
- Cash and cash equivalents were $259.5 million at March 31, 2017, up from $229.5 million at December 31, 2016. Current assets were $417.1 million and current liabilities $467.1 million, implying negative working capital of about $50.0 million.
- Operating activities provided $66.8 million; investing activities used $23.3 million; financing activities used $13.5 million. Capital expenditures were $17.2 million in total, including $10.7 million of maintenance spending.
- Long-term debt, net of current maturities and debt issuance costs, was $1.388 billion; current maturities were $35.6 million. The separate GLPI master lease financing obligation was $3.499 billion, including its current portion. Master lease payments were $112.5 million in the quarter.
- In January, the company refinanced its credit facility and issued $400 million of 5.625% senior unsecured notes due 2027, using proceeds in part to repay the prior facility and redeem $300 million of 5.875% notes due 2021. At quarter-end, the new secured facility had $931 million outstanding and $546.9 million of revolver capacity available. The company reported compliance with its financial covenants.
- The board authorized up to $100 million of share repurchases over two years; 416,886 shares were repurchased in the quarter for approximately $5.8 million.
Outlook, risks, and unusual items
- Management said cash from operations, cash on hand, and available revolving credit were expected to cover debt service, the GLPI financing obligation, capital spending, and working capital needs for the foreseeable future. This was not a numerical earnings or revenue forecast; management cautioned that cash generation, projected earnings, and future borrowing availability were uncertain.
- Planned 2017 project capital expenditures were $35.2 million, of which $6.4 million had been spent by March 31. The company said it did not expect to record fees from the Jamul facility during 2017.
- Management identified significant Jamul Casino performance deterioration relative to expectations and considered its loan to the Jamul Tribe impaired. It forecast that the Tribe was likely to breach certain debt-to-earnings covenants at June 30, 2017 absent a waiver. The company recorded no loan-loss reserve because its discounted expected cash flows exceeded the loan’s carrying value. Collection, possible subordination, and restrictions on management and licensing fees remain material risks.
- Competition, regulatory and tax changes, economic conditions, construction and acquisition execution, and financing availability were among the risks discussed. The company also noted that increased competition was affecting properties in several regions. It reported no material change to previously disclosed risk factors or legal proceedings.
- After quarter-end, on May 1, 2017, the company completed its approximately $44 million cash acquisition of Bally’s Casino Tunica and Resorts Casino Tunica. The properties will be operated under the GLPI master lease; the filing estimated an approximately $82.6 million increase in the lease financing obligation associated with the underlying real estate.
- The company adopted updated share-based compensation accounting in 2017. It expected the new revenue recognition standard, effective for it in 2018, to change the treatment of loyalty points and presentation of gaming revenue and promotional allowances; the impact was still under assessment.
Most important facts for investors to verify
- Jamul Casino’s operating performance, covenant status at June 30, 2017, any waiver, and the recoverability and priority of Penn’s loan and fees.
- Whether operating cash flow and the $546.9 million of reported revolver availability adequately support debt service, GLPI payments, planned capital spending, and acquisitions.
- The scale and durability of adjusted EBITDA growth, particularly given near-flat operating income and lower GAAP net income; adjusted EBITDA is a non-GAAP measure and excludes substantial cash obligations.
- Competitive pressure and trends at Charles Town, Lawrenceburg, Tunica, Zia Park, and other affected regional properties, as well as the contribution and integration of the newly acquired Tunica operations.
- The eventual financial statement impact of the 2018 revenue recognition standard and the company’s deferred tax asset valuation allowance.