PENN National Gaming, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing is by Penn National Gaming, Inc. (now identified in the request as PENN Entertainment). Amounts below are in U.S. dollars.
Business context and financial performance
The company operated or held interests in 26 gaming, racing, and video gaming terminal facilities across 16 jurisdictions, and was expanding into social gaming. The October 10, 2016 opening of Hollywood Casino Jamul-San Diego occurred after quarter-end.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $765.6 million | $739.3 million | $2,291.5 million | $2,104.4 million |
| Income from operations | $139.3 million | $142.2 million | $429.2 million | $377.2 million |
| Net income | $46.5 million | $4.9 million | $104.3 million | $9.8 million |
| Adjusted EBITDA | $211.3 million | $210.3 million | $647.9 million | $590.0 million |
| Operating margin | 18.2% | 19.2% | 18.7% | 17.9% |
Net revenue grew 3.6% in Q3 and 8.9% year to date. Q3 operating income declined despite higher revenue, while nine-month operating income rose. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, GLPI Master Lease payments; it is not a substitute for cash flow or liquidity measures.
Cash flow, debt and liquidity
- Cash and current liquidity: Cash was $201.8 million at September 30, down from $237.0 million at year-end 2015. Current assets were $353.0 million and current liabilities $552.9 million.
- Cash flow, nine months: Operating activities provided $311.5 million, investing activities used $277.3 million, and financing activities used $69.5 million. Cash declined by $35.2 million over the period.
- Debt and lease financing: Long-term debt had a $1.69 billion gross balance, including $81.7 million current maturities. The separate GLPI financing obligation totaled approximately $3.53 billion, including its current portion. The company also had $176.2 million of available revolving-credit capacity at quarter-end.
- Credit status: The company reported compliance with its financial covenants at September 30, 2016. It said cash from operations, cash on hand, and available credit were expected to meet foreseeable financing, debt-service, capital spending, and working-capital needs, while noting that cash generation and future borrowing availability were not assured.
Material changes and unusual items
- Growth reflected the full-period contribution of Plainridge Park Casino, Tropicana Las Vegas, and Prairie State Gaming, acquired or opened in 2015. Rocket Games was acquired on August 1, 2016 for $59.1 million cash plus contingent consideration; the acquisition-date fair value of that consideration was estimated at $56.0 million.
- Q3 net income included a $9.5 million income tax benefit. Management cited a $9.8 million benefit from a tax settlement and a $12.0 million benefit related to deferred tax liabilities from the Rocket Games acquisition, among other tax effects. The nine-month effective tax rate was also affected by valuation allowance changes and other items.
- Interest expense increased to $345.5 million for the nine months, from $329.6 million, including higher borrowing costs and GLPI Master Lease escalators. Interest income rose with accrued interest on Jamul advances.
- Jamul Tribe advances stood at $360.9 million at quarter-end. On October 20, the Tribe refinanced with approximately $460 million of credit facilities and repaid Penn approximately $274 million; Penn said it used a substantial amount to reduce revolver borrowings. Penn also provided a limited completion guarantee of up to $15 million. Loan repayment, fee subordination, and potential loan subordination are linked to the casino’s financing terms and performance.
- The company’s 2016 capital-project spending estimate was $30.4 million, with $14.5 million spent through September. Jamul’s project budget was $407 million. Capital maintenance expenditures were $51.4 million for the first nine months.
Outlook, risks and controls
The filing provides no specific full-year revenue or earnings guidance. Management cited softening regional gaming trends beginning midway through Q2, particularly among unrated players, and competition affecting several properties. It also identified risks from new and planned casinos, economic conditions, gaming-tax or regulatory changes, project costs and delays, and the performance and collectability of the Jamul loans. The company said it expected future growth to come primarily from acquisitions, development, jurisdictional expansion, and property improvements.
Management concluded that disclosure controls were ineffective as of September 30, 2016 because of material weaknesses involving accounting for complex and non-routine transactions, including leases, and goodwill and indefinite-lived intangible impairment testing. The company described remediation actions, including third-party assistance, and expected remediation no later than December 31, 2016, subject to evidence that controls operated effectively. The filing also refers to a recent financial-statement restatement and associated risks. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the control weaknesses were remediated and independently tested, and the implications of the referenced restatement.
- Jamul casino performance, repayment and subordination terms, any additional Penn funding, and the use of the approximately $274 million repayment.
- Underlying operating trends by property and segment, separating acquired/opened-property contributions from comparable-property performance and competition effects.
- Cash available after interest, GLPI Master Lease payments, debt maturities, maintenance spending, and remaining project commitments.
- The final purchase-price allocation and contingent consideration for Rocket Games, plus its contribution to revenue and earnings.