PENN National Gaming, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing was signed March 7, 2016. Financial amounts below are in millions of dollars unless noted. Prior-year figures are restated. The registrant’s name at the time was PENN National Gaming, Inc.
Business context and financial performance
PENN operated or held interests in 27 gaming and racing facilities across 17 jurisdictions. The quarter included Plainridge Park Casino, opened in June, and the acquisitions of Tropicana Las Vegas, completed August 25, and Prairie State Gaming, completed September 1.
| Metric | Q3 2015 | Q3 2014, restated | Nine months 2015 | Nine months 2014, restated |
|---|---|---|---|---|
| Net revenue | $739.3 | $645.9 | $2,104.4 | $1,939.2 |
| Income from operations | $142.2 | $105.9 | $377.2 | $313.8 |
| Net income (loss) | $4.9 | ($15.3) | $9.8 | ($34.0) |
| Adjusted EBITDA | $210.3 | $170.5 | $590.0 | $538.0 |
| Operating margin | 19.2% | 16.4% | 17.9% | 16.2% |
Net revenue increased 14.5% in Q3 and 8.5% year to date. New and recently opened facilities were significant contributors: Plainridge generated $50.8 million of Q3 revenue; Dayton and Mahoning Valley together generated $48.9 million; Tropicana contributed $11.2 million, and Prairie State $4.2 million. PENN cited continued competition affecting properties including Lawrenceburg and Charles Town. Q3 operating income improved despite higher operating expenses; net income also benefited from higher affiliate income and interest income, but was constrained by higher interest expense and taxes. The effective tax rate was 87.83% for Q3 and 86.41% year to date, including the effect of a deferred-tax valuation allowance.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $306.1 million, investing cash outflow was $683.8 million, and financing cash inflow was $392.5 million. Cash increased $14.8 million to $223.5 million.
- Investing outflows included $450.2 million for acquisitions and $64.2 million of advances to the Jamul Tribe. Capital project and maintenance expenditures were $125.2 million and $41.9 million, respectively.
- At September 30, cash was $223.5 million and current assets were $373.7 million, versus current liabilities of $534.9 million. Current maturities of long-term debt were $87.8 million.
- Long-term debt, net of current maturities and issuance costs, was $1,598.8 million. Gross long-term debt was approximately $1,712.5 million, including $1,236.6 million under the secured credit facility and $300 million of 5.875% notes due 2021. The company had $220 million of revolver capacity available.
- The GLPI Master Lease is accounted for as a financing obligation; the balance-sheet obligation totaled approximately $3,576.1 million, including its current portion. Payments under the lease were $327.3 million for the first nine months. The lease covers real estate associated with 18 facilities and carries substantial ongoing payment and property-cost obligations.
- PENN reported compliance with debt covenants at quarter-end. Lenders waived SEC filing requirements through March 15, 2016; the notes carried an additional 25-basis-point annual charge beginning February 8, 2016 until filings became current.
Restatement, outlook and key risks
- Restatement: The filing restated 2014 financial information, primarily because the 2013 GLPI real-estate transaction did not qualify for sale-leaseback accounting and should have been treated as a financing obligation. The restatement recognized the real estate and a substantial financing liability, replacing rent expense with interest and depreciation. Other corrections included impairment analysis, Ohio relocation-fee accounting, lease classification, and deferred-tax valuation allowance matters. Q3 2014 net income changed from previously reported $8.5 million to a restated loss of $15.3 million.
- Internal controls: Management concluded disclosure controls were ineffective at September 30, 2015 due to material weaknesses in accounting for complex transactions and in goodwill and indefinite-lived intangible impairment analysis. Remediation efforts included third-party assistance; management expected remediation no later than December 31, 2016, subject to evidence that controls operated effectively.
- Management outlook: Management believed cash from operations, cash on hand and revolver availability would cover anticipated lease payments, debt service, capital spending and working capital for the foreseeable future, while cautioning that cash generation, earnings and future borrowing availability were uncertain. PENN expected future growth from acquisitions, new projects and expansions; it did not provide quantitative earnings guidance in the supplied filing text.
- Projects and contingencies: The Jamul casino project had a $390 million budget and was expected to open in mid-2016. Advances to the Tribe stood at $143.9 million; repayment depended on casino revenues, and delays or weaker profitability could require a reserve. Tropicana acquisition-related risks included integration, market conditions and potential asbestos or other environmental remediation. An appeal remained pending in a dispute over approximately $13.5 million of Tropicana bankruptcy professional fees; management could not predict the outcome.
- Other risks: Competition, gaming-law and tax changes, regulatory approvals, construction costs and delays, economic conditions, labor, litigation, and the company’s high debt and lease obligations could affect results and liquidity. Management reported signs of improved customer spending at many properties but noted that new gaming facilities continued to pressure some markets.
Most important facts for investors to verify
- Review the accompanying 2014 restatement and the related 10-K/A, particularly the GLPI financing-obligation accounting and its effect on reported earnings, assets and liabilities.
- Track remediation of the disclosed material weaknesses, the effectiveness of new controls and the company’s SEC filing status.
- Assess cash generation against debt service, GLPI payments, remaining capital needs and the $220 million of stated revolver availability.
- Monitor Jamul project costs, completion timing, funding and the collectability of the $143.9 million Tribe advance.
- Separate organic property performance from contributions by recent openings and acquisitions; check continuing competition and Tropicana integration and environmental exposure.
- Follow the Tropicana bankruptcy-fee appeal and any resulting liability, as well as the impact of the tax valuation allowance on future tax expense and deferred-tax asset realization.