Penn National Gaming, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request identifies 2014 Q4, this is an annual filing; it includes quarterly results and reports a substantial fourth-quarter impairment. Amounts below are U.S. dollars.
Business context and reporting period
Penn operated, managed, or held interests in 26 gaming and racing facilities across 17 jurisdictions. Its 2013 separation of real estate into Gaming and Leisure Properties, Inc. (GLPI) materially changed the business: Penn operates most of the gaming properties but leases 18 facilities from GLPI under a triple-net master lease. Accordingly, 2014 comparisons with 2013 are affected by the partial-year lease in 2013 and the transfer of Hollywood Casino Baton Rouge and Perryville to GLPI.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $2,590.5 million | $2,918.8 million |
| Operating income (loss) | $(240.4) million | $(772.0) million |
| Net income (loss) | $(233.2) million; $(2.97) per share | $(794.3) million; $(10.17) per share |
| Adjusted EBITDA | $285.1 million | $706.6 million |
| Adjusted EBITDAR | $706.5 million | $776.1 million |
| Cash from operating activities | $220.0 million | $440.8 million |
| Cash used in investing activities | $(375.5) million | $(415.0) million |
| Capital expenditures | $228.1 million | $199.9 million |
| Cash and cash equivalents at year-end | $208.7 million | $293.0 million |
| Total debt, as reported in selected financial data | $1,260.8 million | $1,050.8 million |
Operating and net loss margins were approximately 9.3% and 9.0% of net revenue, respectively, in 2014. The filing’s adjusted EBITDA and adjusted EBITDAR are non-GAAP measures; the company cautions they are not substitutes for GAAP results or operating cash flow.
Gaming revenue fell 12.2% to $2,297.2 million. Food, beverage and other revenue declined 6.3% to $432.0 million; Casino Rama management fees decreased 11.6% to $11.7 million. Master Lease rent expense was $421.4 million, versus $69.5 million in 2013. Interest expense declined 52.6% to $46.0 million, primarily reflecting lower debt after the Spin-Off.
At year-end, current assets were $386.0 million and current liabilities $435.5 million, implying a working-capital deficit of about $49.5 million. The senior secured credit facility had $807.5 million outstanding, including $85.0 million drawn on its revolver; the $300 million 5.875% senior notes mature in 2021. Revolver availability was $392.0 million, after letters of credit. The company reported compliance with required debt covenants.
Material changes versus the prior comparable period
- Net revenue decreased 11.2% year over year, reflecting competitive pressure and the transfer of Baton Rouge and Perryville to GLPI, partly offset by the late-2014 openings of two Ohio racinos.
- Operating loss narrowed to $240.4 million from $772.0 million, largely because impairment charges were lower: $321.1 million in 2014 versus $1,132.4 million in 2013. The 2014 charge included $315.1 million in Southern Plains and $1.4 million in West; it was mainly non-cash.
- Adjusted EBITDA fell to $285.1 million from $706.6 million, and operating cash flow halved to $220.0 million. Adjusted EBITDAR decreased 9.0% to $706.5 million.
- The 2014 cash-flow decline reflected lower customer receipts and higher Master Lease payments, partly offset by reduced supplier, employee, interest and tax payments.
- Cash declined by $84.3 million during 2014. Debt increased from year-end 2013, and 2014 investing included $47.1 million in advances to the Jamul Tribe, $50 million in Ohio gaming-license fees, and construction and acquisition spending.
- Results are not fully comparable: GLPI lease expense applied for only two months of 2013, and Baton Rouge and Perryville contributed results to Penn only through October 2013.
Outlook, management commentary, risks and unusual items
Management cited sluggish economic conditions and expanding regional gaming competition as ongoing pressures on customer spending and operating results. It said cash from operations, cash on hand and available revolver capacity were expected to cover rent, debt service, capital spending and working capital for the foreseeable future, while warning that cash generation, earnings projections and access to future borrowing were not assured.
- Projects: Plainridge Park Casino, budgeted at $225 million including license fees, was expected to open in June 2015. The approximately $360 million Jamul project in California was anticipated to open in mid-2016; Penn had advanced $62.0 million to the tribe at year-end, with repayment dependent on casino revenues.
- Lease and fixed commitments: The 15-year initial GLPI master lease is triple-net, cannot be terminated early without GLPI’s consent, and carries fixed contractual rent commitments of approximately $4.94 billion over its initial term. Rent expense rose with the opening of the Ohio racinos; the Sioux City closure reduced annual rent by $6.2 million.
- Competition: Management identified pressure at Charles Town and Lawrenceburg, among other markets, from new casinos and racinos. The filing warned of possible further effects from Horseshoe Baltimore and the planned National Harbor casino.
- Regulatory and legal: Penn closed Argosy Casino Sioux City on July 30, 2014 after losing its Iowa gaming license; its appeal remained pending. An Ohio Roundtable challenge to video lottery terminals and casino taxation was pending before the Ohio Supreme Court.
- Other risks: Gaming license renewals, changes in gaming taxes or regulation, economic weakness, construction delays, labor and horsemen agreements, weather and cyber incidents could affect operations. The filing also discusses risks related to Jamul financing and tribal agreements, the GLPI relationship, and the Spin-Off’s tax-free status.
- Unusual items: Penn recorded $6.6 million in 2014 lobbying costs related to a Massachusetts referendum, which failed. It recognized a $5.7 million insurance gain for tornado damage at Hollywood Casino St. Louis. No cash dividend was anticipated for the foreseeable future.
The financial statements received an unqualified audit opinion from Ernst & Young, which also reported effective internal control over financial reporting as of December 31, 2014.
Investor facts to verify
- Whether underlying property performance and cash generation stabilize, particularly in Southern Plains and at Charles Town and Lawrenceburg.
- How the $421.4 million annualized lease burden and approximately $4.94 billion of initial-term fixed rent commitments affect cash available for debt service and investment.
- Whether Penn can fund scheduled capital spending and project costs while maintaining liquidity and covenant compliance.
- Actual opening timing, total cost, financing and returns for Plainridge and Jamul; assess Jamul loan recoverability against casino cash flows.
- Developments in the Sioux City appeal, Ohio litigation, and gaming-license, tax, labor and horsemen matters.
- Whether additional impairment charges arise; management stated reporting units remained exposed to future impairment if forecasts or market conditions weaken.
- Comparability of reported trends given the Spin-Off, lease accounting and property transfers.