Penn National Gaming, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. The filing’s issuer name is Penn National Gaming, Inc. (the company identified in the request as PENN Entertainment). Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
The company owned, managed, or held interests in 26 gaming and pari-mutuel facilities across 19 jurisdictions. Its portfolio included the M Resort, acquired in June 2011; the Kansas Speedway casino, opened through a 50%-owned joint venture in February 2012; and two Ohio casinos under construction.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenue | $736.1 | $667.0 | Up 10.3% |
| Income from operations | $142.6 | $122.7 | Up 16.2% |
| Net income | $78.6 | $51.5 | Up $27.1 |
| Basic / diluted EPS | $0.83 / $0.74 | $0.53 / $0.48 | Higher |
| Operating margin | 19.4% | 18.4% | Up about 1.0 percentage point |
| Net cash from operations | $122.6 | $102.3 | Up $20.3 |
Gaming revenue rose 7.7% to $656.1 million; food, beverage and other revenue rose 32.4% to $112.9 million, primarily reflecting the M Resort acquisition. Interest expense declined 37.8% to $18.0 million, principally due to the 2011 note redemption, expiration of interest-rate swaps, and increased capitalized interest, partly offset by higher facility borrowing costs. The effective tax rate was 37.3%, down from 42.6%.
Cash, debt and investment
- Cash and cash equivalents were $217.5 million at March 31, down from $238.4 million at year-end 2011. Current assets were $377.2 million and current liabilities $394.6 million.
- Gross long-term debt was approximately $2.03 billion, including $1.70 billion under the senior secured credit facility and $325 million of 8.75% senior subordinated notes due 2019. Cash less gross debt was approximately $1.81 billion.
- The company had $390.5 million of available revolving-credit capacity after letters of credit. It reported compliance with all financial covenants.
- Investing cash outflow was $132.3 million, including $119.7 million of property and equipment expenditures and $39.6 million invested in joint ventures. The company expected $353.9 million of 2012 capital-project expenditures, excluding licensing fees; $97.8 million had been spent through March 31.
- Financing cash outflow was $11.3 million. Total cash decreased by $21.0 million during the quarter.
Material changes and operating developments
- East/West revenue increased $82.2 million and operating income increased $24.2 million, driven mainly by the M Resort acquisition, table games at Charles Town, and mild winter weather.
- Midwest revenue declined $8.7 million and operating income declined $6.4 million, reflecting competition from the new Des Plaines, Illinois casino at Aurora and Joliet.
- Southern Plains revenue declined $5.4 million; the Kansas Speedway casino opening added competition for Argosy Riverside. A $1.7 million share of Kansas joint-venture earnings contributed to the quarter.
- Q1 2012 operating results included a $3.9 million pretax insurance gain related to the 2011 Tunica flood. The comparable 2011 quarter included a $1.7 million gain related to a Joliet fire.
- Management said cost controls improved operating margins at 12 of 16 gaming facilities, excluding the recently acquired M Resort.
Outlook, risks and contingencies
No numerical full-year earnings or revenue guidance was provided. Management expected cash from operations, cash on hand, and available credit to cover anticipated debt service, capital spending, and working capital for the foreseeable future, while cautioning that cash generation, growth, and financing availability are not assured.
- Toledo was expected to open on or about May 29, 2012, and Columbus in early Q4 2012. Management expected capital-project spending of $353.9 million in 2012, excluding licensing fees.
- A non-binding Ohio memorandum contemplated relocating two racetracks and developing facilities budgeted at about $275 million each, subject to negotiations and approvals.
- Potential competition included planned casinos in Maryland, Louisiana, and Mississippi, as well as the Kansas opening and the Illinois casino already affecting existing properties.
- The Casino Rama management agreement was extended through September 30, 2012; renewal beyond that date was uncertain. The Iowa Sioux City operator faced uncertainty over its sponsor agreement, gaming license, docking lease, and potential land-based location.
- A Kansas county lawsuit sought more than $50 million from a subsidiary and the company; a $25 million privilege-fee payment was under attachment, and dispositive motions had been argued in April 2012. The company said it intended to defend itself.
- Management cited economic and consumer-spending conditions, gaming competition and taxation, regulatory approvals, construction costs and timing, and access to capital among the risks to results. It reported no material change to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- Whether the Ohio casino openings and related spending remained on schedule and within budget.
- Whether new regional competition continued to pressure Aurora, Joliet, Riverside, and other properties.
- Progress on the Sioux City sponsor arrangement and Casino Rama contract beyond September 2012.
- Developments in the Kansas county litigation and the status of the attached $25 million payment.
- Debt, liquidity, covenant compliance, and operating cash generation as major construction spending continued.
- The sustainability of earnings growth after considering the $3.9 million insurance gain, acquisition effects, and unusually mild winter weather.