PENN National Gaming, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless stated otherwise. The filing issuer is Penn National Gaming, Inc., the company identified in the request as PENN Entertainment, Inc. The company owned, managed, or held interests in 23 facilities across 16 jurisdictions.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenue | $667.0 million | $592.3 million | Up 12.6% |
| Operating income | $122.7 million | $92.4 million | Up 32.9% |
| Operating margin on net revenue | 18.4% | 15.6% | Up 2.8 percentage points |
| Net income attributable to shareholders | $51.5 million | $36.2 million | Up $15.4 million |
| Diluted EPS | $0.48 | $0.34 | Up $0.14 |
| Cash from operations | $102.3 million | $93.7 million | Up $8.6 million |
| Capital expenditures for property and equipment | $54.5 million | $120.4 million | Down $65.9 million |
Gaming revenue rose 12.1% to $609.1 million; food, beverage and other revenue increased 6.0% to $85.3 million. Promotional allowances fell 11.5% to $30.7 million. Management attributed growth primarily to table games introduced in 2010 at Charles Town and Penn National Race Course, and the September 2010 opening of Hollywood Casino Perryville. Cost-management efforts contributed to improved operating margins at 12 of 15 gaming facilities.
Interest expense declined 15.4% to $29.0 million. The effective income tax rate increased to 42.6% from 35.5%, partly because Q1 2010 included a favorable resolution of an uncertain tax position. The filing does not provide a standalone net margin; net income divided by net revenue was approximately 7.7% versus 6.1% in Q1 2010.
Liquidity, debt and capital
- Cash and cash equivalents were $234.5 million at March 31, down from $246.4 million at year-end 2010. Current assets were $421.2 million and current liabilities $1.010 billion, including $745.7 million of current debt maturities.
- Total debt was $2.135 billion, down from $2.171 billion at December 31, 2010. The senior secured facility balance was $1.553 billion, including $35 million drawn on the revolver. The company reported $570.3 million of available borrowing capacity after outstanding letters of credit.
- The term loan included a $354.9 million quarterly principal payment in December 2011, followed by $387.8 million payments in March, June and October 2012. The revolver matures in July 2012. The company said it was considering refinancing options for near-term term-loan maturities and was in compliance with financial covenants.
- Investing activities used $79.6 million; financing activities used $34.6 million. Operating cash flow less property-and-equipment expenditures was approximately $47.8 million, compared with negative $26.6 million in Q1 2010; this is a simple cash-flow comparison, not a company-reported free-cash-flow measure.
Changes, outlook and notable items
- Q1 results included $1.7 million of pretax insurance gain related to the 2009 Hollywood Casino Joliet fire. The company had received $64.3 million in insurance proceeds to date and anticipated additional proceeds.
- Adoption of jackpot-liability accounting guidance increased opening retained earnings by $3.0 million, net of tax.
- Rosecroft Raceway was acquired on February 28, 2011; it had no reported revenue in the quarter and the company was developing a viable operating plan. The Texas racetrack joint venture closed on April 8, after quarter-end.
- Management said cash from operations, cash on hand and facility availability were expected to meet debt service, capital spending and working-capital needs for the foreseeable future, while cautioning that cash generation, earnings growth and future borrowing availability were not assured.
- Planned 2011 capital-project spending was $282 million, excluding licensing fees and the company’s Kansas joint-venture share; $39.8 million had been spent through March 31. Major projects included the Ohio casinos and existing-property work. Toledo was anticipated to open in the first half of 2012, Columbus in Q4 2012, and the Kansas project in Q1 2012.
- Management cited continuing economic pressure on discretionary spending, competition and possible gaming expansion, regulatory and construction risks, and potential tax increases. A proposed casino near Chicago could pressure Joliet and Aurora, while Cincinnati and a potential Arundel Mills casino could affect Lawrenceburg and Charles Town.
Risks, contingencies and unusual matters
Material exposures described include litigation over Illinois’ 3% racing-industry tax surcharge (approximately $52.2 million of cumulative expense recognized, including $2.5 million in Q1 2011), a Kansas county claim seeking more than $50 million, and a related real-estate dispute in which the company had prevailed at summary judgment but an appeal was pending. The company also sued Columbus and Franklin County over water and sewer service for its casino site; injunctive relief and monetary damages were sought. Management said it intended to defend or pursue its positions. The filing cautions that litigation outcomes and insurance coverage are uncertain.
The Casino Rama management contract was due to expire August 1, 2011; the company was bidding for a new term and negotiating an interim extension, with no assurance it would retain the contract. The filing also warns that operating results for the quarter are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm refinancing plans and funding for the scheduled $745.7 million of current debt maturities, including the large 2011–2012 term-loan payments.
- Track cash generation, available revolver capacity, covenant compliance and the effect of planned capital spending on liquidity.
- Assess whether Q1 revenue and margin improvement persists after separating new properties, table-game additions and the $1.7 million insurance gain from underlying property trends.
- Monitor construction schedules, budgets, regulatory approvals and legal proceedings affecting the Ohio, Kansas and other development projects.
- Verify the outcome of the Casino Rama contract process and the potential financial impact of the Illinois surcharge and other litigation.