Business context and reporting period
This is Penn National Gaming, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The company, identified in the request as PENN Entertainment, operated gaming and pari-mutuel properties across 16 jurisdictions; its 2010 filing name was Penn National Gaming. Results include Beulah Park and the Maryland Jockey Club from July 1, and Hollywood Casino Perryville from its September 27 opening.
Financial results and liquidity
Amounts below are in millions, except per-share data.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net revenue | $638.3 | $620.4 | $1,828.9 | $1,813.5 |
| Operating income | $110.5 | $87.4 | $254.5 | $264.9 |
| Income attributable to shareholders | $48.3 | $21.4 | $93.7 | $90.5 |
| Diluted EPS | $0.46 | $0.20 | $0.88 | $0.85 |
- Q3 operating margin was approximately 17.3%, up from 14.1% a year earlier. Nine-month operating margin was approximately 13.9%, versus 14.6%.
- Q3 net revenue grew 2.9%, as gaming revenue increased 3.0%; nine-month net revenue grew 0.9%. Gaming revenue gains were partly offset by lower food, beverage and other revenue.
- Cash provided by operations was $369.7 million for the first nine months, up from $276.8 million. Investing used $415.5 million and financing used $311.9 million; cash fell by $357.7 million to $355.4 million.
- Capital expenditures were $285.3 million in the first nine months, including $70.2 million of maintenance spending. The company reported $541.9 million of current assets and $308.9 million of current liabilities at September 30.
- Debt totaled approximately $2.101 billion: $1.518 billion under the senior secured facility, $575 million of subordinated notes, and other obligations and leases. The $640.6 million Tranche B revolving facility was undrawn. The secured facility matures through October 2012; the company was in compliance with financial covenants.
Material changes versus the prior comparable period
- Q3 operating income rose despite continued economic pressure, aided by table-game openings at Charles Town and Penn National Race Course, cost management, a $5.9 million Empress fire-insurance gain, and a $9.6 million reversal of Capitol House litigation reserves.
- Nine-month operating income declined, reflecting a $31.3 million impairment on Columbus land, a $6.6 million charge to terminate the Aurora police-services contract, and higher depreciation and amortization. The prior-year period included $5.9 million of Empress fire-related costs and an $11.8 million Lawrenceburg vessel impairment.
- Cash and cash equivalents declined from $713.1 million at year-end 2009, largely reflecting debt repayments, capital spending, investments and share repurchases. Long-term debt, net of current maturities, decreased from $2.249 billion to $2.098 billion.
- Q3 gaming revenue and operating income at Charles Town and Penn National Race Course benefited from new table games. At several established properties, revenue was pressured by weak visitation, consumer spending and competition.
Outlook, management commentary and risks
- Management cited high unemployment, weak consumer confidence, housing and credit-market conditions, and reduced customer spend per visit. It emphasized expense control and described operating cash generation and comparatively low leverage versus regional competitors as strengths.
- No specific revenue or earnings guidance was provided. Management expected an effective tax rate of approximately 45% for the remainder of 2010 and planned to meet or refinance debt obligations before maturity, depending on credit-market conditions.
- Growth plans included Ohio casino projects, the Kansas joint-venture development, ongoing property upgrades and potential acquisitions. Columbus and Toledo casinos were anticipated to open in the fourth quarter of 2012 and first half of 2012, respectively; the approximately $411 million Kansas project was planned to open in the first half of 2012. Timing, financing, regulatory approvals and returns remain uncertain.
- After quarter-end, the company announced it had purchased M Resort’s outstanding bank and subordinated debt for $230.5 million, intending to convert it into ownership subject to regulatory approval. A November 2, 2010 Maryland zoning referendum had a negative outcome, affecting the Maryland Jockey Club’s development prospects.
- Material risks include economic weakness, new or expanded gaming competition, changes in gaming taxes or regulation, construction delays and cost overruns, financing availability, regulatory approvals, litigation, and potential impairment of goodwill or intangible assets. Management reported no material change to previously disclosed risk factors.
- Other notable items: Empress insurance proceeds totaled $39.8 million through September, with management anticipating additional proceeds; the $31.3 million Columbus land impairment was non-cash. The company’s annual goodwill impairment test was pending later in 2010.
Most important facts for investors to verify
- Whether earnings growth persists excluding the $5.9 million insurance gain and $9.6 million litigation-reserve reversal, and how much of the nine-month cash-flow improvement is recurring.
- Progress, remaining funding needs and expected returns for Ohio, Kansas and other capital projects, including any changes to planned costs or opening dates.
- Refinancing plans for the $1.518 billion secured facility as its maturities approach in 2012, along with covenant headroom and availability under the revolving facility.
- Final Empress fire-insurance recoveries and the completion costs and schedule for the permanent pavilion.
- Regulatory and legal developments affecting the M Resort debt-to-ownership conversion, the Maryland Jockey Club, and other disclosed proceedings.