Penn National Gaming, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures below are included for context. The company operated or had interests in 40 facilities across 18 jurisdictions at year-end.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3.588 billion | $3.148 billion |
| Operating income / margin | $634.1 million / 17.7% | $445.7 million / 14.2% |
| Net income / margin | $93.5 million / 2.6% | $473.5 million / 15.0% |
| Adjusted EBITDAR | $1.043 billion | $879.1 million |
| Adjusted EBITDA after lease payments | $505.8 million | $423.7 million |
| Cash provided by operating activities | $352.8 million | $477.8 million |
| Cash and cash equivalents at year-end | $479.6 million | $278.0 million |
| Long-term debt, net of current maturities and issuance costs | $2.350 billion | $1.215 billion |
| Master lease financing obligations | $7.148 billion | $3.539 billion |
Revenue rose 14.0%, principally reflecting the October 2018 Pinnacle acquisition, which contributed $385.9 million of revenue after closing. The company reported $2.9 billion of gaming revenue; slots generated approximately 92% of gaming revenue. Net income fell sharply from 2017, when results included a $498.5 million income tax benefit, largely related to a valuation-allowance release. FY 2018 also included $95.0 million of pre-opening and acquisition costs, a $34.3 million asset impairment, and a $21.0 million loss on early debt extinguishment.
Operating cash flow declined 26.2%, while investing activities used $1.423 billion, largely due to the Pinnacle acquisition. Financing activities provided $1.272 billion. Year-end current assets were $677.7 million and current liabilities were $738.4 million. The company reported $558.0 million of available revolving-credit capacity and compliance with its financial covenants at year-end. Annual lease payments were $537.4 million; the filing also reports $20.024 billion of undiscounted future minimum payments under the Penn and Pinnacle Master Leases, including renewal options.
Fourth-quarter context: Revenue was $1.155 billion and operating income was $124.4 million; the company recorded a $42.0 million net loss. The quarter included Pinnacle acquisition costs, an asset impairment, and a debt-extinguishment loss.
Material changes versus the prior period
- Pinnacle was acquired on October 15, 2018, adding 12 properties and substantially increasing the company’s scale, assets, debt, and lease obligations. The company sold certain acquired properties to Boyd and amended the Pinnacle Master Lease.
- Adjusted EBITDAR increased 18.7%, and Adjusted EBITDA after lease payments increased 19.4%; both measures include only a partial-year contribution from Pinnacle. Management said it expected approximately $100 million of annual run-rate cost synergies within two years of the acquisition.
- The 2018 adoption of ASC 606 changed revenue presentation, particularly for complimentary services, loyalty points, racing revenue, and reimbursable management costs. Management said adoption did not materially affect net income; reported revenue comparability is affected.
- Live sports wagering began at facilities in Mississippi, Pennsylvania, and West Virginia during the second half of 2018.
- The company repurchased $50.0 million of shares in 2018. It announced a new authorization of up to $200 million in January 2019.
Outlook, risks, and other notable items
- Management said cash from operations, cash on hand, and available credit were expected to cover lease obligations, debt service, capital expenditures, and working capital for the foreseeable future, while cautioning that cash generation, forecasts, credit availability, and Pinnacle synergies are uncertain.
- Expected 2019 capital expenditures were $224.9 million, including $36.5 million of project spending and $188.4 million of maintenance spending. Planned Pennsylvania projects, Hollywood Casino York and Hollywood Casino Morgantown, were expected to be completed by the end of 2020, subject to approvals and development conditions.
- The company expected to close its approximately $300 million acquisition of Greektown Casino-Hotel in the second quarter of 2019, subject to regulatory and other conditions. It acquired Margaritaville Resort Casino on January 1, 2019; that operation is not included in FY 2018 results.
- Key risks include substantial debt and fixed lease payments; intense regional and online competition; gaming regulation, taxes, and licensing; smoking restrictions; integration and synergy execution; construction and approval delays; interest-rate exposure on variable-rate debt; severe weather; cybersecurity; and potential impairment of goodwill or other assets.
- The company recorded a $34.3 million impairment related to Resorts Casino Tunica, citing competition and projected results. The Pinnacle purchase-price allocation remained preliminary at filing. Management identified goodwill and intangible-asset valuations as requiring significant assumptions.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting. Management’s control assessment excluded Pinnacle, which represented approximately 56% of consolidated assets and 11% of FY 2018 consolidated revenue.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects acquired operations versus comparable-property performance, and whether the targeted Pinnacle synergies are achieved.
- Cash available after debt service and lease payments, covenant headroom, variable-rate exposure, and the company’s capacity to fund acquisitions and development.
- Whether competitive pressure, smoking restrictions, and gaming expansion affect key properties and support or undermine carrying values and impairment assumptions.
- Regulatory approvals, timing, financing, and expected returns for Greektown and the Pennsylvania projects; also confirm the effect of Margaritaville’s lease and operating results in 2019.
- The final Pinnacle purchase-price allocation and the effect of ASC 842 lease-accounting adoption on reported balance-sheet and income-statement measures.