PENN National Gaming, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The filing is under Penn National Gaming, Inc. (now PENN Entertainment). The company operated or held interests in 41 gaming and racing properties across 19 states.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,129.7 million | $1,354.5 million | $2,551.3 million | $3,960.2 million |
| Operating income (loss) | $196.2 million | $179.8 million | $(529.8) million | $560.6 million |
| Net income (loss) | $141.2 million | $43.7 million | $(681.8) million | $136.0 million |
| Adjusted EBITDA (non-GAAP) | $343.6 million | $311.6 million | $419.1 million | $934.8 million |
| Adjusted EBITDA margin (non-GAAP) | 30.4% | 23.0% | 16.4% | 23.6% |
| Adjusted EBITDAR (non-GAAP) | $452.6 million | $407.9 million | $729.4 million | $1,205.8 million |
| Basic / diluted EPS | $1.02 / $0.93 | $0.38 / $0.38 | $(5.36) / $(5.36) | $1.18 / $1.16 |
Q3 revenue fell 16.6% year over year, while nine-month revenue fell 35.6%. The nine-month net loss included $616.1 million of impairment charges, primarily for goodwill, gaming licenses and trademarks, following COVID-related revisions to cash-flow expectations. Q3 operating income and earnings improved from the prior year despite lower revenue, supported by reduced operating costs and higher customer spend per trip at reopened properties.
For the first nine months, operating cash flow was $220.8 million, down from $519.2 million; investing cash outflow was $235.9 million, compared with $542.1 million; and financing cash inflow was $1,445.5 million, compared with a $33.9 million outflow. Cash and cash equivalents were $1,873.1 million at September 30, 2020, versus $437.4 million at December 31, 2019.
At September 30, current assets were $2,186.5 million and current liabilities were $921.4 million. Carrying value of debt was $2,440.5 million, including current maturities; face-value debt and other long-term obligations totaled $2,566.1 million before debt discounts and issuance costs. The revolving facility had no outstanding balance and $670.6 million of available capacity. Total liabilities were $12,180.3 million, including substantial lease liabilities and financing obligations.
Changes, capital and operations
- Most properties temporarily closed in March 2020 and began reopening in May. By September 30, 39 of 41 properties had reopened, operating with capacity limits and reduced food, beverage and hotel offerings.
- Q3 food, beverage, hotel and other revenue declined 48.8%; gaming revenue declined 8.7%. Management attributed the revenue pressure to closures, capacity restrictions and social-distancing measures. Reopened properties generally saw lower visitation but higher spend per trip.
- Q3 Adjusted EBITDAR increased 11.0% year over year; its margin rose to 40.1% from 30.1%. Management cited cost reductions, a focus on higher-margin gaming, lower marketing and limited lower-margin offerings. This non-GAAP measure excludes rent expense and should not be viewed as a substitute for GAAP earnings or cash flow.
- The company raised $331.2 million net in a May common-stock offering, $957.6 million net in a September offering, and $322.2 million net from 2.75% convertible notes. The September offering issued 16.1 million shares; common shares outstanding increased substantially during the year.
- The company invested $161.2 million for a 36% interest in Barstool Sports and launched the Barstool-branded online sports betting app in Pennsylvania in September.
- Capital expenditures for the first nine months were $97.6 million, down from $136.7 million. Construction of the York and Morgantown Pennsylvania projects had been suspended and was expected to resume, with openings anticipated in the second half of 2021.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available credit were expected to cover anticipated lease payments, debt service, capital spending and working capital needs for the foreseeable future. It gave no specific revenue or earnings guidance and cautioned that reopened-property trends, including higher spend per trip, may not continue.
- COVID-19 remained a material uncertainty: renewed closures, capacity restrictions, weaker visitation or consumer spending, labor availability and further impairment charges could adversely affect results, liquidity and cash flows.
- A credit-agreement amendment waived leverage and interest-coverage tests during a covenant-relief period, expected to run through the quarter ending March 31, 2021 unless terminated earlier. A minimum-liquidity covenant applied during that period. The company reported covenant compliance at quarter-end and expected continued compliance for at least the following 12 months.
- Hurricane Laura damaged L’Auberge Lake Charles and caused a 17-day closure. The company recorded a $50.6 million insurance receivable for estimated eligible costs, but had received no proceeds by September 30; the insurance claim remained subject to submission and settlement.
- Other unusual Q3 items included a $67.9 million holding gain on equity securities, $12.4 million of restructuring costs, and higher cash-settled stock-award expense driven largely by the company’s rising share price.
- The company estimated a $40–$50 million income-tax refund, primarily from CARES Act net operating loss carrybacks. The timing and amount were estimates.
- Management identified competition, regulatory approvals, lease obligations, access to capital and execution of online gaming and sports-betting plans as additional risks. Legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether pandemic-related restrictions, property closures or weaker customer demand persist, and whether post-reopening spend-per-trip trends hold.
- Progress on the Barstool app’s planned expansion, including Michigan regulatory approval, and the returns and potential dilution associated with the investment and convertible notes.
- Cash generation after rent-credit use, the company’s substantial triple-net lease commitments, debt maturities, available revolver capacity and covenant requirements after relief ends.
- Completion schedules and remaining funding needs for York and Morgantown, and whether the expected second-half 2021 openings remain achievable.
- Recovery of the Hurricane Laura insurance claim and receipt of the estimated CARES Act tax refund.
- The sustainability of reported non-GAAP margin improvements and the effect of stock-based compensation, asset impairments and other unusual items on GAAP results.