PENN National Gaming, Inc. — Q3 2017 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2017. Penn operated, managed, or held interests in 29 gaming and racing facilities across 17 jurisdictions, alongside Illinois video gaming terminal operations and interactive gaming. The company acquired 1st Jackpot and Resorts in Tunica on May 1, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $806.2M | $765.6M | $2,378.9M | $2,291.5M |
| Income from operations | $143.7M | $139.3M | $418.9M | $429.2M |
| Operating margin | 17.8% | 18.2% | 17.6% | 18.7% |
| Net income | $789.3M | $46.5M | $811.5M | $104.3M |
| Adjusted EBITDA | $221.8M | $211.3M | $662.6M | $647.9M |
| Adjusted EBITDA after GLPI Master Lease payments | $107.3M | $101.6M | $321.7M | $316.1M |
Cash flow and liquidity. For the nine months, operating cash flow was $337.3M versus $320.0M; investing cash outflow was $192.5M versus $277.3M; and financing cash outflow was $109.5M versus $78.0M. Cash rose to $264.9M from $229.5M at year-end 2016. Current assets were $402.3M and current liabilities $492.2M at September 30, 2017.
Debt and lease obligations. Long-term debt, including current maturities and before debt issuance costs and discounts, was approximately $1.351B; the GLPI Master Lease financing obligation totaled approximately $3.553B, including its current portion. The company had $830.0M outstanding under its senior secured credit facility and $637.9M of available revolver capacity. It reported compliance with required financial covenants. The Master Lease is a substantial ongoing cash obligation.
Changes, unusual items, and management commentary
- Net revenue increased 5.3% in Q3 and 3.8% for the nine months. Growth reflected acquisitions, including Tunica casinos and Prairie State Gaming route acquisitions, as well as improved results at some properties. Operating income nevertheless declined 2.4% for the nine-month period.
- Reported net income was dominated by a $766.2M income tax benefit from releasing part of the deferred tax valuation allowance. This non-operating tax accounting benefit drove the large year-over-year increase in net income; it should not be read as comparable growth in recurring operating earnings. A $77.1M valuation allowance remained for certain state filing groups.
- Q3 operating expenses included $24.3M of impairment charges. Nine-month impairment charges totaled $30.0M, including goodwill impairments at Tropicana Las Vegas and Sanford-Orlando Kennel Club and reserves against the Jamul Tribe loan.
- A $22.2M Q3 benefit to general and administrative expense followed the buyout of Rocket Speed’s contingent purchase-price obligation. Nine-month results also included a $23.4M loss on early debt extinguishment, principally related to the redemption of $300M of 5.875% notes and refinancing activity.
- The Jamul Tribe loan had a $75.5M carrying value against $98.2M unpaid principal at September 30. The borrower was negotiating with its lenders after a financial covenant breach; Penn anticipated concessions and full subordination of its loan. Further impairment could be material, and Penn reported no management fees from the facility in 2017 to date.
- Management said cash, operating cash flow, and revolver availability should fund obligations, capital expenditures, and working capital for the foreseeable future, but cautioned that cash generation, earnings projections, and future borrowing availability are not assured. It expected future growth from acquisitions, new projects, jurisdictional expansion, and property expansion; no numerical earnings guidance is stated in the provided filing text.
- Management cited competition and limited regional gaming-industry growth as key pressures. Pennsylvania’s October 2017 gaming-law expansion permits additional gaming formats and could increase competition; the company also noted Maryland competition affecting Charles Town and expected new Massachusetts casinos to pressure Plainridge.
- For 2017, expected project capital expenditures were $35.2M, of which $28.8M had been spent through September 30; maintenance capital expenditures for the nine months were $46.6M. The company expected the Master Lease annual escalator to add about $4.0M, with about $0.7M in Q4 2017.
- The company expected to adopt the new revenue recognition standard on January 1, 2018. It anticipated changes to loyalty-point accounting and presentation of gaming revenue and promotional allowances; the impact assessment was not complete.
Important facts for investors to verify
- Separate recurring operating performance and cash generation from the $766.2M tax valuation-allowance release and the Rocket Speed contingent-payment benefit.
- Monitor Jamul negotiations, loan subordination and concessions, collections, and any further impairment; assess the casino’s performance and the absence of management fees to date.
- Assess leverage and fixed obligations together, including the GLPI Master Lease, debt maturities, interest costs, and capacity under the revolver.
- Track competitive effects from Pennsylvania’s gaming expansion, Maryland facilities, and planned Massachusetts casinos, as well as segment-level trends—particularly South/West operating income.
- Review the eventual quantified impact of the 2018 revenue standard and whether management’s liquidity and growth expectations are supported by subsequent results.