PENN National Gaming, Inc. — 2014 Q3 Form 10-Q
The filing is for the quarter ended September 30, 2014, with year-to-date comparisons for the nine months ended on that date. The statements are unaudited. The registrant’s name at the time was Penn National Gaming, Inc.; it is now known as PENN Entertainment, Inc. The company operated or held interests in 26 facilities across 17 jurisdictions. Comparisons with 2013 are affected by the November 2013 spin-off of real estate assets to Gaming and Leisure Properties, Inc. (GLPI), after which Penn leases many facilities under a master lease.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $645.9 million | $714.4 million | $1,939.2 million | $2,274.1 million |
| Operating income | $22.8 million | $93.3 million | $64.3 million | $273.5 million |
| Net income | $8.5 million | $41.3 million | $17.2 million | $94.4 million |
| Diluted EPS | $0.10 | $0.40 | $0.19 | $0.92 |
| Adjusted EBITDA | $65.7 million | $185.0 million | $221.1 million | $622.9 million |
| Adjusted EBITDAR | $170.3 million | $185.0 million | $534.7 million | $622.9 million |
Net revenue fell 9.6% in Q3 and 14.7% year to date. Operating margin was approximately 3.5% in Q3 and 3.3% year to date, versus 13.1% and 12.0%, respectively, in 2013. Net margin was approximately 1.3% in Q3 and 0.9% year to date, versus 5.8% and 4.2%. Adjusted EBITDA and EBITDAR are non-GAAP measures; EBITDAR excludes master-lease rent, which was $104.6 million in Q3 and $313.5 million year to date in 2014. The 2013 comparison predates that lease expense.
Cash and cash equivalents were $230.7 million at September 30, 2014, down from $293.0 million at year-end 2013. Current assets were $404.1 million and current liabilities $440.3 million. Operating cash flow was $204.7 million for the first nine months, compared with $428.0 million in 2013. Investing activities used $292.3 million; financing activities provided $25.3 million. Cash declined $62.3 million over the period.
Total debt and other long-term obligations were approximately $1.23 billion, including $774.4 million outstanding under the secured credit facility, $300 million of 5.875% senior notes due 2021, and $154.0 million of other long-term obligations. Revolver availability was $432.2 million, net of letters of credit. The company reported compliance with its debt covenants. Interest expense was $33.4 million year to date, down from $80.0 million, primarily reflecting lower debt after the spin-off.
Material changes and operating drivers
- Gaming revenue declined 10.7% in Q3 and 15.7% year to date. Management cited competition, sluggish consumer spending, the transfer of Hollywood Casino Perryville and Baton Rouge to GLPI, severe winter weather earlier in the year, and the July closure of Argosy Casino Sioux City.
- New Ohio facilities opened in Q3: Hollywood Gaming at Dayton Raceway on August 28 and Mahoning Valley Race Course on September 17. Together, they generated $15.2 million of Q3 net revenue. The company also acquired Plainridge Racecourse in Massachusetts and is developing a casino there.
- The new master-lease rental expense materially affects 2014 results and reduces direct comparability with 2013. Rent declined by $6.2 million annually after Sioux City closed, while the Ohio openings increased annual rent by approximately $19 million. A potential annual base-rent escalator of zero to $4.7 million remained under calculation.
- Depreciation and amortization fell substantially, mainly because real estate and two properties were transferred to GLPI. Q3 and nine-month 2014 results also included a $5.7 million insurance recovery related to the 2013 St. Louis tornado. Year-to-date 2014 included a $4.6 million impairment charge; the comparable 2013 period included a $71.8 million Sioux City impairment.
Outlook, risks, and contingencies
Management expected operating cash flow, cash on hand, and credit-facility availability to cover anticipated rent, debt service, capital spending, and working capital needs for the foreseeable future, while cautioning that cash generation, earnings projections, and future borrowing availability are not assured. No quantified earnings or revenue guidance was provided. Planned projects included Plainridge Park Casino, expected to open in June 2015, and the Jamul, California project, then expected to be completed in mid-2016.
Key risks include ongoing competitive pressure, weak economic conditions, changes in gaming taxes or regulation, construction cost and timing, and the ability to fund projects and service or refinance debt. Argosy Casino Sioux City ceased operations on July 30, 2014; the company’s appeal of the closure order remained pending. The Ohio Roundtable litigation concerning video lottery terminals also remained a potential risk. Penn had advanced $44.0 million, including accrued interest, to the Jamul Tribe for project development; repayment depends on future casino revenues, and management noted that delays or lower-than-projected profitability could require a reserve. Management also stated that its annual impairment testing could result in significant fourth-quarter charges.
Important facts for investors to verify
- How much of the sharp earnings and cash-flow decline reflects the GLPI spin-off and new rent structure versus underlying property performance.
- Whether the new Ohio facilities and Plainridge project achieve projected returns, and whether remaining license, construction, and relocation costs stay within expectations.
- The outcome of the Sioux City and Ohio legal proceedings, and any resulting operational, financial, or regulatory effects.
- Debt repayment and liquidity needs, including the $154.0 million in other long-term obligations and potential master-lease escalator.
- Results of the company’s fourth-quarter impairment testing and the assumptions supporting realization of its $83.5 million net deferred tax asset.