PENN Entertainment, Inc. — 2012 Form 10-K Summary
Filing identity and period: The supplied filing is Penn National Gaming, Inc.’s Form 10-K for the fiscal year ended December 31, 2012; it predates the company’s current PENN Entertainment name. The 10-K also reports unaudited fourth-quarter results.
Business context and reporting period
The company owned, managed, or held interests in 29 gaming and pari-mutuel facilities across 19 jurisdictions. Its portfolio expanded during 2012 with the openings of Hollywood Casino Toledo and Columbus, the opening of its Kansas Speedway joint venture, and the November acquisition of Harrah’s St. Louis, subsequently rebranded Hollywood Casino St. Louis. Gaming—primarily slot machines—was the principal revenue source.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net revenue | $2.899 billion | $2.742 billion |
| Operating income | $442.6 million | $499.6 million |
| Income before income taxes | $364.5 million | $389.2 million |
| Net income | $212.0 million | $242.4 million |
| Basic / diluted EPS | $2.24 / $2.04 | $2.52 / $2.26 |
| Operating cash flow | $507.2 million | $567.4 million |
| Capital expenditures | $473.0 million | $293.1 million |
| Cash and cash equivalents at year-end | $260.5 million | $238.4 million |
| Total debt at year-end | $2.731 billion | $2.043 billion |
Net revenue rose 5.7%, while operating income fell 11.4% and net income fell 12.5%. Operating margin was approximately 15.3%, down from 18.2%; net margin was approximately 7.3%, versus 8.8%. The effective tax rate increased to 41.8% from 37.7%, partly reflecting non-deductible Maryland lobbying costs. Interest expense declined to $81.4 million from $99.6 million.
Operating cash flow decreased by $60.2 million, principally reflecting higher income-tax payments and operating outlays, partly offset by increased customer receipts. Investing activities used $1.188 billion, including $473.0 million of property and equipment expenditures, the St. Louis acquisition, and Ohio gaming-license payments. Financing activities provided $703.3 million, largely reflecting additional borrowings used to fund the acquisition.
At December 31, 2012, the company had $2.395 billion outstanding under its senior secured credit facility, including $100 million drawn on its revolver, and $325 million of 8.75% senior subordinated notes. Revolver capacity available was $609.7 million after letters of credit. Current assets of $487.1 million were slightly below current liabilities of $499.6 million. The company reported compliance with required financial covenants and said cash, operating cash flow, and available borrowing capacity were expected to meet foreseeable needs, subject to risks and assumptions.
Fourth-quarter 2012 net revenue was $743.8 million, operating income $73.3 million, and net income $20.2 million; diluted EPS was $0.19. The filing attributes substantial fourth-quarter and third-quarter costs to Maryland lobbying.
Material changes versus the prior comparable period
- Growth reflected new Ohio casinos, the full-year contribution from the M Resort, and the late-year St. Louis acquisition. Toledo generated $129.3 million of FY 2012 net revenue; Columbus generated $62.1 million; St. Louis contributed $35.9 million after acquisition.
- Competition pressured established properties, including Lawrenceburg, Charles Town, Perryville, Aurora/Joliet, Riverside, Baton Rouge, and Biloxi. Management said cost controls improved operating margins at 9 of 16 facilities operated in both periods.
- General and administrative expense increased 25.6% to $532.2 million, including $45.1 million of non-deductible Maryland lobbying expense and a $6.4 million accrual related to Cherokee County, Kansas litigation.
- Depreciation and amortization rose 16.0% to $245.3 million, mainly due to new facilities and the acquisition. No impairment losses were reported in 2012 or 2011; 2010 included $224.7 million.
- Segment operating income was $206.5 million in Midwest (down from $211.4 million), $291.6 million in East/West (up from $263.4 million), and $132.2 million in Southern Plains (down from $137.6 million). Other reported an operating loss of $187.7 million, versus $112.8 million, reflecting, among other items, lobbying and corporate costs.
Outlook, contingencies, and notable items
- Proposed real estate separation: Announced in November 2012, the proposed Spin-Off would place most real estate in a new REIT, PropCo, which would lease most properties to the operating company under a proposed 35-year triple-net master lease. Completion remained subject to regulatory, board, legal, financing, and other conditions; management said it could modify or abandon the plan. The company estimated a $1.4 billion taxable accumulated-earnings dividend if PropCo elected REIT status effective January 1, 2014, with at least 20% paid in cash. Debt refinancing and new credit facilities were anticipated. The IRS had issued a private letter ruling subject to qualifications.
- Planned investment and spending: Management expected 2013 capital-project spending of approximately $259.6 million and identified total project spending of $1.332 billion, including Ohio racetrack relocations and St. Louis rebranding. These plans were subject to approvals and execution risks; some future construction spending was not contractually committed at year-end.
- Competition and operating risks: Management warned of continued pressure from new casinos and racinos, economic weakness and lower discretionary spending, possible gaming-tax increases, regulatory changes, weather and casualty events, and the risk that acquisitions or construction projects may not deliver expected returns.
- Iowa license and litigation: The Sioux City operating agreement with its local nonprofit partner had expired, and the Iowa regulator had not approved the proposed extension. The casino was permitted to continue operating pending a possible hearing; Penn’s proposals for a new Woodbury County license were under consideration. The property had $92.8 million of goodwill and other intangible assets at year-end; loss of the license or selection of another operator could lead to impairment and lost earnings.
- Other legal exposure: In Cherokee County litigation, a judge ruled for the county on summary judgment; the company accrued $6.4 million based on settlement discussions. The county’s claim sought more than $50 million, and a $25 million privilege fee was subject to an attachment order.
- Preferred investment obligation: Series B preferred stock had a $1.23 billion liquidation/redemption price at year-end and was due for redemption on June 30, 2015, in cash or common shares at the company’s election. The proposed Spin-Off could affect its treatment; the filing described related exchange arrangements and planned repurchases.
- Other unusual items: The company recognized a $7.2 million insurance gain related to the Tunica flood. It had no outstanding interest-rate swaps at year-end and disclosed exposure to variable-rate debt tied to LIBOR.
- Assurance: Ernst & Young issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the proposed Spin-Off, REIT election, $1.4 billion dividend, master lease, and associated refinancing were ultimately completed on the terms described.
- The status and outcome of the Sioux City license process and litigation, and any related impairment or change in property earnings.
- Actual results at new Ohio properties and acquired St. Louis, alongside the scale of cannibalization and competition at existing casinos.
- Debt and liquidity after acquisition financing, variable-rate interest costs, covenant headroom, and the 2015 preferred-stock redemption obligation.
- Actual 2013 capital spending, regulatory approvals, and completion costs and timing for the Ohio relocations and St. Louis rebranding.
- Resolution of the Cherokee County litigation and any further material legal, tax, or regulatory contingencies.