Business context and reporting period
Penn National Gaming, Inc. (now PENN Entertainment, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operated or held interests in 41 gaming and racing facilities across 19 jurisdictions, with retail sports betting and newly launched Pennsylvania iGaming.
Comparisons are materially affected by the October 2018 Pinnacle acquisition and 2019 acquisitions of Margaritaville and Greektown. The company also adopted ASC 842 lease accounting on January 1, 2019; prior-year figures were not restated.
Financial performance and liquidity
- Third quarter: Revenue was $1.355 billion, up 71.5% year over year; operating income was $179.8 million versus $155.8 million; net income was $43.7 million versus $36.1 million; and net income attributable to Penn was $43.9 million. Diluted EPS was $0.38 versus $0.38.
- Nine months: Revenue was $3.960 billion, up 62.8%; operating income was $560.6 million versus $509.7 million; net income attributable to Penn was $136.4 million versus $135.5 million. Diluted EPS declined to $1.16 from $1.43.
- Non-GAAP measures: Third-quarter Adjusted EBITDA was $311.6 million (23.0% margin), compared with $229.7 million (29.1%); Adjusted EBITDAR was $407.9 million (30.1% margin), compared with $229.7 million (29.1%). For nine months, Adjusted EBITDA was $934.8 million (23.6% margin) and Adjusted EBITDAR was $1.206 billion (30.4% margin), versus $719.3 million (29.6%) for both measures in 2018. Management attributed much of the growth to acquisitions; the EBITDA margin comparison is affected by lease-accounting changes and related rent expense.
- Cash flow: Nine-month operating cash flow was $519.2 million, investing cash outflow $542.1 million, and financing cash outflow $33.9 million. Cash, cash equivalents and restricted cash ended at $424.4 million, including $406.9 million of unrestricted cash.
- Debt and liquidity: Long-term debt, net of current maturities and issuance costs, was $2.392 billion; current maturities were $62.9 million. Gross Senior Secured Credit Facilities borrowings were $2.001 billion, and $400 million of 5.625% notes mature in 2027. Revolver availability was $470 million after $200 million drawn and $30 million of letters of credit. The company reported compliance with debt covenants.
- Lease obligations: At September 30, operating lease liabilities were $4.564 billion, finance lease liabilities $224.1 million, and financing obligations $4.156 billion. These substantial obligations reflect the company’s leased-property model.
Material changes versus the prior comparable period
- Acquisitions contributed $570.4 million of third-quarter revenue and $1.608 billion for the nine-month period. Growth therefore does not represent comparable same-property growth.
- Management cited adverse weather and flooding as reducing visitation at existing properties, particularly in the Midwest. Existing Midwest property revenue declined year over year by $2.3 million in the quarter and $19.1 million over nine months.
- Interest expense rose to $133.5 million for the quarter and $400.5 million for nine months, reflecting acquisition-related debt and lease obligations, partly offset by reclassification of certain Penn Master Lease components to operating rent under ASC 842.
- ASC 842 materially changed balance-sheet presentation. Adoption added $3.807 billion of operating right-of-use assets and $3.704 billion of operating lease liabilities at January 1, 2019, and increased opening retained earnings by $1.086 billion. These accounting changes are not equivalent to new cash or a comparable improvement in underlying economics.
- Operating cash flow improved year over year, while investing outflows increased substantially due mainly to acquisitions. Nine-month maintenance capital expenditures were $118.5 million versus $54.8 million.
Outlook, commentary, and risks
- Management said cash from operations, cash on hand and available credit were expected to cover anticipated lease payments, debt service, capital expenditures and working capital needs for the foreseeable future, but gave no specific earnings or revenue guidance.
- The company expected Hollywood Casino York and Hollywood Casino Morgantown to be completed by the end of 2020, with estimated total investments of approximately $120 million and $111 million, respectively, including previously acquired licenses.
- Management anticipated future growth from acquisitions, development, market expansion, retail sports betting and iGaming. It cautioned that acquisition synergies, operating cash flow, future credit availability and projected earnings are uncertain.
- Risks highlighted include competition (including a new competitor affecting Plainridge Park), regulatory and legislative changes, construction and approval delays or cost overruns, economic conditions, weather and flooding, acquisition integration and synergy execution, and the uncertain economics and regulation of sports betting and iGaming.
- The filing said pending legal proceedings were not expected to materially affect financial position, cash flows or results; it reported no material change to the previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much reported growth and segment performance came from acquired properties versus same-property trends, and whether weather-related weakness persisted.
- Whether operating cash flow can sustain substantial triple-net lease payments, debt service and planned capital spending; review lease escalators and rent-reset terms.
- Debt maturities, floating-rate exposure, covenant headroom and the availability of the revolving credit facility.
- Actual costs, timelines, approvals and returns for the York and Morgantown projects, and realized Pinnacle, Margaritaville and Greektown integration benefits.
- The sustainability of earnings excluding the $7.1 million unrealized gain on sports-betting-related equity securities and other non-GAAP adjustments; assess GAAP results alongside Adjusted EBITDA and Adjusted EBITDAR.