PENN National Gaming, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing is by Penn National Gaming, Inc. (now PENN Entertainment, Inc.). Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context and reporting period
PENN operated or held interests in 41 facilities across 18 jurisdictions, alongside racing, video gaming terminals, interactive gaming and sports wagering operations. The quarter’s comparison with Q1 2018 is significantly affected by the October 2018 Pinnacle acquisition and the January 1, 2019 acquisition of Margaritaville Resort Casino, as well as the adoption of new lease accounting. Prior-period figures were not restated for the lease-standard adoption.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1,282.6 | $816.1 |
| Operating income | $182.4 | $172.1 |
| Operating margin | 14.2% | 21.1% |
| Net income | $41.0 | $45.4 |
| Net income attributable to Penn | $41.0 | $45.4 |
| Basic / diluted EPS | $0.35 / $0.35 | $0.50 / $0.48 |
| Net cash from operating activities | $125.7 | $66.9 |
| Net cash used in investing activities | $(408.2) | $(62.5) |
| Net cash from (used in) financing activities | $215.4 | $(64.4) |
| Adjusted EBITDAR (non-GAAP) | $391.4 | $242.6 |
| Adjusted EBITDA after lease payments (non-GAAP) | $183.5 | $126.7 |
Revenue increased 57.2%, while operating income rose about 6% and net income declined about 10%. Net margin fell to 3.2% from 5.6%. Adjusted EBITDAR margin was 30.5%, versus 29.7%; this non-GAAP measure excludes rent and other items, so it should not be read as a substitute for earnings or cash flow.
At March 31, cash and cash equivalents were $400.3; cash, cash equivalents and restricted cash totaled $414.1. Current assets were $639.2 and current liabilities $820.4. The revolving credit facility had $92.0 drawn and $571.5 of available capacity after letters of credit.
Reported long-term debt, net of current maturities and issuance costs, was $2,311.4; current maturities were $62.5. Separately, the balance sheet included $4,181.8 of financing obligations and $3,964.3 of operating lease liabilities, plus $222.8 of finance lease liabilities. These lease-related obligations are substantial and should be considered separately from reported funded debt. Interest expense was $132.6, up from $115.7.
Material changes versus the prior comparable period
- Acquisitions drove much of the growth: Pinnacle and Margaritaville together contributed $504.8 of revenue and $164.9 of Adjusted EBITDAR in Q1 2019, according to management. The acquired properties’ contribution is not equivalent to organic growth.
- Management cited adverse winter weather as reducing visitation, particularly at existing Midwest properties; Midwest revenue decreased $6.6 year over year despite the acquired-property contribution.
- Operating cash flow increased $58.8, primarily due to higher customer receipts following acquisitions. Investing outflow rose sharply, including $370.3 paid for Margaritaville, net of cash acquired. Financing cash flow included $261.1 of proceeds from the Margaritaville real-estate sale-leaseback.
- Capital expenditures were $37.7, including $36.2 of maintenance spending, compared with total capital expenditures of $11.8 in Q1 2018.
- PENN adopted ASC 842 on January 1, 2019. This reclassified certain master-lease components and added substantial lease assets and liabilities; the comparative period was not restated. Consequently, changes in property, equipment, rent and interest expense are not fully comparable across periods.
Outlook, commentary, risks and unusual items
- Management said cash from operations, cash on hand and revolver availability should be adequate for anticipated lease payments, debt service, capital spending and working capital for the foreseeable future. This expectation is conditional: the company noted uncertainty around operating cash flow, economic conditions, acquisition synergies and future financing availability. No numerical earnings guidance was provided.
- PENN expected to complete its Hollywood Casino York and Hollywood Casino Morgantown projects by the end of 2020. Disclosed 2019 project capital spending was expected to total $36.9; management estimated total investments of approximately $120 for York and $111 for Morgantown, including gaming licenses, subject to approvals and execution risks.
- The Greektown operations acquisition, for approximately $300 in cash, was expected to close by the end of May 2019, subject to Michigan regulatory approval and other closing conditions. In April 2019, PENN also announced that it expected to close Resorts Casino Tunica on June 30, 2019.
- The company cited risks from competition, gaming-tax or property-tax increases, regulation, economic and consumer conditions, weather, project costs and approvals, acquisition integration and leverage, and sports-betting and interactive-gaming execution. It reported compliance with required financial covenants at March 31, 2019.
- The adoption of ASC 842 materially changed balance-sheet presentation. Separately, the preliminary Margaritaville purchase-price allocation included $39.5 of goodwill and remained subject to valuation work; Pinnacle purchase accounting also remained preliminary.
- The board authorized a share repurchase program of up to $200 through December 31, 2020; no shares were repurchased during the quarter. Management said pending legal proceedings were not expected to have a material effect and reported no material changes to the previously disclosed risk factors.
Most important facts for investors to verify
- How much future revenue and cash generation is organic versus attributable to Pinnacle, Margaritaville and other portfolio changes, and whether expected integration synergies are achieved.
- The cash burden and terms of the Penn and Pinnacle master leases and other lease obligations, alongside funded debt, interest expense and recurring lease payments.
- Whether operating cash flow can sustain debt service, lease payments and planned capital spending, particularly given the quarter’s acquisition-related investing outflow.
- Regulatory approvals, timing, total costs and expected returns for Greektown, York and Morgantown, and the planned Resorts Casino Tunica closure.
- The effect of ASC 842 and still-preliminary acquisition accounting on reported assets, liabilities, margins, taxes and comparisons with prior periods.