PENN National Gaming, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 1, 2014. The filing registrant was Penn National Gaming, Inc. (now identified in the request as PENN Entertainment). The company operated or held interests in 27 facilities across 18 jurisdictions.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net revenue | $641.1 million | $798.2 million |
| Income from operations | $18.1 million | $133.3 million |
| Net income | $4.5 million | $65.3 million |
| Diluted EPS | $0.05 | $0.63 |
| Operating cash flow | $23.6 million | $133.8 million |
| Adjusted EBITDA (non-GAAP) | $70.4 million | $220.7 million |
| Adjusted EBITDAR (non-GAAP) | $174.7 million | $220.7 million |
Net revenue fell 19.7%; operating income and net income declined substantially. Operating margin was approximately 2.8%, versus 16.7%; net margin was approximately 0.7%, versus 8.2%. Adjusted EBITDA and EBITDAR are company-defined non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Cash and equivalents were $287.7 million at quarter-end, down from $293.0 million at year-end 2013. Current assets were $507.6 million and current liabilities $394.8 million. Long-term debt, including current maturities and the Plainridge contingent obligation, was approximately $1.064 billion; cash less that debt was approximately $776 million. The company had $477.9 million of available revolver capacity after letters of credit and reported compliance with debt covenants. Interest expense was $11.3 million, down from $27.9 million.
Investing cash outflow was $44.5 million, including $37.0 million of capital expenditures and $25.6 million for gaming licenses, partly offset by an $18.0 million decrease in escrowed cash. Financing cash inflow was $15.6 million. Capital maintenance spending was $24.1 million.
Changes and drivers versus prior year
- The November 2013 GLPI spin-off materially changed the business and makes year-over-year comparisons less like-for-like. Penn transferred most real estate assets and the Baton Rouge and Perryville properties to GLPI, then began leasing many facilities under a triple-net master lease. Q1 2014 rent expense was $104.3 million; there was no comparable rent expense in Q1 2013.
- Gaming revenue declined 20.5%. Management attributed the decrease to competition, the transfer of Perryville and Baton Rouge to GLPI, adverse winter weather, and softer regional markets. Competition particularly affected Lawrenceburg and Charles Town.
- Operating expenses declined 6.3%, but the new master-lease expense and lower revenue contributed to sharply lower operating income. Depreciation and amortization fell 38.5%, primarily because real estate assets were transferred to GLPI.
- The effective tax rate increased to 60.0% from 39.6%, reflecting lower pretax earnings, nondeductible costs and increased reserves for unrecognized tax benefits.
Outlook, developments and risks
- Management expected cash from operations, cash on hand and revolver availability to cover anticipated rent, debt service, capital expenditures and working capital for the foreseeable future, while cautioning that cash generation, earnings and future borrowing availability were not assured.
- Planned 2014 capital-project spending was $162.3 million, excluding licensing fees and net of reimbursements. Projects included Ohio facilities expected to open in fall 2014, Plainridge Park Casino in Massachusetts expected to open in Q2 2015, and the Jamul project in California anticipated for early 2016. Ohio openings were expected to increase annual master-lease rent by approximately $19 million.
- The Iowa Racing and Gaming Commission ruled in April 2014 that Argosy Casino Sioux City must cease operations by July 1, 2014. Penn sought reconsideration and was pursuing other legal options. This post-quarter development poses a material operating and legal risk.
- Other disclosed risks included continuing regional gaming competition, weak consumer spending, adverse weather, possible gaming-tax or regulatory changes, construction and permitting delays, and litigation. The company cited pending Ohio litigation affecting video lottery terminals and racetrack relocation, and project-specific legal and approval risks for Jamul.
- Penn had advanced $15.5 million to the Jamul Tribe at quarter-end; repayment depends on future casino revenues. The company said collectability was considered highly certain but noted a reserve could be required if project profitability or timing assumptions prove inaccurate.
- The company stated there had been no material change in its previously disclosed risk factors. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- How much of the earnings and cash-flow decline reflects the GLPI spin-off and new rent burden versus underlying property performance?
- What is the likely outcome and financial impact of the Sioux City license dispute and required closure ruling?
- Are the Ohio, Plainridge and Jamul projects on schedule and within budget, and what additional funding or lease costs will they require?
- Can operating cash flow sustain master-lease payments, debt service and planned capital spending if competition or consumer demand worsens?
- How sensitive are debt service capacity and covenant compliance to variable interest rates, gaming taxes and further revenue declines?