Business Context and Reporting Period
Company: Penn National Gaming, Inc. (now PENN Entertainment, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: A diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties operating 19 facilities across 15 jurisdictions. The company is actively pursuing expansion in Ohio, Kansas, and Maryland while managing capital projects at existing properties.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenues | $592.3 million | $612.2 million |
| Income from Operations | $92.4 million | $100.8 million |
| Net Income (Attributable to Shareholders) | $36.2 million | $40.7 million |
| Diluted EPS | $0.34 | $0.38 |
| Operating Cash Flow | $93.7 million | $104.1 million |
| Cash and Cash Equivalents | $642.5 million | $713.1 million (Dec 31, 2009) |
| Total Debt (Long-term + Current) | $2.30 billion | $2.33 billion (Dec 31, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased by 3.3% ($19.9 million) primarily due to inclement weather, reduced consumer spending from economic conditions, and lower gaming revenue at several properties (Charles Town, Aurora, Baton Rouge, Bay St. Louis). These declines were partially offset by growth at Hollywood Casino Lawrenceburg and Penn National Race Course.
- Operating Expenses: Total operating expenses decreased by 2.2% ($11.4 million). This was driven by a significant reduction in the "Empress Casino Hotel fire" charge (from $5.4 million in 2009 to $0.1 million in 2010) and lower general and administrative expenses. However, depreciation and amortization increased by 15.2% due to new assets at Lawrenceburg and Penn National.
- Profitability: Income from operations fell 8.4% and Net Income fell 11.1%. The decline in net income was exacerbated by increased interest expense ($3.1 million increase) and a loss from unconsolidated affiliates ($1.4 million vs. $0.3 million loss), largely due to the Kansas Entertainment project.
- Effective Tax Rate: The effective tax rate dropped to 35.5% from 45.4%, primarily due to a favorable resolution of an uncertain tax position in Pennsylvania.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Expansion Projects: The company is proceeding with major developments in Ohio (Columbus and Toledo), Kansas (Kansas Speedway), and Maryland (Perryville). Construction on the Kansas facility is expected to begin in Q2 2010.
- Ohio Casino Location: Following a May 4, 2010 election, the Columbus casino site was determined to be the former Delphi Automotive plant. The company plans to sell the previously purchased Arena District land, which may result in a charge in Q2 2010.
- Capital Expenditures: Expected capital project expenditures for 2010 are approximately $308.8 million (company share $298.9 million). Significant spending is allocated to Empress Casino Hotel reconstruction and the Ohio/Kansas projects.
- Joint Ventures: Announced a joint venture with MI Developments to own and operate the Maryland Jockey Club (Laurel Park and Pimlico).
Risks and Contingencies
- Regulatory and Legislative: Risks include changes in gaming taxes, smoking bans, and the outcome of referenda in jurisdictions where the company operates or seeks to expand.
- Legal Proceedings: Ongoing litigation includes a RICO case regarding the Illinois 3% tax surcharge and disputes over the Cherokee County, Kansas gaming application. The company believes it has meritorious defenses.
- Insurance Recovery: The company continues to recover insurance proceeds related to the March 2009 fire at Empress Casino Hotel. Receivables stood at $13.7 million as of March 31, 2010.
- Debt Covenants: The company is in compliance with all financial covenants, including fixed charge coverage and leverage ratios, but remains restricted on additional indebtedness and capital expenditures.
Investor Verification Checklist
- Ohio Land Disposal: Verify the fair market value and potential impairment charge associated with the sale of the Columbus Arena District land parcel.
- Kansas Project Financing: Confirm the status of third-party financing for the Kansas Entertainment project; the company may need to fund its $155 million share if external financing is unavailable.
- Empress Casino Reconstruction: Monitor the timeline and cost overruns for the permanent land-based pavilion completion (expected Q4 2010) and insurance claim finalization.
- Illinois Tax Litigation: Track the status of the RICO lawsuit and the Seventh Circuit Court of Appeals order regarding funds held in the protest fund.
- Debt Maturities: Review the repayment schedule for the senior secured credit facility, specifically the Tranche A Revolving Loans maturing in October 2010.