Penn National Gaming, Inc. — FY2010 Form 10-K
The filing covers the fiscal year ended December 31, 2010. The registrant was Penn National Gaming, Inc. (the company now identified in the request as PENN Entertainment). It owned, managed, or held interests in 23 gaming and racing facilities across 16 jurisdictions. Results are annual, with fourth-quarter data noted separately.
Financial performance
| Metric | FY2010 | FY2009 | Change / context |
|---|---|---|---|
| Net revenue | $2,459.1 million | $2,369.3 million | Up 3.8% |
| Operating income (loss) | $153.2 million | $(194.6) million | Improved; impairment charges were $224.7 million versus $532.4 million |
| Net loss attributable to shareholders | $(59.5) million; $(0.76) per diluted share | $(264.9) million; $(3.39) per diluted share | Loss narrowed substantially |
| Cash from operations | $493.2 million | $338.2 million | Up $154.9 million |
| Cash used in investing | $(736.8) million | $(262.7) million | Includes capital spending, M Resort debt purchase, acquisitions, and joint-venture investment |
| Cash and cash equivalents | $246.4 million at year-end | $713.1 million | Down $466.7 million |
| Total debt | $2,171.1 million | $2,334.8 million | Down $163.7 million |
Net operating margin was approximately 6.2% of net revenue. Gaming revenue rose 3.9% to $2,242.5 million; food, beverage, and other revenue fell 1.3% to $334.8 million. The filing reports $362.955 million of property and equipment expenditures and $88.5 million of maintenance capital expenditures. Operating cash flow less property and equipment expenditures was approximately $130.2 million, before acquisitions and other investing items.
Year-end current assets were $466.0 million and current liabilities were $691.5 million. The company reported $534.5 million of available borrowing capacity under its revolving facility, after letters of credit. Debt included $1,589.1 million under the senior secured facility and $575.0 million of senior subordinated notes. The company said it complied with financial covenants at year-end.
Material changes and unusual items
- Revenue growth reflected new table games at Charles Town and Penn National Race Course, the September opening of Hollywood Casino Perryville, and recovery of Joliet operations after its 2009 fire. Table games generated $58.2 million at Charles Town and $15.1 million at Penn National Race Course.
- Impairment charges totaled $224.7 million, principally goodwill impairments of $144.6 million at Aurora and $44.2 million at Joliet, plus a $31.3 million charge on the former Columbus Arena District site and a $4.4 million Argosy trademark write-off.
- Joliet fire insurance recoveries produced a $7.5 million gain in 2010; the company received $42.0 million of related proceeds during the year and said claims remained under settlement.
- The company recorded $66.2 million of income tax expense despite only $4.5 million of pretax income, mainly because a portion of goodwill impairment was nondeductible.
- Cash investment included $230.5 million to purchase M Resort debt, intended for conversion into ownership subject to Nevada regulatory approval, and $63.6 million invested in joint ventures. The company also repurchased $35.9 million of common stock and $11.2 million of preferred stock.
- Fourth-quarter 2010 net revenue was $630.2 million; operating loss was $101.3 million and shareholder net loss was $153.1 million, reflecting fourth-quarter impairments.
Outlook, risks, and contingencies
Management expected operating cash flow, cash on hand, and available revolver capacity to meet anticipated debt service, capital expenditures, and working-capital needs, while cautioning that results, financing access, and earnings growth were uncertain. Planned projects included casinos in Toledo and Columbus, Ohio, and a Kansas joint venture facility, with openings targeted for 2012. The company estimated its Kansas project share at approximately $155 million. Its projected 2011 capital project spending was $287.5 million, and it identified a further $556 million of uncontracted future construction spending, primarily for Ohio projects.
- Debt refinancing is a key risk: the senior secured facility matures in 2012, with substantial scheduled principal payments in 2011 and 2012. Management expected to refinance a significant portion but gave no assurance of acceptable financing.
- Charles Town and Lawrenceburg together generated approximately 38% of 2010 net revenue. Management identified new or expanding competition—including planned casinos near these properties—as a threat, alongside weak consumer spending and possible increases in gaming taxes.
- Casino Rama’s management agreement was due to expire July 31, 2011. The operator was bidding for a new term under terms that included a $5 million annual management-fee cap; continued management was not assured.
- Material project risks include construction costs and delays, regulatory approvals, and local opposition. The M Resort conversion and Texas racing joint venture remained subject to approvals or closing conditions.
- Contingencies include ongoing Illinois litigation over a 3% casino tax surcharge (approximately $49.7 million of cumulative incremental expense recognized, including $9.7 million in 2010), a shareholder class action on appeal, and a Kansas county claim seeking more than $50 million. A separate Kansas real-estate dispute was dismissed on summary judgment, subject to a pending fee request.
- Other exposures include gaming-license and labor-agreement renewals, environmental matters whose costs the company could not estimate, weather and casualty losses, and impairment risk. The filing states that goodwill and indefinite-lived intangibles require significant estimates and that future impairment charges remain possible.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the company refinanced or replaced its senior secured credit facility before maturity and met the scheduled 2011–2012 principal payments.
- Final regulatory approval and economic terms of the M Resort conversion, and the outcome of the Casino Rama management bid.
- Actual construction costs, opening dates, funding needs, and returns for the Ohio and Kansas projects.
- Operating trends at Charles Town, Lawrenceburg, Aurora, and Joliet amid new regional competition and continued pressure on customer spending.
- Resolution and potential financial effects of the Illinois surcharge, shareholder, and Kansas litigation, as well as outstanding Joliet insurance claims.
- Further impairment charges, tax developments, and the company’s ability to maintain liquidity while pursuing acquisitions and capital projects.