Business context and reporting period
Penn National Gaming, Inc. (now PENN Entertainment, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company operated or held interests in 41 gaming and racing properties across 19 states, alongside interactive gaming and sports betting operations and a 36% interest in Barstool Sports.
COVID-19 forced temporary closures of all 41 properties beginning March 13–19. Reopenings began May 18 under capacity limits and health protocols; 31 properties were open at June 30. The filing says all but Tropicana Las Vegas, Valley Race Park and Zia Park Casino had reopened by filing date.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $305.5 million | $1,323.1 million | $1,421.6 million | $2,605.7 million |
| Operating income (loss) | $(165.4) million | $198.4 million | $(726.0) million | $380.8 million |
| Net income (loss) | $(214.4) million | $51.4 million | $(823.0) million | $92.3 million |
| Adjusted EBITDA (non-GAAP) | $(79.3) million | $316.5 million | $75.5 million | $623.2 million |
| Adjusted EBITDAR (non-GAAP) | $24.5 million | $406.5 million | $276.8 million | $797.9 million |
Q2 revenue fell 76.9% year over year; gaming revenue declined 75.6% and food, beverage, hotel and other revenue declined 82.3%. Q2 net loss attributable to Penn was $213.9 million, or $1.69 per diluted share. Adjusted EBITDA margin was (26.0)% versus 23.9% a year earlier; Adjusted EBITDAR margin was 8.0% versus 30.7%. These non-GAAP measures are not substitutes for GAAP results.
For the first six months, operating cash flow was $(130.9) million, versus $315.2 million in 2019. Investing cash outflow was $218.5 million and financing cash inflow was $1,155.1 million. Capital expenditures were $73.7 million, down from $95.0 million. Cash and cash equivalents were $1,244.3 million at June 30, with total cash, cash equivalents and restricted cash of $1,260.9 million.
Long-term debt, net of current maturities, discounts and issuance costs, was $3,044.8 million, compared with $2,322.2 million at year-end 2019. Senior secured facilities had $2,436.4 million gross outstanding, including $670.0 million drawn on the revolver, leaving only $0.6 million of stated borrowing capacity. The company also reported $4,084.6 million of long-term financing obligations and $4,623.8 million of long-term lease liabilities. These lease and financing obligations are separate from reported debt.
In response to the disruption, Penn raised cash through a $345.0 million gross common-stock offering ($331.2 million net), $330.5 million of 2.75% convertible notes ($322.2 million net), and additional revolver borrowings. Cash rose substantially from $437.4 million at December 31, 2019, while debt and share count also increased. The credit agreement waived leverage and interest-coverage tests during a covenant relief period, subject to minimum liquidity requirements; the company reported compliance with required covenants at June 30.
Material changes, outlook and risks
- Impairments: First-half operating expenses included $616.1 million of impairment losses, principally $113.0 million of goodwill and $498.5 million of other intangible assets, following a COVID-related first-quarter impairment review. No impairment charge was recorded in Q2.
- Other unusual items: Q2 included a $28.5 million gain associated with the Tropicana real-estate transaction and a $29.5 million unrealized holding gain on equity securities. The company also recorded $21.8 million in CARES Act payroll credits for the six-month period.
- Real estate and leases: GLPI acquired Tropicana’s real estate for $307.5 million of rent credits; $176.7 million of credits remained at June 30. The company expected a separate $30.0 million rent-credit transaction for the Morgantown land to close in Q4 2020. Penn also reported a $5.0 million annual rent reduction under the Pinnacle Master Lease effective May 1.
- Operations and cost actions: Penn furloughed approximately 26,000 employees during closures, operated with fewer than 850 employees company-wide at the low point, and said approximately 13,000 had returned by June 30. It reduced compensation, operating costs and capital spending; York and Morgantown casino construction was suspended.
- Outlook: No quantified earnings or revenue guidance was provided. Management said recovery, visitation and spending were uncertain and warned that further closures or restrictions could require additional cost and liquidity actions. It planned to launch the Barstool-branded online sports betting app in Q3 2020, initially in Pennsylvania, with additional states expected by year-end.
- Risks and contingencies: Key risks include renewed shutdowns, capacity restrictions, weak consumer demand, competition, liquidity and refinancing needs, covenant compliance, potential further asset impairments, and uncertainty over CARES Act benefits. Management estimated a potential $40–$50 million income-tax refund, primarily from NOL carrybacks. Legal proceedings were not expected by management to materially affect results.
- Barstool investment: Penn acquired a 36% interest for a stated purchase price of $161.2 million and described a plan to raise its ownership to approximately 50% by purchasing about $62 million of additional shares after three years or earlier at its election.
Important facts for investors to verify
- Whether reopened-property revenue and margins persisted after the initial reopening period, and whether later restrictions or closures affected results.
- Cash burn, actual liquidity against the amended minimum-liquidity covenant, and the company’s ability to meet debt service and substantial lease and financing obligations.
- The timing and realization of the estimated tax refund, remaining Tropicana rent credits, and the expected Morgantown transaction.
- Whether the Barstool app launches as planned, obtains required approvals, and produces returns sufficient to justify the investment and potential additional share purchases.
- Whether COVID-related assumptions, valuation allowances or property performance lead to further impairment charges or changes in reported asset values.