PENN National Gaming, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing registrant was Penn National Gaming, Inc. (now PENN Entertainment, Inc.). The company operated or held interests in 27 facilities across 17 jurisdictions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $769.4 million | $701.0 million | $1,525.9 million | $1,365.1 million |
| Operating income | $149.3 million | $123.4 million | $289.9 million | $235.1 million |
| Net income | $34.0 million | $3.0 million | $57.7 million | $4.9 million |
| Diluted EPS | $0.37 | $0.03 | $0.63 | $0.05 |
| Adjusted EBITDA | $223.8 million | $195.4 million | $436.7 million | $379.8 million |
Net revenue increased 9.8% in Q2 and 11.8% for the six-month period. Operating margin was approximately 19.4% in Q2 versus 17.6%, and 19.0% for six months versus 17.2%. Net income rose substantially, helped by recently opened or acquired properties, a lower tax provision, and higher interest income. Higher depreciation and interest expense partly offset those benefits. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, Master Lease payments.
For the six months, operating cash flow was $189.7 million (prior year $199.7 million); investing cash outflow was $143.8 million (prior year $163.1 million); and financing cash outflow was $61.6 million (prior year $12.1 million). Cash declined $15.6 million to $221.4 million. Capital project and maintenance expenditures were $11.0 million and $32.5 million, respectively; advances to the Jamul Tribe were $102.2 million.
Balance sheet, debt and liquidity
- At June 30, cash was $221.4 million and current assets were $342.7 million against current liabilities of $540.6 million, a working-capital deficit of approximately $197.8 million.
- Long-term debt was $1.69 billion gross, including $1.22 billion under the secured credit facility and $300 million of 5.875% senior notes due 2021. The company also reported a $3.54 billion GLPI Master Lease financing obligation.
- Revolver borrowings were $409.0 million; available borrowing capacity was $200.7 million after letters of credit. The company reported covenant compliance at quarter-end.
- Management said cash from operations, cash on hand and facility availability should cover anticipated rent, debt service, capital spending and working capital for the foreseeable future, while cautioning that cash generation, earnings and future borrowing availability are not assured.
Changes, outlook and risks
- Growth reflected Plainridge Park Casino, Tropicana Las Vegas and Prairie State Gaming, which contributed $43.6 million, $30.5 million and $14.9 million of Q2 net revenue, respectively. Comparable-period results also benefited from weaker corporate stock-compensation costs.
- Management said regional gaming trends softened midway through Q2 and stayed soft through June, particularly among unrated players. Competition weighed on Charles Town and Lawrenceburg; flooding affected Argosy Alton, and adverse energy trends affected Zia Park. Management also cited new and planned regional competitors.
- The Jamul project was expected to open in August 2016. Penn had advanced $299.1 million by June 30, including accrued interest, against an approximately $390 million project budget. Collection depends on casino revenues; Penn said collectability was highly certain but disclosed possible reserve risk if profitability or timing assumptions prove inaccurate.
- After quarter-end, Penn acquired social casino developer Rocket Games on August 1 for $60 million cash, subject to adjustments, with potential contingent consideration of up to $110 million. The acquisition was funded with cash and revolver borrowings.
- The company recorded a $3.5 million Tropicana litigation settlement gain in South/West segment adjusted EBITDA. A separate $3.1 million settlement of a dispute over Tropicana bankruptcy professional fees was approved in June.
- The effective tax rate fell to approximately 24% for the first half from approximately 85% a year earlier, primarily due to a lower valuation allowance and higher pretax earnings. A substantial deferred-tax-asset valuation allowance remained; any release could materially reduce tax expense, but timing and amount were uncertain.
- Disclosure controls were reported ineffective at June 30 due to material weaknesses involving complex and non-routine transaction accounting, including leases, and goodwill and indefinite-lived intangible impairment calculations. Management expected remediation by December 31, 2016, subject to evidence that controls operated effectively. The filing also references a recent financial-statement restatement and related potential risks.
- No numerical full-year earnings or revenue guidance was provided. The filing identifies regulatory, construction, litigation, tax, competition, economic and financing risks; it also notes that planned gaming developments and acquisitions may require additional financing.
Investor verification priorities
- Track remediation and independent testing of the disclosed material weaknesses and the consequences of the prior restatement.
- Check Jamul opening progress, remaining funding needs, financing arrangements and recovery prospects for Penn’s advances.
- Monitor debt, GLPI lease obligations, interest costs, revolver availability and covenant headroom, especially after the Rocket acquisition.
- Assess whether soft regional gaming trends and competitive pressure affect comparable-property revenue and margins, apart from acquisitions and new openings.
- Verify Rocket’s final purchase-price adjustments and performance-based contingent consideration, and evaluate the remaining tax valuation allowance.