PENN National Gaming, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2014; year-to-date figures cover the six months ended June 30, 2014. The filing is under the name Penn National Gaming, Inc. The company operated or held interests in 27 facilities across 18 jurisdictions at quarter-end.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $652.1 million | $761.4 million | $1,293.2 million | $1,559.6 million |
| Operating income | $23.4 million | $46.9 million | $41.4 million | $180.2 million |
| Net income (loss) | $4.2 million | $(12.2) million | $8.7 million | $53.1 million |
| Diluted EPS | $0.05 | $(0.16) | $0.10 | $0.51 |
| Adjusted EBITDA | $82.1 million | $214.3 million | $155.4 million | $437.9 million |
- Net revenue fell 14.3% in Q2 and 17.1% year to date. Operating margin was approximately 3.6% in Q2 versus 6.2% a year earlier, and 3.2% year to date versus 11.6%.
- Q2 returned to profitability compared with a prior-year loss, primarily amid lower impairment expense and lower interest and income tax expense. Year-to-date net income nevertheless declined substantially.
- Operating cash flow was $121.9 million for the six months, down from $291.4 million. Investing cash use was $170.2 million; financing provided $6.6 million. Cash declined $41.7 million to $251.3 million.
- At June 30, total debt and other long-term obligations were approximately $1.057 billion, including $736.3 million under the secured facility, $300 million of 5.875% notes due 2021, and an $18.5 million Plainridge contingent obligation. The company had $477.6 million of available revolver capacity and reported compliance with debt covenants.
- Current assets were $497.1 million and current liabilities $395.7 million. Master Lease rent expense was $104.6 million in Q2 and $208.9 million for the first half.
Material changes and drivers
- The November 2013 GLPI spin-off transferred substantially all real estate assets to GLPI, which leases most properties back to Penn under a triple-net master lease. This introduced significant rent expense and makes year-over-year comparisons less comparable; depreciation and interest expense also declined following the spin-off.
- Gaming revenue declined 15.2% in Q2 and 18.0% year to date. Management cited sluggish consumer spending, severe winter weather in the first quarter, increased regional competition, and the transfer of Hollywood Casino Perryville and Hollywood Casino Baton Rouge to GLPI.
- Competition pressured East/Midwest results, including at Lawrenceburg and Charles Town. East/Midwest adjusted EBITDAR fell 18.8% in Q2 and 25.2% year to date. Southern Plains adjusted EBITDAR fell 12.7% in both periods.
- Q2 included a $4.6 million pre-tax impairment charge for idle assets. The prior-year comparison included a $71.8 million impairment charge related to Sioux City and a $2.5 million tornado-related insurance deductible charge.
- The 2014 tax provision and earnings were revised after the earnings release: an additional $1.4 million reduction in tax expense raised reported Q2 and first-half net income to $4.2 million and $8.7 million, respectively.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said cash from operations, cash on hand, and revolver availability were expected to meet rent, debt service, capital spending, and working-capital needs for the foreseeable future, while cautioning that cash generation and financing availability are not assured.
- Management expected the Ohio Dayton and Austintown racinos to open in Q3 2014, Plainridge Park Casino in Massachusetts in June 2015, and the Jamul project in California in mid-2016. The filing outlined 2014 capital project spending of $156.7 million, excluding licensing fees and net of reimbursements.
- Massachusetts voters were scheduled to decide in November 2014 whether to repeal the state’s expanded gaming law. Penn was continuing construction despite having invested more than $69 million by June 30; repeal could jeopardize the investment and lead to litigation. A lawsuit challenging the Plainridge license award was pending.
- Argosy Casino Sioux City ceased operations on July 30, 2014 after Iowa authorities declined to renew its license and the Iowa Supreme Court denied further review. The master-lease amendment reduces annual rent by $6.2 million following cessation.
- Other stated risks included regulatory approvals and project execution, new gaming competition, economic weakness, possible tax increases, litigation, and the potential need for additional financing. A July insurance settlement related to the 2013 St. Louis tornado was expected to produce approximately $5.7 million.
Investor facts to verify
- How much of the revenue and earnings decline reflects comparable-property performance versus properties transferred to GLPI, competition, and weather?
- What are the net cash-flow and coverage effects of the GLPI master lease, including rent changes from new Ohio facilities and Sioux City’s closure?
- What is the outcome of the Massachusetts referendum and Plainridge license litigation, and what portion of the project investment could be recovered if gaming legislation is repealed?
- What are the final costs, opening dates, and financing needs for the Ohio, Plainridge, and Jamul projects?
- How does the decline in operating cash flow affect debt repayment capacity, capital spending, and liquidity under weaker operating conditions?