PENN National Gaming, Inc. — Q2 2013 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2013. Penn National Gaming operated or held interests in 29 gaming and pari-mutuel facilities across 19 jurisdictions at quarter-end. It sold its Bullwhackers property on July 1, 2013. The unaudited interim statements are prepared under U.S. GAAP.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $761.4 million | $712.6 million | $1,559.6 million | $1,448.6 million |
| Operating income | $46.9 million | $128.0 million | $180.2 million | $270.6 million |
| Net income (loss) | $(12.2) million | $66.7 million | $53.1 million | $145.3 million |
| Diluted EPS | $(0.16) | $0.63 | $0.51 | $1.37 |
| Adjusted EBITDA | $211.4 million | $189.8 million | $432.1 million | $390.5 million |
Margins. Operating margin was approximately 6.2% in Q2 2013 versus 18.0% in Q2 2012; net margin was approximately -1.6% versus 9.4%. For the first six months, operating margin was approximately 11.6% versus 18.7%, and net margin approximately 3.4% versus 10.0%.
- Q2 net revenue rose 6.9%, and first-half net revenue rose 7.7%. Growth reflected new Ohio casinos and the acquisition of Harrah’s St. Louis, partly offset by competitive pressure at several established properties.
- Operating income fell sharply, and Q2 swung to a net loss. Results included a $71.8 million pre-tax impairment charge at Argosy Casino Sioux City and a $2.5 million tornado-related insurance deductible charge at Hollywood Casino St. Louis. Higher depreciation and interest expense also weighed on earnings.
- Cash from operations was $291.4 million for the first half, up from $230.9 million. Investing activities used $81.7 million, versus $325.5 million in the prior-year period; financing activities used $235.1 million, versus $60.3 million provided.
- Cash and cash equivalents were $235.1 million at June 30, down from $260.5 million at year-end 2012. Current assets were $401.3 million and current liabilities $457.0 million.
- Total debt, including current maturities, was approximately $2.48 billion; cash-adjusted debt was approximately $2.24 billion. The revolving facility had no borrowings and $711.7 million of available capacity after letters of credit. The company reported compliance with debt covenants.
Changes, outlook, and key risks
- Segment performance: Midwest revenue and Adjusted EBITDA grew, driven by Toledo and Columbus openings. East/West revenue and EBITDA declined, principally amid Maryland competition. Southern Plains benefited from the St. Louis acquisition, but its reported operating result included the Sioux City impairment.
- Proposed REIT separation: The company planned a fourth-quarter 2013 spin-off of Gaming and Leisure Properties, Inc. (GLPI), subject to regulatory, financing, board, legal, and other conditions. GLPI was expected to own most real estate and lease most properties back under a 15-year triple-net master lease. The company estimated a roughly $1.05 billion taxable accumulated-earnings dividend if GLPI elected REIT status as of January 1, 2014, with at least 20% payable in cash. The company expected to refinance existing debt in connection with the transaction.
- Management outlook: Management believed operating cash flow, cash on hand, and revolver availability would cover expected debt service, capital expenditures, and working capital for the foreseeable future, while cautioning that cash generation, earnings growth, and financing availability were not assured. 2013 capital project spending was projected at $194.5 million, excluding licensing fees and net of reimbursements; $70.8 million had been spent in the first half.
- Development and obligations: Construction began on Ohio’s planned Dayton and Austintown facilities, with combined project budgets of approximately $515 million, including stated fees. Under the Ohio agreement, the company also agreed to pay $110 million over ten years beginning July 2013, plus facility-related payments after openings.
- Principal risks and contingencies: The Iowa gaming license for Sioux City was awarded to another operator; Penn expected to continue operating only until the new casino opens and had litigation pending, with trial scheduled for April 2014. Other risks include intensifying regional competition, economic weakness, regulatory and construction approvals, the outcome and financing of the proposed spin-off, gaming tax or legislative changes, and legal proceedings. Management disclosed no material change to previously reported risk factors.
- Unusual items: The Sioux City license award prompted impairment and accelerated amortization of the remaining gaming license through the anticipated opening of the replacement facility. A $6.7 million distribution from bankruptcy proceedings on a corporate debt security generated a $1.3 million gain.
Most important facts for investors to verify
- Whether the GLPI spin-off, related financing, regulatory approvals, and estimated special dividend proceeded as planned; the transaction remained conditional in this filing.
- The expected duration and financial impact of Penn’s Sioux City operations, including litigation outcomes and the new casino’s opening timetable.
- Whether new and planned competition continues to pressure established properties, especially in Ohio, Maryland, and Louisiana.
- The company’s ability to fund its Ohio projects and other capital needs while meeting debt service and obligations under its credit agreements.
- How much of the reported revenue and Adjusted EBITDA growth reflects acquired or newly opened facilities versus comparable-property performance; Adjusted EBITDA is a non-GAAP measure.