Penn National Gaming, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing registrant was Penn National Gaming, Inc. (now identified in the request as PENN Entertainment). Financial amounts below are in U.S. dollars; tables are in millions except per-share data.
Business context and results
The company owned, managed, or held interests in 26 gaming and pari-mutuel facilities across 18 jurisdictions. Gaming generated most revenue. Comparisons reflect new table games at Charles Town and Penn National Race Course, the opening of Hollywood Casino Perryville, the June 1 acquisition of the M Resort, and the 2011 Tunica flood closure.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenue | $687.9 | $598.3 | $1,354.9 | $1,190.6 |
| Income from operations | $140.6 | $51.7 | $263.3 | $144.1 |
| Operating margin | 20.4% | 8.6% | 19.4% | 12.1% |
| Net income attributable to Penn shareholders | $76.0 | $9.2 | $127.5 | $45.3 |
| Diluted EPS | $0.71 | $0.09 | $1.19 | $0.42 |
| Operating cash flow | — | $291.0 | $223.3 |
Q2 net revenue rose 15.0%; six-month net revenue rose 13.8%. Management cited gaming revenue growth, including table-game revenue of $38.3 million at Charles Town and $10.0 million at Penn National Race Course in Q2. Q2 operating income included $11.6 million of net insurance recoveries; the prior-year quarter included a $30.5 million impairment charge and a $6.6 million police-services contract termination charge. The effective tax rate was 33.5% in Q2 2011 versus 64.7% in Q2 2010, partly reflecting reversal of tax reserves in 2011.
Financial position, cash flow, and debt
- At June 30, cash and cash equivalents were $322.0 million, versus $246.4 million at December 31, 2010. Current assets were $485.5 million and current liabilities $309.0 million.
- Total debt carrying value was $2,098.1 million, versus $2,171.1 million at year-end; cash less total debt was approximately negative $1,776.2 million. Current maturities fell to $3.1 million from $357.9 million, principally because the July refinancing allowed the existing facility to be classified as long-term.
- Six-month operating cash flow of $291.0 million funded, in part, $107.3 million of property and equipment spending. Investing cash outflow was $144.8 million, including $80.7 million invested in joint ventures; financing cash outflow was $70.6 million, including $103.1 million of debt principal payments. Cash increased $75.6 million.
- The company reported compliance with debt covenants at June 30. Its $1.518 billion senior secured term loan was part of a facility with $614.1 million of available borrowing capacity, including the effect of letters of credit.
Developments, outlook, and risks
- Debt refinancing after quarter-end: In July, the company entered a $2.15 billion secured facility: a $700 million revolver, $700 million Term Loan A, and $750 million Term Loan B. It intended to redeem its $250 million 6.75% notes at a premium, using the new revolver, and expected an approximately $18 million Q3 debt-extinguishment loss. Management anticipated lower prospective interest expense in the prevailing low-rate environment.
- Investment and construction: The M Resort acquisition exchanged the company’s $230.5 million loan receivable for the business; purchase-price allocation remained preliminary. The company expected $247.9 million of 2011 capital-project spending, excluding licensing fees, with $77.7 million spent in the first half. Toledo and Columbus casinos were expected to open in the first half and fourth quarter of 2012, respectively; the Kansas joint-venture project was planned to open in Q1 2012.
- Management outlook: Management believed operating cash flow, cash on hand, and credit availability would meet foreseeable debt service, capital expenditure, and working-capital needs, but cautioned that cash generation, earnings growth, and future borrowing availability were not assured. No numerical earnings guidance was provided.
- Competition and operating risks: Management expected the new Des Plaines, Illinois casino to pressure Joliet and Aurora, while the end of their 3% racing surcharge after the new casino opened provided an offset. Future casinos in Cincinnati and Maryland were also expected to pressure Lawrenceburg and Charles Town. The filing cited economic weakness, gaming-tax and regulatory changes, development costs and delays, licensing, and competition as risks.
- Other unusual items and contingencies: Tunica closed May 1–25 due to flooding and reopened; the company recorded a $5.2 million insurance-deductible loss. The Joliet fire insurance claim was settled, with $81.2 million received cumulatively and a Q2 pre-tax gain of $16.8 million. The Maryland Jockey Club interest sale closed after quarter-end and was expected to generate an approximately $20 million Q3 gain. Litigation included Illinois gaming-surcharge disputes and Kansas development-related claims; management stated it believed it had defenses, while noting legal outcomes can be costly and unpredictable.
Important facts for investors to verify
- How much of the revenue and earnings increase reflects sustainable same-property growth versus new facilities, table games, and acquisition effects.
- Actual borrowing, interest costs, revolver usage, note redemption, and the Q3 refinancing-related charge following the July debt transactions.
- Whether expected Ohio and Kansas project schedules and capital spending remain on plan, and whether projects achieve expected returns.
- The realized impact of new and planned casino competition, especially in Illinois, Ohio, and Maryland.
- Final M Resort purchase-price allocation, the realized Maryland Jockey Club sale gain, and any material developments in outstanding litigation or regulatory matters.