PENN National Gaming, Inc. — Q2 2017 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2017. The contemporaneous registrant name in the filing is Penn National Gaming, Inc. The company operated, managed, or held interests in 29 gaming and racing facilities across 17 jurisdictions, alongside video gaming terminals and interactive gaming. It acquired Bally’s and Resorts Casino Tunica on May 1, 2017.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $796.5 million | $769.4 million | $1,572.7 million | $1,525.9 million |
| Operating income | $135.0 million | $149.3 million | $275.3 million | $289.9 million |
| Net income | $17.1 million | $34.0 million | $22.2 million | $57.7 million |
| Diluted EPS | $0.18 | $0.37 | $0.24 | $0.63 |
| Adjusted EBITDA | $219.1 million | $223.8 million | $440.8 million | $436.7 million |
| Adjusted EBITDA after GLPI master lease payments | $105.2 million | $113.0 million | $214.4 million | $214.5 million |
- Q2 net revenue rose 3.5%, while operating income fell 9.6% and net income fell 49.8% year over year. Operating margin declined to about 17.0% from 19.4%; net margin declined to about 2.1% from 4.4%.
- Six-month net revenue increased 3.1%, but operating income decreased 5.0% and net income decreased 61.6%. The filing attributes lower earnings primarily to refinancing-related debt charges, the Jamul loan impairment, higher depreciation and interest expense, and lower interest income.
- Six-month operating cash flow was $195.9 million, versus $194.0 million. Investing used $166.2 million, including acquisitions; financing used $34.8 million. Cash declined $5.1 million to $224.4 million.
- Six-month project and maintenance capital expenditures were $43.0 million combined. Management expected $36.7 million of project spending for full-year 2017, with $19.5 million remaining at June 30.
- At June 30, cash was $224.4 million and current assets were $373.6 million, versus current liabilities of $500.6 million. The company reported $627.9 million of available revolving-credit capacity, net of letters of credit.
- Long-term debt, including current maturities, was about $1.339 billion net of issuance costs and discounts; the separate GLPI financing obligation totaled about $3.567 billion. The company reported compliance with required debt covenants.
Material changes and management commentary
- Revenue growth included contributions from Bally’s and Resorts, Rocket Speed, and Prairie State Gaming acquisitions. Bally’s and Resorts contributed $12.5 million of net revenue and $2.8 million of adjusted EBITDA in the period.
- Regional results were mixed: Northeast and Midwest adjusted EBITDA increased, while South/West Q2 adjusted EBITDA declined 3.9%. “Other” adjusted EBITDA declined, mainly because of higher corporate overhead and cash-settled stock compensation.
- January 2017 refinancing included a new $400 million, 5.625% senior unsecured note issuance due 2027, a new secured credit facility, and redemption of $300 million of 5.875% notes due 2021. The six-month statement includes a $23.4 million loss on early extinguishment of debt; management also cites related financing charges.
- The May Tunica acquisition added $82.6 million to the GLPI master lease financing obligation. Total master lease payments were $226.4 million for the first half, and management expected an approximately $4.1 million annual lease escalator at the end of October 2017.
- Management said cash, operating cash flow, and available credit were expected to cover obligations, capital expenditures, and working capital for the foreseeable future, while cautioning that cash generation, earnings, and future borrowing availability were uncertain. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
Risks, contingencies, and unusual items
- The Jamul Tribe was expected to breach a debt-to-earnings covenant and was negotiating with its lenders. Penn anticipated possible loan concessions and full subordination of its loan. It recorded a $5.6 million impairment reserve; the loan’s carrying value was $84.2 million against $98.1 million unpaid principal. Further impairment could be material. Penn did not expect management fees from the facility in 2017.
- Management’s sensitivity analysis said a 5% increase in projected Jamul facility earnings could reverse the reserve, while a 5% decrease could require an additional $18.5 million charge.
- Management cited slow regional gaming-market growth and competitive pressure, including in Maryland, Massachusetts, Ohio, and Mississippi; softness in oil-related markets; and a May flood that affected Argosy Alton.
- Other stated risks include gaming-tax or regulatory changes, economic and consumer-spending conditions, acquisition and integration risks, access to capital, and risks related to interactive gaming, cybersecurity, data privacy, and litigation. The filing reported no material change to previously disclosed risk factors and no new material legal proceeding requiring disclosure.
- The company adopted new share-based compensation accounting in 2017, recognizing a $1.9 million income-tax benefit for the first half. It expected to adopt the new revenue standard in 2018 and was still assessing its impact, including changes to loyalty-point accounting and revenue presentation.
Investor facts to verify
- Progress and terms of the Jamul Tribe lender negotiations, Penn’s subordination or concessions, and the recoverability of the loan.
- Underlying same-property revenue and margins, separated from acquisition contributions and one-time or unusual items.
- Cash generation after GLPI lease payments, capital expenditures, interest, and scheduled debt repayments; adjusted EBITDA is a non-GAAP measure and excludes significant cash obligations.
- Execution and integration of Tunica and other acquisitions, and whether regional competition or market softness further affects results.
- Debt and lease obligations, the October 2017 master-lease escalator, covenant headroom, and the company’s ability to maintain liquidity.