PENN National Gaming, Inc. (now PENN Entertainment) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company operated gaming and racing properties, retail and online sports betting, and other interactive gaming businesses across 19 states. All properties had reopened by quarter-end; most were operating at full capacity subject to health and safety protocols.
Financial performance and liquidity
- Q2 revenue: $1.546 billion, up 406% from $305.5 million. Gaming revenue was $1.306 billion; food, beverage, hotel and other revenue was $240.3 million.
- Q2 earnings: Operating income was $377.9 million, versus an operating loss of $165.4 million; net income was $198.7 million, versus a net loss of $214.4 million. Diluted EPS was $1.17, compared with a loss of $1.69 per share.
- First-half results: Revenue was $2.821 billion, up 98.4%; operating income was $594.4 million, versus a $726.0 million loss; net income was $289.6 million, versus a net loss of $823.0 million. Diluted EPS was $1.72, versus a loss of $6.78.
- Margins and non-GAAP measures: Q2 net income margin was 12.9%, Adjusted EBITDA margin 30.4%, and Adjusted EBITDAR margin 37.9%. First-half margins were 10.3%, 28.6%, and 36.6%, respectively. Adjusted EBITDA and EBITDAR are non-GAAP measures; EBITDAR excludes triple-net operating lease rent.
- Cash flow and investment: First-half operating cash flow was $504.6 million, versus cash used of $130.9 million in 2020. Investing cash use was $99.1 million, including $64.6 million of capital expenditures; financing provided $18.8 million. Cash and cash equivalents were $2.275 billion at June 30.
- Debt and liquidity: Reported aggregate indebtedness was $2.468 billion, including $1.596 billion under secured credit facilities; the revolving facility was undrawn. Available revolver capacity was $672.2 million. Current assets of $2.552 billion exceeded current liabilities of $958.1 million. The company also reported substantial lease and financing obligations: $4.078 billion in long-term financing obligations and $4.535 billion in long-term lease liabilities.
Changes versus the prior-year period
The sharp year-over-year recovery primarily reflects the reopening of properties that had been temporarily closed during the 2020 comparison periods, increased visitation and length of play, and easing capacity and operating restrictions. Accordingly, the comparisons are substantially affected by pandemic-related closures. First-half 2020 also included $616.1 million of impairment losses; none were recorded in first-half 2021. First-half 2021 operating cash flow improved alongside the recovery, while 2020 financing cash flow had included significant debt and equity issuance proceeds.
Management cited strong visitation across customer age groups and continued strength in unrated play. Segment Adjusted EBITDAR improved year over year across the four regional segments; the “Other” category remained loss-making, in part reflecting investment in interactive operations and corporate costs.
Outlook, developments and risks
- Management said cash from operations, cash on hand and available credit were expected to cover lease payments, debt service, capital expenditures and working capital needs for the foreseeable future. It did not provide quantified financial guidance and cautioned that strong reopening trends may not continue.
- COVID-19 remained a material uncertainty, including possible renewed closures or restrictions, changing customer demand, staffing and supply-chain disruption, and potential impairment charges. Other cited risks include competition, regulatory approvals and changes, cyber and data-security threats, access to capital, and compliance with debt covenants.
- The company was in compliance with required financial covenants at June 30 and said it expected to remain compliant for at least the next 12 months. Its debt agreements restrict certain activities and include cross-default provisions tied to key leases.
- Subsequent events: On July 1, the company issued $400 million of 4.125% senior notes due 2029, with proceeds intended for general corporate purposes. The Perryville casino operations purchase closed July 1; the Texas racetrack interests transaction closed August 1. On August 4, the company agreed to acquire theScore in a cash-and-stock transaction valued at approximately $2.0 billion, subject to shareholder and regulatory approvals.
- Unusual or judgment-sensitive items include a February 2021 financing arrangement tied to certain claims, accruing interest at an effective 27% rate; a $28.3 million Hurricane Laura insurance receivable with no proceeds received in the first half; and significant long-term triple-net lease commitments.
Investor verification priorities
- Assess how much of the reported growth and margins reflects sustainable operations versus the unusually depressed 2020 comparison base, reopening effects and temporary cost measures.
- Review the cash economics of online sports betting and interactive operations, including gaming-tax reimbursements, promotional and operating costs, and the “Other” segment’s losses.
- Reconcile reported debt with lease and financing obligations, covenant thresholds, floating-rate exposure, and the post-quarter $400 million notes issuance.
- Verify the terms, funding needs, dilution, approvals and integration risks of theScore acquisition, alongside other announced or recently closed transactions.
- Track COVID-19 demand and operating restrictions, insurance recovery timing for Hurricane Laura, and potential effects on liquidity, covenant compliance and asset valuations.