Business context and reporting period
PENN National Gaming, Inc. (the historical registrant name in this filing; now PENN Entertainment) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It operated or held interests in 41 gaming and racing facilities across 19 jurisdictions, alongside interactive gaming and sports wagering. Results include the October 2018 Pinnacle acquisition and the 2019 acquisitions of Margaritaville (January 1) and Greektown (May 23), limiting direct comparability with 2018.
Key financial results
Amounts below are in millions, except per-share data. Quarterly and half-year comparisons are year over year.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,323.1 | $826.9 | $2,605.7 | $1,643.0 |
| Operating income | $198.4 | $181.8 | $380.8 | $353.9 |
| Net income | $51.4 | $54.0 | $92.3 | $99.4 |
| Diluted EPS | $0.44 | $0.57 | $0.78 | $1.05 |
| Adjusted EBITDAR (non-GAAP) | $406.5 | $247.1 | $797.9 | $489.7 |
| Adjusted EBITDA after lease payments (non-GAAP) | $191.6 | $131.2 | $375.1 | $257.9 |
| Operating / net income margin | 15.0% / 3.9% | 22.0% / 6.5% | 14.6% / 3.5% | 21.5% / 6.0% |
Revenue rose 60.0% in Q2 and 58.6% year to date, principally from acquired properties; management attributed $532.6 million of Q2 and $1,037.4 million of first-half revenue to Pinnacle, Margaritaville and Greektown combined. Despite higher revenue and operating income, net income and diluted EPS declined, with higher interest, depreciation and other costs. Adjusted EBITDAR margin was 30.7% in Q2 versus 29.9%; the measure excludes lease costs and should not be treated as GAAP earnings or cash flow.
Operating cash flow was $315.2 million for the first half, up from $207.1 million. Investing used $494.6 million, including acquisitions and capital spending; financing provided $86.9 million. Cash and cash equivalents were $378.8 million at June 30 (cash, cash equivalents and restricted cash totaled $388.8 million). Maintenance capital spending was $83.0 million and project spending $12.0 million for the half.
At June 30, total debt, including current maturities, was approximately $2.55 billion; revolving credit borrowings were $280 million, with $390.3 million of stated remaining capacity after letters of credit. The company reported compliance with debt covenants. Current assets were $609.2 million and current liabilities $860.5 million. In addition to debt, the balance sheet included $4.44 billion of operating lease liabilities, $225.7 million of finance lease liabilities and $4.17 billion of financing obligations.
Material changes versus the prior comparable period
- Acquisitions materially expanded the portfolio and drive much of the reported growth; Q2 and first-half results also include only partial-period contributions from Greektown.
- Q2 operating income increased 9.1%, while net income fell 4.9%; diluted EPS fell from $0.57 to $0.44. Interest expense increased to $135.0 million from $115.9 million, and depreciation and amortization rose to $106.0 million from $58.6 million.
- Cash rent and lease payments increased with the enlarged portfolio. Total payments under the Master Leases and other specified leases were $214.9 million in Q2 and $422.8 million in the first half, versus $115.9 million and $231.8 million under the Penn Master Lease in the comparable 2018 periods.
- The company adopted ASC 842 on January 1, 2019. This reclassified certain master-lease components and added substantial right-of-use assets and lease liabilities; comparative periods were not restated. Adoption increased opening retained earnings by $1.086 billion, so balance-sheet and expense comparisons are affected by accounting changes as well as acquisitions.
- The company repurchased 1.27 million shares for $24.9 million in the first half at an average $19.55 per share, under a $200 million authorization.
Outlook, risks and unusual items
Management said cash from operations, cash on hand and available credit were expected to cover anticipated lease payments, debt service, capital expenditures and working capital needs for the foreseeable future. This is conditional: management cautioned that operating cash flow, acquisition synergies, economic conditions and future access to borrowing may not meet expectations. No numerical earnings or revenue guidance was provided.
Management expected Hollywood Casino York and Hollywood Casino Morgantown, with estimated total investments of approximately $120 million and $111 million respectively (including previously acquired licenses), to be completed by the end of 2020. York approvals were still in process; Morgantown approvals had been obtained. The company also cited acquisition integration and synergy execution, competition, gaming-tax or property-tax increases, regulatory approvals, economic and consumer conditions, and weather as risks. Flooding closed Argosy Casino Alton for most of June; adverse weather and flooding reduced visitation at Midwest properties. A new competitor near Plainridge Park Casino opened in late June, and management expected continued impact. Resorts Casino Tunica closed June 30; management expected the closure to benefit future South segment results.
Unusual and accounting items include ASC 842’s significant lease-accounting effects and an acknowledged cash-flow classification error: $261.1 million of Margaritaville sale-leaseback proceeds was misclassified in the Q1 2019 cash-flow statement as financing rather than investing. The six-month statement in this filing reflects the corrected classification; the company said it planned to correct the Q1 statement in a later filing. The error did not affect operating cash flow, earnings or the balance sheet. Greektown and Margaritaville purchase-price allocations remained preliminary. The company reported no material adverse expected effect from pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate acquisition-driven growth from performance at properties owned in both periods, including the realization of planned Pinnacle, Margaritaville and Greektown synergies.
- Assess cash generation after recurring lease payments, interest, taxes, capital spending and debt principal; Adjusted EBITDAR excludes lease payments.
- Review total fixed and variable lease obligations, rent escalators and reset terms alongside reported debt and revolver availability.
- Monitor Midwest recovery from flooding, the expected competitive effect at Plainridge, and the financial impact of the Tunica closure.
- Track approval, construction cost and timing for the York and Morgantown projects, and confirm the Q1 cash-flow classification correction when filed.