Business context and reporting period
Penn National Gaming, Inc. (now Penn Entertainment, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It operated or held interests in 26 gaming and pari-mutuel facilities across 17 jurisdictions. The quarter included the June 24 opening of Plainridge Park Casino in Massachusetts.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $701.0 | $652.1 | $1,365.1 | $1,293.2 |
| Operating income | $34.7 | $23.4 | $58.2 | $41.4 |
| Net income | $16.9 | $4.2 | $27.9 | $8.7 |
| Diluted EPS | $0.19 | $0.05 | $0.31 | $0.10 |
| Adjusted EBITDA | $85.7 | $82.1 | $161.1 | $155.4 |
| Adjusted EBITDAR | $195.2 | $186.7 | $379.4 | $364.3 |
- Q2 net revenue rose 7.5%; operating income rose 48%, and net income rose to $16.9 million from $4.2 million. Calculated operating margin was approximately 5.0%, versus 3.6% in Q2 2014; net margin was approximately 2.4%, versus 0.6%.
- For the six months, operating cash flow was $175.4 million, compared with $121.9 million. Investing activities used $163.1 million, including $90.3 million of capital-project spending, $30.2 million of maintenance spending, and $38.5 million advanced to the Jamul Tribe. Financing activities provided $12.2 million. Cash increased $24.4 million to $233.1 million.
- At June 30, cash was $233.1 million and current liabilities were $491.5 million, versus current assets of $406.6 million (calculated current ratio approximately 0.83). Total debt carrying value, including current maturities, was approximately $1.261 billion. The company reported $372.1 million of available revolver capacity and compliance with required debt covenants.
- Master Lease rent expense was $109.5 million for Q2 and $218.4 million for the first half. The company estimated a $3.9 million annual rent escalation beginning November 1, 2015, subject to lease coverage thresholds.
Material changes versus prior comparable periods
- Growth was driven substantially by the 2014 openings of the Dayton and Mahoning Valley racinos, which together generated $48.8 million of Q2 net revenue and $96.1 million for the first half, and by the opening of Plainridge Park Casino.
- East/Midwest segment revenue and operating income improved; Southern Plains revenue declined, primarily reflecting the July 2014 closure of Argosy Casino Sioux City and competition. West segment operating income was roughly flat in Q2 and lower for the first half.
- Gaming expense, general and administrative expense, and Master Lease rent increased. Corporate expense growth included higher cash-settled stock-based compensation, partly associated with increases in Penn and GLPI share prices. Depreciation and amortization fell, and the $4.6 million impairment charge recorded in 2014 did not recur.
- Capital investment remained significant: six-month capital-project and maintenance expenditures totaled approximately $120.5 million, compared with $80.3 million in 2014.
Outlook, commentary, and risks
- The filing provides no earnings or revenue guidance. Management expected operating cash flow, cash on hand, and revolver availability to meet anticipated rent, debt service, capital spending, and working-capital needs for the foreseeable future, while cautioning that cash generation, projections, and future borrowing availability were not assured.
- The company agreed to acquire Tropicana Las Vegas for approximately $360 million, subject to regulatory approvals and other closing conditions. Funding was expected to include existing revolver capacity and approximately $280 million of incremental commitments under an amended credit facility; closing was expected later in 2015.
- The Jamul project budget had increased by $30 million to $390 million, with a mid-2016 opening anticipated. Penn had advanced $108.1 million to the Tribe, including accrued interest; repayment depends on future casino revenues. Delays or weaker-than-projected profitability could affect collectability.
- Management cited continued competition, sluggish consumer spending, possible gaming-tax increases, regulatory approvals, construction costs and delays, and access to capital as risks. It also identified litigation and local opposition risks for the Jamul project and certain other pending disputes. Management did not expect ordinary-course legal matters to materially affect results, but noted outcomes and insurance coverage were uncertain.
- Management reported signs of stabilization and low-single-digit increases in customer spending at many facilities not affected by recent competition. It emphasized that new gaming facilities continued to pressure the industry and certain Penn properties.
Important facts for investors to verify
- Whether operating growth from new facilities can offset competition and the lost Sioux City contribution, and how Plainridge performs after its late-quarter opening.
- The funding, closing conditions, added leverage, and integration assumptions for the Tropicana Las Vegas acquisition.
- Jamul’s remaining funding needs, construction schedule, expected returns, and the recoverability of Penn’s $108.1 million advance.
- Debt maturities, variable-rate exposure, covenant headroom, and the effect of rent escalation under the GLPI Master Lease.
- Whether the reported cash-flow improvement is sustainable given capital spending, lease obligations, debt service, and other required cash uses.