PENN National Gaming, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited interim financial statements. The filing was submitted under the name Penn National Gaming, Inc. The company operated or held interests in 27 gaming and pari-mutuel facilities across 19 jurisdictions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $712.6 million | $687.9 million | $1,448.6 million | $1,354.9 million |
| Operating income | $128.0 million | $140.6 million | $270.6 million | $263.3 million |
| Net income | $66.7 million | $76.0 million | $145.3 million | $127.5 million |
| Diluted EPS | $0.63 | $0.71 | $1.37 | $1.19 |
| Operating margin | 18.0% | 20.4% | 18.7% | 19.4% |
Q2 net revenue rose 3.6%, but operating income fell 9.0% and net income fell 12.3%. For the six-month period, revenue increased 6.9%, operating income 2.8%, and net income 13.9%. Lower interest expense helped six-month earnings; the Q2 effective tax rate increased to 41.0% from 33.5%.
- Cash flow: Six-month operating cash flow was $230.9 million, down from $291.0 million. Investing used $325.5 million, including $254.2 million of property and equipment expenditures and a $50.0 million Toledo license payment. Financing provided $60.3 million; cash declined $34.3 million to $204.1 million.
- Liquidity: Current assets were $377.4 million versus current liabilities of $383.6 million at June 30. The revolving facility had $307.1 million of available borrowing capacity, after letters of credit.
- Debt: Long-term debt, including current maturities, was approximately $2.10 billion. Senior secured credit facility borrowings were $1.78 billion; the company also had $325 million of 8.75% notes due 2019. It reported compliance with required covenants.
Changes, developments, and outlook
- East/West segment growth, including the M Resort acquisition, Charles Town and Perryville performance, and new Bangor table games, supported results. East/West six-month operating income increased to $160.6 million from $129.2 million.
- Midwest six-month operating income declined to $93.4 million from $122.5 million, reflecting competition and the prior-year Joliet fire insurance gain. Toledo opened May 29, 2012; Columbus was under construction and expected to open early in Q4 2012.
- Southern Plains six-month revenue declined, partly because the Kansas Speedway joint-venture casino drew business from Argosy Riverside. The Kansas facility opened in February 2012.
- Unusual items affected comparisons: Q2 2012 included a $3.4 million pre-tax Tunica flood-insurance gain; Q2 2011 included a $16.8 million Joliet fire-insurance gain, partly offset by a $5.2 million Tunica flood loss. The Tunica claim was settled, with no further proceeds expected.
- The company expected a significant East/West gaming-revenue decline in the second half of 2012 from expanded Maryland competition, and anticipated Midwest revenue growth from Toledo and Columbus openings. These are management expectations, not formal earnings guidance.
- Penn agreed to acquire Harrah’s St. Louis for approximately $610 million, subject to regulatory approval and other closing conditions, with closing expected in Q4 2012. The purchase was to be funded through an add-on to the secured credit facility.
- Management said operating cash, cash on hand, and available credit were expected to cover debt service, capital spending, and working capital for the foreseeable future, while noting cash flow, financing availability, economic conditions, and growth spending could differ from expectations.
Risks and contingencies
Key risks include increased regional gaming competition, economic weakness affecting discretionary spending, regulatory and legislative changes, construction and approval delays, and higher gaming taxes. In Iowa, the Sioux City operating agreement and docking lease faced uncertainty; the company challenged the regulator’s casino licensing process in litigation and warned of potential disruption, lost earnings, or impairment. The Harrah’s St. Louis transaction also remained contingent on approvals. The filing reported other litigation, including a Kansas county claim seeking more than $50 million, and stated that outcomes could be unpredictable.
Investor verification checklist
- Track whether Columbus opened on schedule and whether project costs and expected returns met management’s assumptions.
- Verify the timing, approvals, financing, and final purchase terms for Harrah’s St. Louis.
- Monitor competitive pressure and revenue trends at Charles Town, Perryville, Lawrenceburg, and Riverside.
- Follow developments in the Sioux City license, QSO agreement, docking lease, and related litigation; assess impairment exposure.
- Reconcile operating cash flow and capital spending with liquidity, debt balances, and covenant headroom.
- Separate recurring operating performance from insurance gains and changes in taxes, interest expense, and acquisition-related costs.