ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Operations
We are a leading, diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations. As of June 30, 2016, we owned, managed, or had ownership interests in twenty-seven facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario, Canada. We believe that our portfolio of assets provides us the benefit of geographically diversified cash flow from operations.
On June 24, 2015, we opened Plainridge Park Casino, an integrated racing and slots-only gaming facility in Plainville, Massachusetts. On August 25, 2015, we completed our acquisition of Tropicana Las Vegas Hotel and Casino (“Tropicana Las Vegas”) in Las Vegas, Nevada. On September 1, 2015, we completed our acquisition of Illinois Gaming Investors, LLC (d/b/a Prairie State Gaming), one of the largest video gaming terminal route operators in Illinois. In addition, we are developing a Hollywood Casino branded gaming facility on the Jamul Indian Village near San Diego, California, which we will manage upon its anticipated opening in August this year. Finally, we recently implemented our interactive gaming strategy through our subsidiary, Penn Interactive Ventures, LLC, which included launching our HollywoodCasino.com Play4Fun social gaming platform with Scientific Games and our HollywoodSlots.com mobile social gaming platform with OpenWager.
The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 86% and 84% of our gaming revenue in 2015 and 2014, respectively) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fee from Casino Rama, our hotels, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities.
Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 14% to 27% of table game drop. Slot handle is the gross amount wagered for the period cited. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.
For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table’s drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional gaming markets, our table win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.
Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to satisfy our obligations under the Master Lease, repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.
We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new
gaming properties, particularly in attractive regional markets. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.
Segment Information
The Company’s Chief Executive Officer and President, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. During the second quarter of 2016, the Company changed its three reportable segments from East/Midwest, West and Southern Plains to Northeast, South/West, and Midwest
in connection with the addition of a new regional vice president and a realignment of responsibilities within our segments
. Segment information for prior periods has been restated for comparability.
The Northeast reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino, which opened on June 24, 2015. It also includes the Company’s Casino Rama management service contract.
The South/West reportable segment consists of the following properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, M Resort, and Tropicana Las Vegas, which was acquired on August 25, 2015, as well as the Hollywood Casino Jamul—San Diego project with the Tribe, which the Company anticipates completing in August this year.
The Midwest reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg, Hollywood Casino St. Louis, and Prairie State Gaming, which the Company acquired on September 1, 2015, and includes the Company’s 50% investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway.
The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280 and Penn Interactive Ventures, LLC, the Company’s wholly-owned subsidiary which represents its social online gaming initiatives and would meet the definition of an operating segment under ASC 280, but is currently immaterial to the Company’s operations.
In addition to GAAP financial measures, management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel and believes it is especially relevant in evaluating large, long lived casino projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. The Company defines adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of contingent purchase price to the previous owners of Plainridge Racecourse, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with the Company’s share of non-operating items (such as depreciation and amortization) added back for its joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction is accounted for as a financing obligation. Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA.
Executive Summary
For the past few quarters, we had seen improved customer spending behavior patterns at the majority of our geographically diversified regional gaming properties. However, as reported by most jurisdictions, regional gaming industry trends began softening midway through the second quarter and remained soft through the end of June, particularly in our unrated player category. The expansion of recently constructed gaming facilities continues to impact the overall domestic gaming industry as well as our operating results in certain markets.
We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee. Historically, the Company has been reliant on certain key regional gaming markets (for example, its results from Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Over the past several years, the Company has diversified its operations via new development facilities and acquisitions and anticipates further diversifying its reliance on specific properties in connection with its current development pipeline
.
Financial Highlights:
We reported net revenues and income from operations of $769.4 million and $149.3 million, respectively, for the three months ended June 30, 2016, compared to $701.0 million and $123.4 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $1,525.9 million and $289.9 million, respectively, for the six months ended June 30, 2016 compared to $1,365.1 million and $235.1 million, respectively for the corresponding period in the prior year. The major factors affecting our results for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, were:
|
·
|
|
The opening of Plainridge Park Casino on June 24, 2015 in our Northeast segment, which generated $43.6 million and $85.9 million of net revenues for the three and six months ended June 30, 2016, respectively.
|
|
·
|
|
The acquisition of Tropicana Las Vegas on August 25, 2015 in our South/West segment, which generated $30.5 million and $60.4 million of net revenues for the three and six months ended June 30, 2016, respectively.
|
|
·
|
|
The acquisition of Prairie State Gaming on September 1, 2015 in our Midwest segment, which generated $14.9 million and $29.4 million of net revenues for the three and six months ended June 30, 2016.
|
|
·
|
|
Net income increased by $31.1 million and $52.9 million for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to contributions from the new or recently acquired properties described above, as well as lower income tax provision and higher interest income, partially offset by higher depreciation expense and higher interest expense incurred under our credit facility.
|
Segment Developments:
The following are recent developments that have had or will have an impact on us by segment:
Northeast
|
·
|
|
Hollywood Casino at Charles Town Races faced increased competition from the Baltimore, Maryland market, which includes Maryland Live! and Horseshoe Casino Baltimore, which opened at the end of August 2014, as we have been impacted by their marketing efforts. In addition, in December 2013, the license for Prince George’s County, Maryland was granted to MGM. The proposed $1.3 billion National Harbor casino, which MGM plans to open in December 2016, is anticipated to adversely impact our financial results as it will create additional competition for Hollywood Casino at Charles Town Races.
|
|
·
|
|
On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license for its planned Plainridge Park Casino in Plainville, Massachusetts. On June 24, 2015, the Company opened the facility, which features live harness racing and simulcasting, along with 1,250 gaming devices, various dining and entertainment options, structured and surface parking, and a two story clubhouse with approximately 55,000 square feet.
|
|
·
|
|
A tribal casino is being constructed in Taunton, Massachusetts that, despite a recent judicial opinion to the contrary, could open in 2017. MGM Springfield in Western Massachusetts is expected to be completed in late 2018 and Wynn Everett in Eastern Massachusetts is scheduled to open by the end of 2018. The increased competition in Massachusetts will have a negative impact on the operations of Plainridge Park Casino.
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South/West
|
·
|
|
On April 5, 2013, we announced that, subject to final National Indian Gaming Commission approval, we and the Tribe had entered into definitive agreements (including management, development, branding and lending arrangements) to jointly develop a Hollywood Casino branded gaming facility on the Tribe’s trust land in San Diego County, California. The Hollywood Casino Jamul-San Diego facility is located approximately 20 miles east of downtown San Diego. The $390 million facility is a state of the art development project which will include a three-story gaming and entertainment facility of approximately 200,000 square feet featuring over 1,700 slot machines, 43 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. In mid-January 2014, we commenced construction activities at the site and in June 2015, we announced the “Topping Out” marking the halfway point of construction. It is anticipated that the facility will open in August this year. We currently provide financing to the Jamul Tribe in connection with the project and, upon opening, we will manage and provide branding for the casino in exchange for a management fee equal to 30% of the casino’s pretax income, a licensing fee of 2% of gross revenues for the Hollywood Casino brand, as well as interest on funds advanced by the Company to develop the project.
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|
·
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|
On April 29, 2015, we announced that we entered into a definitive agreement to acquire the Tropicana Las Vegas for $360 million. The acquisition was completed on August 25, 2015. Tropicana Las Vegas is situated on 35 acres of land located on the Las Vegas Strip with 1,467 remodeled guest rooms and suites, a 50,000 square foot casino gaming floor featuring 844 slot and video poker machines and 38 table games including blackjack, mini-baccarat, craps and roulette, three full-service restaurants, a 1,200 seat performance theater, a 300 seat comedy club, a nightclub, beach club and 2,950 parking spaces. During the second quarter of 2016, we refreshed the gaming floor with new slot machines and launched our Marquee Rewards player loyalty program at the Tropicana Las Vegas.
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Midwest
|
·
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|
Hollywood Casino Lawrenceburg faced increased competition, namely the openings of a racino at Belterra Park in May 2014 and our own Dayton facility in late August 2014.
|
|
·
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|
On September 1, 2015, we acquired Prairie State Gaming (“PSG”), a leading Illinois video gaming terminal operator. As one of the largest and most respected video gaming terminal route operators in Illinois, PSG’s operations include more than 1,100 video gaming terminals across a network of 270 bar and retail gaming establishments throughout Illinois.
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Critical Accounting Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long-lived assets, goodwill and other intangible assets, income taxes and litigation, claims and assessments as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.
For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. There has been no material change to these estimates for the six months ended June 30, 2016.
Results of Operations
The following are the most important factors and trends that contribute to our operating performance:
|
·
|
|
Most of our properties operate in mature competitive markets. As a result, we expect a majority of our future growth to come from prudent acquisitions of gaming properties (such as our August 2015 acquisition of Tropicana Las Vegas), jurisdictional expansions (such as our June 2015 opening of a slots-only gaming facility in Massachusetts, our planned August 2016 opening of a Hollywood Casino branded gaming facility on the Jamul Indian Village land in trust which we will manage, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course and the August 2014 opening of Hollywood Gaming at Dayton Raceway), expansions of gaming in existing jurisdictions (such as the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, and at Hollywood Casino Bangor in March 2012), expansions/improvements of existing properties (such as a hotel at Zia Park Casino which opened in August 2014) and new growth opportunities (such as our acquisition of Prairie State Gaming, a leading video lottery terminal operator in Illinois, and our entry into the interactive and social gaming business through Penn Interactive Ventures).
|
|
·
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|
A number of states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for example, in Massachusetts, where we opened a slots-only gaming facility on June 24, 2015, in Kansas, where we opened a casino through a joint venture in February 2012, and in Ohio, where we opened casinos in Toledo and Columbus in May 2012 and October 2012, respectively, and opened video lottery terminal facilities at two racetracks in Ohio in the third quarter of 2014) and increased competitive threats to business at our existing properties (such as the introduction/expansion of commercial casinos in Kansas, Maryland, Ohio, and potentially Kentucky, Nebraska and Illinois, and the introduction of tavern licenses in several states, most significantly in Illinois).
|
|
·
|
|
The actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or via an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans).
|
|
·
|
|
The continued demand for, and our emphasis on, slot wagering entertainment at our properties.
|
|
·
|
|
The successful execution of our development and construction activities, as well as the risks associated with the costs, regulatory approval and the timing of these activities.
|
|
·
|
|
The risks related to economic conditions and the effect of such prolonged sluggish conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms.
|
The consolidated results of operations for the three and six months ended June 30, 2016 and 2015 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
663,326
|
|
$
|
618,919
|
|
$
|
1,320,027
|
|
$
|
1,210,255
|
|
Food, beverage, hotel and other
|
|
|
144,390
|
|
|
117,421
|
|
|
282,238
|
|
|
226,184
|
|
Management service fee
|
|
|
2,964
|
|
|
2,816
|
|
|
5,437
|
|
|
4,743
|
|
Reimbursed management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
|
—
|
|
Revenues
|
|
|
813,535
|
|
|
739,156
|
|
|
1,610,557
|
|
|
1,441,182
|
|
Less promotional allowances
|
|
|
(44,113)
|
|
|
(38,200)
|
|
|
(84,684)
|
|
|
(76,088)
|
|
Net revenues
|
|
|
769,422
|
|
|
700,956
|
|
|
1,525,873
|
|
|
1,365,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
339,201
|
|
|
313,616
|
|
|
674,518
|
|
|
608,511
|
|
Food, beverage, hotel and other
|
|
|
101,873
|
|
|
82,803
|
|
|
199,952
|
|
|
160,732
|
|
General and administrative
|
|
|
109,974
|
|
|
118,901
|
|
|
226,478
|
|
|
235,157
|
|
Reimbursable management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
|
—
|
|
Depreciation and amortization
|
|
|
66,182
|
|
|
62,275
|
|
|
132,202
|
|
|
125,644
|
|
Total operating expenses
|
|
|
620,085
|
|
|
577,595
|
|
|
1,236,005
|
|
|
1,130,044
|
|
Income from operations
|
|
$
|
149,337
|
|
$
|
123,361
|
|
$
|
289,868
|
|
$
|
235,050
|
|
Certain information regarding our results of operations by segment for the three and six months ended June 30, 2016 and 2015 is summarized below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
401,516
|
|
$
|
372,926
|
|
$
|
103,695
|
|
$
|
90,075
|
|
South/West
|
|
|
140,108
|
|
|
113,345
|
|
|
27,622
|
|
|
29,091
|
|
Midwest
|
|
|
220,256
|
|
|
208,838
|
|
|
57,446
|
|
|
54,620
|
|
Other
|
|
|
7,542
|
|
|
5,847
|
|
|
(39,426)
|
|
|
(50,425)
|
|
Total
|
|
$
|
769,422
|
|
$
|
700,956
|
|
$
|
149,337
|
|
$
|
123,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
794,722
|
|
$
|
713,720
|
|
$
|
204,616
|
|
$
|
167,846
|
|
South/West
|
|
|
276,076
|
|
|
227,253
|
|
|
53,607
|
|
|
59,604
|
|
Midwest
|
|
|
441,334
|
|
|
413,535
|
|
|
115,670
|
|
|
108,110
|
|
Other
|
|
|
13,741
|
|
|
10,586
|
|
|
(84,025)
|
|
|
(100,510)
|
|
Total
|
|
$
|
1,525,873
|
|
$
|
1,365,094
|
|
$
|
289,868
|
|
$
|
235,050
|
|
Revenues
Revenues for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
663,326
|
|
$
|
618,919
|
|
$
|
44,407
|
|
7.2
|
%
|
|
Food, beverage, hotel and other
|
|
|
144,390
|
|
|
117,421
|
|
|
26,969
|
|
23.0
|
%
|
|
Management service fee
|
|
|
2,964
|
|
|
2,816
|
|
|
148
|
|
5.3
|
%
|
|
Reimbursed management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
N/A
|
|
|
Revenues
|
|
|
813,535
|
|
|
739,156
|
|
|
74,379
|
|
10.1
|
%
|
|
Less promotional allowances
|
|
|
(44,113)
|
|
|
(38,200)
|
|
|
(5,913)
|
|
15.5
|
%
|
|
Net revenues
|
|
$
|
769,422
|
|
$
|
700,956
|
|
$
|
68,466
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
1,320,027
|
|
$
|
1,210,255
|
|
$
|
109,772
|
|
9.1
|
%
|
|
Food, beverage, hotel and other
|
|
|
282,238
|
|
|
226,184
|
|
|
56,054
|
|
24.8
|
%
|
|
Management service fee
|
|
|
5,437
|
|
|
4,743
|
|
|
694
|
|
14.6
|
%
|
|
Reimbursed management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
N/A
|
|
|
Revenues
|
|
|
1,610,557
|
|
|
1,441,182
|
|
|
169,375
|
|
11.8
|
%
|
|
Less promotional allowances
|
|
|
(84,684)
|
|
|
(76,088)
|
|
|
(8,596)
|
|
11.3
|
%
|
|
Net revenues
|
|
$
|
1,525,873
|
|
$
|
1,365,094
|
|
$
|
160,779
|
|
11.8
|
%
|
|
In our business, revenue is driven by discretionary consumer spending. The expansion of newly constructed gaming facilities has increased competition in many regional markets (including at some of our key facilities). As reported by most jurisdictions, regional gaming industry trends began softening midway through the second quarter and remained so through the end of June.
We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period to period and as such cannot quantify a dollar amount for each factor that impacts our customers’ spending behaviors.
However, based on our experience, we can generally offer some insight into the factors that we believe were likely to account for such changes. In instances where we believe one factor may have had a significantly greater impact than the other factors, we have noted that as well. However, in all instances, such insights are based only on our reasonable judgment and professional experience, and no assurance can be given as to the accuracy of our judgments.
The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as “promotional allowances.” Our promotional allowance levels are determined based on various factors such as our marketing plans, competitive factors, economic conditions, and regulations.
Gaming revenue
Gaming revenue increased by $44.4 million, or 7.2%, and $109.8 million, or 9.1%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the variances explained below.
Gaming revenue for our Northeast segment increased by $28.5 million, or 8.5%, and $75.9 million, or 11.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and improved results at Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, which together increased gaming revenue $35.7 million and $77.9 million, respectively, and improved results at all our Ohio properties for the six months ended
June 30, 2016, all of which were partially offset by decreased gaming revenue at Hollywood Casino Charles Town and to a lesser extent at Hollywood Casino Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore.
Gaming revenue for our Midwest segment increased by $10.6 million, or 5.5%, and $25.9 million, or 6.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015, which generated $14.6 million and $28.9 million for the three and six months ended June 30, 2016, respectively, and improved results at Argosy Riverside, all of which were partially offset by decreased gaming revenue at Hollywood Casino Aurora, Argosy Alton, due to flooding that occurred during the first quarter 2016, and Hollywood Casino Lawrenceburg, primarily due to the continued impact of competition in Ohio, namely the openings of a racino at Belterra Park, Horseshoe Casino in Cincinnati and our own facility in Dayton.
Gaming revenue for our South/West segment increased by $5.3 million, or 5.8%, and $8.0 million, or 4.3%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015, partially offset by decreased gaming revenue at Zia Park Casino, as adverse energy trends have continued to affect the economy in this area, and new competition impacting Boomtown Biloxi.
Food, beverage, hotel and other revenue
Food, beverage, hotel and other revenue increased by $27.0 million, or 23.0%, and $56.1 million, or 24.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the variances explained below.
Food, beverage, hotel and other revenue for our South/West segment increased by $22.6 million, or 66.6%, and $43.6 million, or 64.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015.
Food, beverage, hotel and other revenue for our Northeast segment increased by $1.8 million, or 4.0%, and $7.6 million, or 8.9%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015.
Promotional allowances
Promotional allowances increased by $5.9 million, or 15.5%, and $8.6 million, or 11.3%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino
on June 24, 2015 and the acquisition of Tropicana Las Vegas on August 24, 2015
.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
339,201
|
|
$
|
313,616
|
|
$
|
25,585
|
|
8.2
|
%
|
Food, beverage, hotel and other
|
|
|
101,873
|
|
|
82,803
|
|
|
19,070
|
|
23.0
|
%
|
General and administrative
|
|
|
109,974
|
|
|
118,901
|
|
|
(8,927)
|
|
(7.5)
|
%
|
Reimbursable management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
N/A
|
|
Depreciation and amortization
|
|
|
66,182
|
|
|
62,275
|
|
|
3,907
|
|
6.3
|
%
|
Total operating expenses
|
|
$
|
620,085
|
|
$
|
577,595
|
|
$
|
42,490
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
674,518
|
|
$
|
608,511
|
|
$
|
66,007
|
|
10.8
|
%
|
Food, beverage, hotel and other
|
|
|
199,952
|
|
|
160,732
|
|
|
39,220
|
|
24.4
|
%
|
General and administrative
|
|
|
226,478
|
|
|
235,157
|
|
|
(8,679)
|
|
(3.7)
|
%
|
Reimbursable management costs
|
|
|
2,855
|
|
|
—
|
|
|
2,855
|
|
N/A
|
|
Depreciation and amortization
|
|
|
132,202
|
|
|
125,644
|
|
|
6,558
|
|
5.2
|
%
|
Total operating expenses
|
|
$
|
1,236,005
|
|
$
|
1,130,044
|
|
$
|
105,961
|
|
9.4
|
%
|
Gaming expense
Gaming expense increased by $25.6 million, or 8.2%, and $66.0 million, or 10.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the variances explained below.
Gaming expense for our Northeast segment increased by $15.1 million, or 8.1%, and $42.3 million, or 11.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and increased gaming taxes resulting from increased taxable gaming revenue mentioned above at our Ohio properties, which was partially offset by a decrease in gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Charles Town and to a lesser extent Hollywood Casino at Penn National Race Course.
Gaming expense for our Midwest segment increased by $8.7 million, or 9.6%, and $19.5 million, or 10.9%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015 and an increase in gaming taxes resulting from increased taxable gaming revenue mentioned above at Argosy Riverside, which was partially offset by decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Aurora, Argosy Alton due to flooding that occurred during the first quarter 2016 and Hollywood Casino Lawrenceburg, primarily due to the continued impact of competition in Ohio, namely the openings of a racino at Belterra Park, Horseshoe Casino in Cincinnati and our own facility in Dayton.
Gaming expense for our South/West segment increased by $2.3 million, or 6.7%, and $4.4 million, or 6.4%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015, partially offset by decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Zia Park Casino, as adverse energy trends have continued to affect the economy in this area.
Food, beverage, hotel and other expenses
Food, beverage, hotel and other expenses increased by $19.1 million, or 23.0%, and $39.2 million, or 24.4%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the variances explained below.
Food, beverage, hotel and other expenses for our South/West segment increased by $16.2 million, or 65.7%, and $31.0 million, or 63.2%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015.
Food, beverage, hotel and other expenses for our Northeast segment increased by $1.3 million, or 3.8%, and $5.0 million, or 7.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015.
General and administrative expenses
General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include lobbying expenses
.
General and administrative expenses decreased by $8.9 million, or 7.5%, and $8.7 million, or 3.7%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the variances explained below.
General and administrative expenses for Other decreased by $9.1 million, or 34.1%, and $13.4 million, or 25.1%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to decreased corporate overhead costs of $10.1 million and $13.5 million for the three and six months ended June 30, 2016, respectively, primarily due to decreased cash-settled stock-based compensation charges mainly due to the changes in stock price for Penn and GLPI common stock during 2016 compared to 2015.
General and administrative expenses for our South/West segment increased by $3.1 million, or 15.2%, and $9.1 million, or 23.1%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015.
General and administrative expenses for our Northeast segment decreased by $2.2 million, or 5.5%, and $3.6 million, or 4.6%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to lower property taxes at Hollywood Gaming at Dayton Raceway, partially offset by increased expenses due to the opening of Plainridge Park Casino on June 24, 2015.
Depreciation and amortization expense
Depreciation and amortization expense increased by $3.9 million, or 6.3%, and $6.6 million, or 5.2%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015, the acquisitions of Tropicana Las Vegas on August 25, 2015 and Prairie State Gaming on September 1, 2015, all of which were partially offset by decreased depreciation expense at the majority of our other properties as assets are becoming fully depreciated.
Other income (expenses)
Other income (expenses) for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(114,687)
|
|
$
|
(109,798)
|
|
$
|
(4,889)
|
|
4.5
|
%
|
Interest income
|
|
|
6,597
|
|
|
2,443
|
|
|
4,154
|
|
170.0
|
%
|
Income from unconsolidated affiliates
|
|
|
3,548
|
|
|
4,154
|
|
|
(606)
|
|
(14.6)
|
%
|
Other
|
|
|
44
|
|
|
(956)
|
|
|
1,000
|
|
(104.6)
|
%
|
Total other expenses
|
|
$
|
(104,498)
|
|
$
|
(104,157)
|
|
$
|
(341)
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(231,199)
|
|
$
|
(218,144)
|
|
$
|
(13,055)
|
|
6.0
|
%
|
Interest income
|
|
|
11,837
|
|
|
4,313
|
|
|
7,524
|
|
174.4
|
%
|
Income from unconsolidated affiliates
|
|
|
8,157
|
|
|
8,136
|
|
|
21
|
|
0.3
|
%
|
Other
|
|
|
(2,382)
|
|
|
2,133
|
|
|
(4,515)
|
|
(211.7)
|
%
|
Total other expenses
|
|
$
|
(213,587)
|
|
$
|
(203,562)
|
|
$
|
(10,025)
|
|
4.9
|
%
|
Interest expense
Interest expense increased by $4.9 million, or 4.5%, and $13.1 million, or 6.0%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to $3.3 million and $8.1 million for the three and six months ended June 30, 2016, respectively, from higher borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility, $0.1 million and $2.5 million for the three and six months ended June 30, 2016, respectively, from higher contingent payments associated with the monthly variable components for Hollywood Casino Columbus and Hollywood Casino Toledo and annual escalator on the financing obligation to GLPI and $1.1 million and $1.7 million for the three and six months ended June 30, 2016, respectively, from a decrease in capitalized interest.
Interest income
Interest income has increased for the three and six months ended June 30, 2016, as compared to the comparable periods in the prior year, primarily due to higher interest accrued on advances to the Jamul Tribe (see Note 2 to the condensed consolidated financial statements for further details).
Other
Other increased by $1.0 million, or 104.6%, for the three months ended June 30, 2016, as compared to the three and ended June 30, 2015, primarily due to foreign currency translation gains for the three months ended June 30, 2016, compared to foreign currency translation losses for the corresponding period in the prior year.
Other decreased by $4.5 million or 211.7%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, primarily due to foreign currency translation losses for the six months ended June 30, 2016, compared to foreign currency translation gains for the corresponding period in the prior year.
Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate (“ETR”) to the full year projected pretax book income or loss excluding certain discrete items. The Company’s ETR (income taxes as a percentage of income from operations before income taxes) including discrete items was 24.10% and 24.30% for the three and six months ended June 30, 2016, as compared to 84.47% and 84.59% for the three and six months ended June 30, 2015, primarily due to a year-over-year reduction to our federal and state valuation allowance coupled with an increase to earnings before income taxes.
As of June 30, 2016, we intend to continue maintaining a valuation allowance on our deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance would result in a significant decrease to income tax expense in the period the release is recorded. However, the exact timing and amount of the reduction in our valuation allowance are unknown at this time and will be subject to the earnings level we achieve in 2016 as well as our projected income levels in future periods.
The Company’s annual ETR can vary each interim period depending on, among other factors, the geographic and business mix of our earnings, as well as changes in forecasted earnings, the level of our tax credits and the realizability of our deferred tax assets.
Adjusted EBITDA
In addition to GAAP financial measures, adjusted EBITDA is used by management as an important measure of the Company’s operating performance. We define adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of contingent purchase price to the previous owners of Plainridge Racecourse, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction is accounted for as a financing obligation. Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also present adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In addition, gaming companies have historically reported adjusted EBITDA as a supplement to financial measures in accordance with GAAP. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their adjusted EBITDA calculations certain corporate expenses that do not relate to the management of specific casino properties. However, adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a widely used measure of performance in the gaming industry, is used in the valuation of gaming companies, and that it is considered by many to be a key indicator of the Company’s operating results. Management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel. Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate this metric in a different manner than the Company and therefore, comparability may be limited.
A reconciliation of the Company’s net income per GAAP to adjusted EBITDA, as well as the Company’s income from operations per GAAP to adjusted EBITDA, is included below. Additionally, a reconciliation of each segment’s income from operations to adjusted EBITDA is also included below. On a segment level, income (loss) from operations per GAAP, rather than net income (loss) per GAAP, is reconciled to adjusted EBITDA due to, among other things, the impracticability of allocating interest expense, interest income, income taxes and certain other items to the Company’s segments on a segment by segment basis. Management believes that this presentation is meaningful to investors in evaluating the performance of the Company’s segments and is consistent with the reporting of other gaming companies.
The following table presents a reconciliation of the Company’s most directly comparable GAAP financial measures to adjusted EBITDA, for the three and six months ended June 30, 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net income
|
|
$
|
34,035
|
|
$
|
2,983
|
|
$
|
57,743
|
|
$
|
4,852
|
|
Income tax provision
|
|
|
10,804
|
|
|
16,221
|
|
|
18,538
|
|
|
26,636
|
|
Other
|
|
|
(44)
|
|
|
956
|
|
|
2,382
|
|
|
(2,133)
|
|
Income from unconsolidated affiliates
|
|
|
(3,548)
|
|
|
(4,154)
|
|
|
(8,157)
|
|
|
(8,136)
|
|
Interest income
|
|
|
(6,597)
|
|
|
(2,443)
|
|
|
(11,837)
|
|
|
(4,313)
|
|
Interest expense
|
|
|
114,687
|
|
|
109,798
|
|
|
231,199
|
|
|
218,144
|
|
Income from operations
|
|
$
|
149,337
|
|
$
|
123,361
|
|
$
|
289,868
|
|
$
|
235,050
|
|
Loss (gain) on disposal of assets
|
|
|
441
|
|
|
371
|
|
|
(660)
|
|
|
525
|
|
Charge for stock compensation
|
|
|
1,582
|
|
|
2,337
|
|
|
3,037
|
|
|
4,421
|
|
Contingent purchase price
|
|
|
119
|
|
|
356
|
|
|
(1,081)
|
|
|
707
|
|
Depreciation and amortization
|
|
|
66,182
|
|
|
62,275
|
|
|
132,202
|
|
|
125,644
|
|
Income from unconsolidated affiliates
|
|
|
3,548
|
|
|
4,154
|
|
|
8,157
|
|
|
8,136
|
|
Non-operating items for Kansas JV
|
|
|
2,571
|
|
|
2,528
|
|
|
5,141
|
|
|
5,278
|
|
Adjusted EBITDA
|
|
$
|
223,780
|
|
$
|
195,382
|
|
$
|
436,664
|
|
$
|
379,761
|
|
The reconciliation of each segment’s income (loss) from operations to adjusted EBITDA for the three and six months ended June 30, 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
103,695
|
|
$
|
27,622
|
|
$
|
57,446
|
|
$
|
(39,426)
|
|
$
|
149,337
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,582
|
|
|
1,582
|
|
Depreciation and amortization
|
|
|
23,209
|
|
|
8,839
|
|
|
9,460
|
|
|
24,674
|
|
|
66,182
|
|
Contingent purchase price
|
|
|
119
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
119
|
|
(Gain) loss on disposal of assets
|
|
|
(14)
|
|
|
11
|
|
|
(52)
|
|
|
496
|
|
|
441
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
3,744
|
|
|
(196)
|
|
|
3,548
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
2,571
|
|
|
—
|
|
|
2,571
|
|
Adjusted EBITDA
|
|
$
|
127,009
|
|
$
|
36,472
|
|
$
|
73,169
|
|
$
|
(12,870)
|
|
$
|
223,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
90,075
|
|
$
|
29,091
|
|
$
|
54,620
|
|
$
|
(50,425)
|
|
$
|
123,361
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,337
|
|
|
2,337
|
|
Depreciation and amortization
|
|
|
22,413
|
|
|
5,000
|
|
|
9,897
|
|
|
24,965
|
|
|
62,275
|
|
Contingent purchase price
|
|
|
356
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
356
|
|
Loss (gain) on disposal of assets
|
|
|
137
|
|
|
138
|
|
|
(34)
|
|
|
130
|
|
|
371
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
4,401
|
|
|
(247)
|
|
|
4,154
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
2,528
|
|
|
—
|
|
|
2,528
|
|
Adjusted EBITDA
|
|
$
|
112,981
|
|
$
|
34,229
|
|
$
|
71,412
|
|
$
|
(23,240)
|
|
$
|
195,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
204,616
|
|
$
|
53,607
|
|
$
|
115,670
|
|
$
|
(84,025)
|
|
$
|
289,868
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,037
|
|
|
3,037
|
|
Depreciation and amortization
|
|
|
46,202
|
|
|
17,604
|
|
|
19,028
|
|
|
49,368
|
|
|
132,202
|
|
Contingent purchase price
|
|
|
(1,081)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,081)
|
|
Loss (gain) on disposal of assets
|
|
|
7
|
|
|
(14)
|
|
|
(45)
|
|
|
(608)
|
|
|
(660)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
8,462
|
|
|
(305)
|
|
|
8,157
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
5,141
|
|
|
—
|
|
|
5,141
|
|
Adjusted EBITDA
|
|
$
|
249,744
|
|
$
|
71,197
|
|
$
|
148,256
|
|
$
|
(32,533)
|
|
$
|
436,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
167,846
|
|
$
|
59,604
|
|
$
|
108,110
|
|
$
|
(100,510)
|
|
$
|
235,050
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,421
|
|
|
4,421
|
|
Depreciation and amortization
|
|
|
45,667
|
|
|
10,120
|
|
|
19,862
|
|
|
49,995
|
|
|
125,644
|
|
Contingent purchase price
|
|
|
707
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
707
|
|
Loss (gain) on disposal of assets
|
|
|
7
|
|
|
400
|
|
|
(7)
|
|
|
125
|
|
|
525
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
8,189
|
|
|
(53)
|
|
|
8,136
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
5,278
|
|
|
—
|
|
|
5,278
|
|
Adjusted EBITDA
|
|
$
|
214,227
|
|
$
|
70,124
|
|
$
|
141,432
|
|
$
|
(46,022)
|
|
$
|
379,761
|
|
|
(1)
|
|
Adjusted EBITDA excludes our share of the impact of non-operating items (such as depreciation and amortization expense) from our joint venture in Kansas Entertainment.
|
Adjusted EBITDA for
our Northeast segment increased by $14.0 million, or 12.4%, and $35.5 million, or 16.6%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and improved results at Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course which together increased adjusted EBITDA by $19.5 million and $35.3 million, respectively, and improved results at all our Ohio properties for the six months ended June 30, 2016 as compared to the corresponding period in the prior year, all of which were partially offset by decreased adjusted EBITDA at Hollywood Casino Charles Town and to a lesser extent at Hollywood Casino Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore, and include additional expenses of $1.6 million for a change in accounting estimate for workers compensation and general liability insurance reserves.
Adjusted EBITDA for our South/West segment increased by $2.2 million, or 6.6%, and $1.1 million, or 1.5%, for the three and six months ended June 30, 2016 as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015 and improved results at M Resort, partially offset by decreased adjusted EBITDA at Zia Park Casino, as adverse energy trends have continued to affect the economy in this area. South/West segment results for the three and six months ended June 30, 2016 include a $3.5 million litigation settlement gain at the Tropicana Las Vegas which is partially offset by severance charges and gaming floor disruption. The South/West segment second quarter 2016 results also include additional expenses of $1.3 million for a change in accounting estimate for workers compensation and general liability insurance reserves.
Adjusted EBITDA for
our Midwest segment increased by $1.8 million, or 2.5%, and $6.8 million, or 4.8%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015 and improved results at Hollywood Casino St. Louis, which was partially offset by decreased adjusted EBITDA at Argosy Alton resulting from flooding during the first quarter 2016, which has resulted in declines in business volumes, decreased adjusted EBITDA at Hollywood Lawrenceburg, primarily due to the continued impact of competition in Ohio, namely the openings of a racino at Belterra Park, Horseshoe Casino in Cincinnati and our own facility in Dayton, and include additional expenses of $1.1 million for a change in accounting estimate for workers compensation and general liability insurance.
Adjusted EBITDA for
Other improved by $10.4 million, or 44.6%, and $13.5 million, or 29.3%, for the three and six months ended June 30, 2016, as compared to the three and six months ended June 30, 2015, primarily due to decreased corporate overhead costs of $9.5 million and $12.1 million for the three and six months ended June 30, 2016, respectively, primarily due to decreased cash-settled stock-based compensation charges mainly due to changes in stock price for Penn and GLPI common stock during 2016 compared to 2015.
Liquidity and Capital Resources
Historically and prospectively, our primary sources of liquidity and capital resources have been and will be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.
Net cash provided by operating activities totaled $189.7 million and $199.7 million for six months ended June 30, 2016 and 2015, respectively. The decrease in net cash provided by operating activities of $10.0 million for six months ended June 30, 2016, compared to the corresponding period in the prior year, was comprised primarily of an increase in cash paid to suppliers and vendors of $116.6 million, an increase in cash paid to employees of $48.3 million, an increase in cash paid for interest of $17.6 million, partially offset by an increase in cash receipts from customers of $159.4 million and an decrease in cash paid for taxes of $12.6 million due to refunds received in first quarter 2016. The increases in cash paid to suppliers and vendors, cash receipts from customers and cash paid to employees is primarily due to the opening of Plainridge Park Casino on June 24, 2015 and the acquisitions of Tropicana Las Vegas on August 25, 2015 and Prairie State Gaming on September 1, 2015. The increase in cash paid for interest is primarily due to higher borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility and contingent payments on the financing obligation to GLPI and a decrease in capitalized interest for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Net cash used in investing activities totaled $143.8 million and $163.1 million for six months ended June 30, 2016 and 2015, respectively. The decrease in net cash used in investing activities of $19.3 million for six months ended June 30, 2016, compared to the corresponding period in the prior year, was primarily due to decreased capital project expenditures of $79.3 million due to the development of Plainridge Park Casino during the six months ended June 30, 2015 and a $4.0 million decrease in cash escrow related to the acquisition of Tropicana Las Vegas, partially offset by increased advances to the Jamul Tribe of $63.8 million and increased capital maintenance expenditures of $2.4 million.
Net cash used in financing activities totaled $61.6 million and $12.1 million for the six months ended June 30, 2016 and 2015, respectively. The increase in net cash used in financing activities of $49.5 million for six months ended June 30, 2016, compared to the corresponding period in the prior year, was primarily due to lower proceeds from our long-term debt of $35.8 million, lower tax benefits from the exercise of options of $3.7 million, increased payments on other long term obligations of $6.9 million and increased principal payments of $10.0 million on long-term debt, partially offset by higher proceeds from insurance financing of $8.6 million.
Capital Expenditures
Capital expenditures are accounted for as either capital project or capital maintenance (replacement) expenditures. Capital project expenditures are for fixed asset additions that expand an existing facility or create a new facility. Capital maintenance expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.
The following table summarizes our expected capital project expenditures by segment for the fiscal year ending December 31, 2016, and actual expenditures for the six months ended June 30, 2016 (excluding licensing fees and net of
reimbursements). The table below should not be utilized to predict future expected capital project expenditures subsequent to 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected for Year
|
|
Expenditure for
|
|
|
|
|
|
Ending December 31,
|
|
Six Months Ended
|
|
Balance to Expend
|
|
Property
|
|
2016
|
|
June 30, 2016
|
|
in 2016
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
6.0
|
|
$
|
3.7
|
|
$
|
2.3
|
|
South/West
|
|
|
25.2
|
|
|
7.3
|
|
|
17.9
|
|
Total
|
|
$
|
31.2
|
|
$
|
11.0
|
|
$
|
20.2
|
|
Tropicana Las Vegas was acquired on August 25, 2015 for $360 million. We recently reconfigured the gaming floor with updated slot machines, altered game placements and refined the table game mix. During the coming months, we will be making further enhancements to the facility with a focus on improving the food and beverage offerings. Additionally, in April 2016, we integrated the property into our Marquee Rewards player loyalty program which enables our regional gaming customers to redeem their loyalty reward points at the facility.
During the six months ended June 30, 2016, we spent $32.5 million for capital maintenance expenditures, with $11.7 million at our Northeast segment, $7.0 million at our South/West segment, $12.3 million at our Midwest segment, and $1.5 million for other. The majority of the capital maintenance expenditures were for slot machines and slot machine equipment.
Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our capital projects, capital maintenance expenditures and the Jamul Tribe project in 2016 to date.
Jamul Tribe
Advances to the Tribe, which totaled $299.1 million at June 30, 2016, is accounted for as a loan in other assets on the consolidated balance sheet and as such is not included in the capital expenditures table presented above. The budget for this development project is $390 million. The project is nearly complete, and we expect the facility to open in August of this year. Hollywood Casino Jamul-San Diego will offer a three-story gaming and entertainment facility of approximately 200,000 square feet featuring over 1,700 slot machines, 43 live table games, including poker, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. The Company has been and will continue to explore other financing options to provide more permanent, lower cost terms for the Tribe as well as allowing us to reduce our revolving debt levels thereby enhancing our liquidity position.
Senior Secured Credit Facility
On April 28, 2015, the Company entered into an agreement to amend its senior secured credit facility. In August 2015, the amendment to the senior secured credit facility went into effect increasing the capacity under an existing five year revolver from $500 million to $633.2 million and increased the existing five year $500 million Term Loan A facility by $146.7 million. The seven year $250 million Term Loan B facility remained unchanged. At June 30, 2016, the Company’s senior secured credit facility had a gross outstanding balance of $1,220.8 million, consisting of a $568.0 million Term Loan A facility, a $243.8 million Term Loan B facility, and $409.0 million outstanding on the revolving credit facility. Additionally, at June 30, 2016, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $23.5 million, resulting in $200.7 million of available borrowing capacity as of June 30, 2016 under the revolving credit facility.
Financing Obligation with GLPI
As discussed in Note 6 to the condensed consolidated financial statements, the Company makes significant payments to GLPI under the Master Lease. As of June 30, 2016, the Company financed with GLPI real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.
Covenants
The Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $300 million 5.875% senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.
At June 30, 2016, the Company was in compliance with all required financial covenants.
Outlook
Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our senior secured credit facility, will be adequate to meet our anticipated rental obligation, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings projections will be realized, or that future borrowings will be available under our senior secured credit facility or otherwise will be available to enable us to service our indebtedness, including the senior secured credit facility and the $300 million 5.875% senior unsecured notes, to retire or redeem the $300 million 5.875% senior unsecured notes when required or to make anticipated capital expenditures. In addition, we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions and property expansion in under-penetrated markets. If we consummate significant acquisitions in the future or undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors—Risks Related to Our Capital Structure” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the risk related to our capital structure.
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace and in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information at June 30, 2016 about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents notional amounts maturing during the period and the related weighted-average interest rates by maturity dates. Notional amounts are used to calculate the contractual
payments to be exchanged by maturity date and the weighted-average interest rates are based on implied forward LIBOR rates at June 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07/01/16 -
|
|
07/01/17 -
|
|
07/01/18 -
|
|
07/01/19 -
|
|
07/01/20 -
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
6/30/2017
|
|
6/30/2018
|
|
6/30/2019
|
|
6/30/2020
|
|
6/30/2021
|
|
Thereafter
|
|
Total
|
|
6/30/2016
|
|
|
|
(in thousands)
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
300,000
|
|
$
|
300,000
|
|
$
|
294,000
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate
|
|
$
|
60,127
|
|
$
|
68,360
|
|
$
|
856,055
|
|
$
|
2,500
|
|
$
|
233,750
|
|
$
|
—
|
|
$
|
1,220,792
|
|
$
|
1,214,502
|
|
Average interest rate (1)
|
|
|
3.19
|
%
|
|
3.24
|
%
|
|
3.31
|
%
|
|
3.87
|
%
|
|
3.50
|
%
|
|
—
|
%
|
|
—
|
|
|
|
|
|
(1)
|
|
Estimated rate, reflective of forward LIBOR plus the spread over LIBOR applicable to variable-rate borrowing.
|
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2016, which is the end of the period covered by this Quarterly Report on Form 10-Q. As described below, management has identified material weaknesses in our internal controls over financial reporting. As a result of these material weaknesses, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2016 to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
As disclosed in Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 15, 2016, the Company did not maintain effective controls and procedures over the evaluation and accounting of certain complex and non-routine transactions including lease transactions. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of knowledge and experience to challenge our application of GAAP commensurate with the nature and complexity of certain of our transactions to prevent or detect and correct material misstatements in a timely manner. In addition, we did not maintain effective controls and procedures over the calculation of impairment charges for goodwill and indefinite-lived intangible assets. Specifically, our review controls were not designed with a sufficient level of precision and executed by personnel with an appropriate level of experience to detect material errors in the methodologies used and in the calculation of the impairment charges that were recognized in our consolidated statements.
The Company has initiated a compensating control over the proper application of GAAP to complex and non-routine transactions, which includes the involvement of a third party consultant with relevant knowledge and experience to assist the Company with the evaluation of the accounting for highly technical accounting matters. The Company currently expects to have this material weakness remediated no later than December 31, 2016, once we have obtained sufficient evidence that the newly designed and implemented controls are operating effectively.
With respect to the material weakness over the accounting for goodwill and indefinite-lived intangible impairment measurement, the Company designed and implemented additional controls during 2015. This included the involvement of a third party consultant to provide the Company with the appropriate level of expertise to assist in the review of the assessment at a sufficient level of precision. The Company currently expects to have this material weakness remediated no later than December 31, 2016, once we have obtained sufficient evidence that the newly designed and implemented controls are operating effectively.
Changes in Internal Control over Financial Reporting
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.