PENN Entertainment, Inc. - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to        

 

Commission File Number:  0-24206

 

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

 

 

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

 

610-373-2400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title		Outstanding as of July 27, 2015
Common Stock, par value $.01 per share		80,185,538 (includes 134,567 shares of restricted stock)

 

 

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This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” or the negative or other variation of these or similar words, or by discussions of future events, strategies, or risks and uncertainties.  Actual results may vary materially from expectations.  Although Penn National Gaming, Inc. (“Penn”) and its subsidiaries (together with Penn, collectively, the “Company”) believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business, there can be no assurance that actual results will not differ materially from our expectations.  Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays or impediments to completing our planned acquisitions or projects; our ability to secure federal, state and local permits and approvals necessary for our construction projects; construction factors, including delays, unexpected remediation costs, local opposition, organized labor, and increased cost of labor and materials; our ability to maintain agreements with our horsemen, pari-mutuel clerks and other organized labor groups; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet and sweepstakes based and taverns); increases in the effective rate of taxation at any of our properties or at the corporate level; our ability to identify attractive acquisition and development opportunities and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our expectations for the continued availability and cost of capital; the outcome of pending legal proceedings, including the ongoing appeal by the Ohio Roundtable addressing the legality of video lottery terminals in Ohio and litigation surrounding our withdrawal from a gaming project in Western Pennsylvania; changes in accounting standards; the impact of weather; with respect to the proposed Jamul project near San Diego, California, particular risks associated with financing a project of this type, sovereign immunity, local opposition (including several pending lawsuits), and building a complex project on a relatively small parcel; with respect to our Massachusetts project, the ultimate location of the other gaming facilities in the state; with respect to our pending acquisition of Tropicana Las Vegas Hotel and Casino, risks relating to required regulatory approvals and other conditions to closing, higher leverage, the successful integration of the acquisition, our ability to successfully leverage our player database, market conditions affecting the Las Vegas Strip, ongoing litigation, labor relations, future capital expenditures, the risks associated with construction projects (such as delays and unexpected costs) and the availability and cost of capital; with respect to our social and other interactive gaming endeavors, risks related to ultimate profitability, cyber-security, data privacy, intellectual property and legal and regulatory challenges; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, subsequent Quarterly Report on Form 10-Q and Current Reports on Form 8-K as filed with the United States Securities and Exchange Commission.  The Company does not intend to update publicly any forward-looking statements except as required by law.

 

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

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PART I.	FINANCIAL INFORMATION	4
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	4
	Condensed Consolidated Balance Sheets — June 30, 2015 and December 31, 2014	4
	Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2015 and 2014	5
	Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2015 and 2014	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity — Six Months Ended June 30, 2015 and 2014	7
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2015 and 2014	8
	Notes to the Condensed Consolidated Financial Statements	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
ITEM 4.	CONTROLS AND PROCEDURES	36
PART II.	OTHER INFORMATION	36
ITEM 1.	LEGAL PROCEEDINGS	36
ITEM 1A.	RISK FACTORS	36
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37
ITEM 4.	MINE SAFETY DISCLOSURES	37
ITEM 5.	OTHER INFORMATION	37
ITEM 6.	EXHIBITS	38
SIGNATURES		39
EXHIBIT INDEX		40

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		June 30,			December 31,
		2015			2014
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	233,118		$	208,673
Receivables, net of allowance for doubtful accounts of $2,071 and $2,004 at June 30, 2015 and December 31, 2014, respectively		45,135			41,618
Prepaid expenses		62,185			68,947
Deferred income taxes		50,751			55,579
Other current assets		15,452			11,189
Total current assets		406,641			386,006
Property and equipment, net		835,462			769,145
Other assets
Investment in and advances to unconsolidated affiliates		173,726			179,551
Goodwill		274,764			277,582
Other intangible assets, net		370,820			370,562
Deferred income taxes		76,135			79,067
Advances to the Jamul Tribe		108,142			62,048
Other assets		79,358			87,318
Total other assets		1,082,945			1,056,128
Total assets		$	2,325,048		$	2,211,279
Liabilities
Current liabilities
Current maturities of long-term debt		$	44,015		$	30,853
Accounts payable		73,393			43,136
Accrued expenses		136,681			130,818
Accrued interest		8,781			5,163
Accrued salaries and wages		86,069			84,034
Gaming, pari-mutuel, property, and other taxes		62,965			52,132
Insurance financing		6,092			13,680
Other current liabilities		73,528			75,703
Total current liabilities		491,524			435,519
Long-term liabilities
Long-term debt, net of current maturities and debt issuance costs		1,216,908			1,204,828
Noncurrent tax liabilities		9,935			8,188
Other noncurrent liabilities		7,460			8,258
Total long-term liabilities		1,234,303			1,221,274
Shareholders’ equity
Series C Preferred stock ($.01 par value, 18,500 shares authorized, 8,624 shares issued at June 30, 2015 and December 31, 2014)		—			—
Common stock ($.01 par value, 200,000,000 shares authorized, 80,115,538 and 79,161,817 shares issued at June 30, 2015 and December 31, 2014, respectively)		795			786
Additional paid-in capital		936,391			918,370
Retained deficit		(335,506		)	(363,388		)
Accumulated other comprehensive loss		(2,459		)	(1,282		)
Total shareholders’ equity		599,221			554,486
Total liabilities and shareholders’ equity		$	2,325,048		$	2,211,279

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Revenues
Gaming		$	618,919		$	576,158		$	1,210,255		$	1,146,841
Food, beverage and other		117,421			110,574			226,184			215,444
Management service fee		2,816			3,105			4,743			5,563
Revenues		739,156			689,837			1,441,182			1,367,848
Less promotional allowances		(38,200		)	(37,691		)	(76,088		)	(74,622		)
Net revenues		700,956			652,146			1,365,094			1,293,226
Operating expenses
Gaming		313,616			284,107			608,511			570,184
Food, beverage and other		82,803			80,403			160,732			157,941
General and administrative		118,572			107,898			234,641			215,637
Rental expense related to Master Lease		109,519			104,613			218,364			208,922
Depreciation and amortization		41,752			47,183			84,674			94,549
Impairment losses		—			4,560			—			4,560
Total operating expenses		666,262			628,764			1,306,922			1,251,793
Income from operations		34,694			23,382			58,172			41,433
Other income (expenses)
Interest expense		(12,295		)	(10,892		)	(24,458		)	(22,187		)
Interest income		2,443			790			4,313			1,257
Income from unconsolidated affiliates		4,154			1,473			8,136			3,956
Other		(956		)	(1,823		)	2,133			(192		)
Total other expenses		(6,654		)	(10,452		)	(9,876		)	(17,166		)
Income from operations before income taxes		28,040			12,930			48,296			24,267
Income tax provision		11,154			8,754			20,414			15,554
Net income		$	16,886		$	4,176		$	27,882		$	8,713
Earnings per common share:
Basic earnings per common share		$	0.19		$	0.05		$	0.32		$	0.10
Diluted earnings per common share		$	0.19		$	0.05		$	0.31		$	0.10

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Net income		$	16,886		$	4,176		$	27,882		$	8,713
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment during the period		539			619			(1,177		)	(81		)
Other comprehensive income (loss)		539			619			(1,177		)	(81		)
Comprehensive income		$	17,425		$	4,795		$	26,705		$	8,632

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share data) (unaudited)

 

		Preferred Stock					Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive			Total Shareholders’
		Shares		Amount			Shares		Amount			Capital			Deficit			Loss			Equity
Balance, December 31, 2013		8,624		$	—		77,788,393		$	775		$	887,556		$	(130,314	)	$	383		$	758,400
Share-based compensation arrangements, net of tax benefits of $9,591		—		—			839,090		6			20,715			—			—			20,721
Foreign currency translation adjustment		—		—			—		—			—			—			(81		)	(81		)
Net income		—		—			—		—			—			8,713			—			8,713
Balance, June 30, 2014		8,624		$	—		78,627,483		$	781		$	908,271		$	(121,601	)	$	302		$	787,753
Balance, December 31, 2014		8,624		$	—		79,161,817		$	786		$	918,370		$	(363,388	)	$	(1,282	)	$	554,486
Share-based compensation arrangements, net of tax benefits of $8,036		—		—			953,721		9			18,021			—			—			18,030
Foreign currency translation adjustment		—		—			—		—			—			—			(1,177		)	(1,177		)
Net income		—		—			—		—			—			27,882			—			27,882
Balance, June 30, 2015		8,624		$	—		80,115,538		$	795		$	936,391		$	(335,506	)	$	(2,459	)	$	599,221

 

See accompanying notes to the condensed consolidated financial statements.

 

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

Six Months Ended June 30,		2015			2014
Operating activities
Net income		$	27,882		$	8,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		84,674			94,549
Amortization of items charged to interest expense		3,008			3,022
Accretion of settlement values on long term obligations		707			—
Loss (gain) on sale of fixed assets		388			(47		)
Income from unconsolidated affiliates		(8,136		)	(3,956		)
Distributions of earnings from unconsolidated affiliates		14,000			11,000
Deferred income taxes		8,805			(7,401		)
Charge for stock-based compensation		4,421			5,096
Impairment losses and writedowns		—			7,860
(Increase) decrease, net of businesses acquired
Accounts receivable		(3,462		)	(16,983		)
Prepaid expenses and other current assets		2,537			(5,749		)
Other assets		5,750			4,303
Increase (decrease), net of businesses acquired
Accounts payable		6,633			24,115
Accrued expenses		6,148			(8,837		)
Accrued interest		3,618			(2,030		)
Accrued salaries and wages		2,035			(6,293		)
Gaming, pari-mutuel, property and other taxes		10,833			4,009
Income taxes		5,735			1,337
Other current and noncurrent liabilities		(2,973		)	3,467
Other noncurrent tax liabilities		2,791			5,698
Net cash provided by operating activities		175,394			121,873
Investing activities
Capital project expenditures, net of reimbursements		(90,324		)	(36,041		)
Capital maintenance expenditures		(30,165		)	(44,273		)
Advances to the Jamul Tribe		(38,452		)	(18,856		)
Proceeds from sale of property and equipment		375			176
Investment in joint ventures		(328		)	(1,000		)
(Increase) decrease in cash in escrow		(4,000		)	18,000
Acquisition of businesses and gaming and other licenses		(248		)	(88,185		)
Net cash used in investing activities		(163,142		)	(170,179		)
Financing activities
Proceeds from exercise of options		5,518			6,034
Proceeds from issuance of long-term debt, net of issuance costs		60,000			—
Principal payments on long-term debt		(53,773		)	(13,866		)
Proceeds from insurance financing		885			14,816
Payments on insurance financing		(8,473		)	(9,965		)
Tax benefit from stock options exercised		8,036			9,591
Net cash provided by financing activities		12,193			6,610
Net increase (decrease) in cash and cash equivalents		24,445			(41,696		)
Cash and cash equivalents at beginning of year		208,673			292,995
Cash and cash equivalents at end of period		$	233,118		$	251,299
Supplemental disclosure
Interest expense paid, net of amounts capitalized		$	17,114		$	21,187
Income taxes paid		$	432		$	3,030

 

See accompanying notes to the condensed consolidated financial statements.

 

Non-cash transaction:  In January 2015, a repayment obligation for a hotel and event center near Hollywood Casino Lawrenceburg was assumed by a subsidiary of the Company, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment. This non-cash transaction increased property and equipment, net and total debt by $15.3 million. See Note 6 for further detail.

 

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Organization and Basis of Presentation

 

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”) is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of June 30, 2015, the Company owned, managed, or had ownership interests in twenty-six 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.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates, that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIE”), are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.  For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation.

 

Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2014 should be read in conjunction with these condensed consolidated financial statements.  The December 31, 2014 financial information has been derived from the Company’s audited consolidated financial statements.

 

2.  Summary of Significant Accounting Policies

 

Revenue Recognition and Promotional Allowances

 

Gaming revenue consists mainly of slot and video lottery gaming machine revenue as well as to a lesser extent table game and poker revenue. Gaming revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs, for “ticket-in, ticket-out” coupons in the customers’ possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increases. Table game revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens and outstanding markers (credit instruments) that are removed from the live gaming tables.

 

Food, beverage and other revenue, including racing revenue, is recognized as services are performed. Racing revenue includes the Company’s share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, its share of wagering from import and export simulcasting, and its share of wagering from its off-track wagering facilities.

 

Revenue from the management service contract for Casino Rama is based upon contracted terms and is recognized when services are performed.

 

Revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives.” The Company records certain sales incentives and points earned in point-loyalty programs as a reduction of revenue.

 

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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. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense.

 

The amounts included in promotional allowances for the three and six months ended June 30, 2015 and 2014 are as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Rooms		$	8,903		$	8,426		$	17,239		$	16,497
Food and beverage		27,215			26,790			54,651			53,389
Other		2,082			2,475			4,198			4,736
Total promotional allowances		$	38,200		$	37,691		$	76,088		$	74,622

 

The estimated cost of providing such complimentary services for the three and six months ended June 30, 2015 and 2014 are as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Rooms		$	974		$	891		$	1,909		$	1,758
Food and beverage		10,657			11,247			21,486			22,215
Other		873			913			1,711			1,755
Total cost of complimentary services		$	12,504		$	13,051		$	25,106		$	25,728

 

Gaming and Racing Taxes

 

The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. Finally, the Company recognizes purse expense based on the statutorily required percentage of revenue that is required to be paid out in the form of purses to the winning owners of horse races run at the Company’s racetracks in the period in which wagering occurs. For the three and six months ended June 30, 2015, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $244.5 million and $471.6  million, as compared to $223.2 million and $442.6 million for the three and six months ended June 30, 2014, respectively.

 

Rental Expense related to the Master Lease

 

As of June 30, 2015, the Company leases from Gaming and Leisure Properties, Inc. (“GLPI”) real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations under a “triple net” master lease agreement (“Master Lease”).

 

The rent structure under the Master Lease, which became effective November 1, 2013, includes a fixed component, a portion of which is subject to an annual escalator of up to 2% if certain rent coverage ratio thresholds are met, and a variable component that is based on the performance of the facilities, which is prospectively adjusted, subject to a floor of zero (i) every five years by an amount equal to 4% of the average change to net revenues of all facilities under the Master Lease (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding five years, and (ii) monthly by an amount equal to 20% of the change in net revenues of Hollywood Casino Columbus and Hollywood Casino Toledo during the preceding month.  In addition, with the openings of Hollywood Gaming at Mahoning Valley Race Course and Hollywood Gaming at Dayton Raceway in the third quarter of 2014, these properties began paying rent subject to the terms of the Master Lease, for which the annual rental obligation is calculated as 10% of the real estate construction costs paid for by GLPI related to these facilities.

 

The Master Lease is commonly known as a triple-net lease. Accordingly, in addition to rent, the Company is required to pay the following, among other things: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); and (4) all utilities and other services necessary or appropriate for the leased properties and the business

 

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conducted on the leased properties. At the Company’s option, the Master Lease may be extended for up to four five-year renewal terms beyond the initial fifteen-year term, on the same terms and conditions.

 

Total rental expense under the Master Lease for the three and six months ended June 30, 2015 was $109.5 million and $218.4 million, as compared to $104.6 million and $208.9 million for the three and six months ended June 30, 2014, respectively.

 

Long-term asset related to the Jamul Tribe

 

On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Indian Village of California (the “Jamul Tribe”) had entered into definitive agreements to jointly develop a Hollywood Casino branded gaming facility on the Jamul Tribe’s trust land in San Diego County, California.  The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre-development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company will provide a loan or loans to the Jamul Tribe to fund certain development costs; and (iii) create an exclusive arrangement between the parties.

 

The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possesses certain inherent powers of self-government.  The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”).  The Jamul Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe.  The arrangement between the Jamul Tribe and the Company provides the Jamul Tribe with the expertise, knowledge and capacity of a proven developer and operator of gaming facilities and provides the Company with the exclusive right to administer and oversee planning, designing, development, construction management, and coordination during the development and construction of the project as well as the management of a gaming facility on the Property.

 

The proposed $390 million development project 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, the Company announced the commencement of construction activities at the site and it is anticipated that the facility will open in mid-2016.  The Company may, under certain circumstances, provide backstop financing to the Jamul Tribe in connection with the project and, upon opening, will manage and provide branding for the casino. The Company has a conditional loan commitment to the Jamul Tribe (that can be terminated under certain circumstances) for up to $400 million and anticipates it will fund approximately $390 million related to this development.

 

The Company is accounting for the development agreement and related loan commitment letter with the Jamul Tribe as a loan (note receivable) with accrued interest in accordance with ASC 310 “Receivables.”  The loan represents advances made by the Company to the Jamul Tribe for the development and construction of a gaming facility for the Jamul Tribe on reservation land.  As such, the Jamul Tribe will own the casino and its related assets and liabilities.  San Diego Gaming Ventures, LLC (a wholly owned subsidiary of the Company) is a separate legal entity established to account for the loan and, upon completion of the project and subsequent commencement of gaming operations on the Property, will be the Penn entity which receives management and licensing fees from the Jamul Tribe.  The Company has a note receivable with the Jamul Tribe for $108.1 million and $62.0 million, which includes accrued interest of $7.2 million and $3.3 million, at June 30, 2015 and December 31, 2014, respectively. Collectability of the note receivable will be derived from the revenues of the casino operations once the project is completed.  Based on the Company’s current progress with this project, the Company believes collectability of the note is highly certain.  However, in the event that the Company’s internal projections related to the profitability of this project and/or the timing of the opening are inaccurate, the Company may be required to record a reserve related to the collectability of this note receivable.

 

The Company considered whether the arrangement with the Jamul Tribe represents a variable interest that should be accounted for pursuant to the VIE Subsections of ASC 810 “Consolidation” (“ASC 810”).  The Company noted that the scope and scope exceptions of ASC 810-10-15-12(e) states that a reporting entity shall not consolidate a government organization or financing entity established by a government organization (other than certain financing entities established to circumvent the provisions of the VIE Subsections of ASC 810).  Based on the status of the Jamul Tribe as a government organization, the Company believes its arrangement with the Jamul Tribe is not within the scope defined by ASC 810.

 

Earnings Per Share

 

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding

 

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during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

 

At June 30, 2015 and 2014, the Company had outstanding 8,624 shares of Series C Convertible Preferred Stock. The Company determined that both classes of preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

 

The following table sets forth the allocation of net income for the three and six months ended June 30, 2015 and 2014 under the two-class method:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
		(in thousands)
Net income		$	16,886		$	4,176		$	27,882		$	8,713
Net income applicable to preferred stock		1,648			414			2,726			866
Net income applicable to common stock		$	15,238		$	3,762		$	25,156		$	7,847

 

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and six months ended June 30, 2015 and 2014:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2015		2014		2015		2014
		(in thousands)
Determination of shares:
Weighted-average common shares outstanding		79,758		78,458		79,580		78,189
Assumed conversion of dilutive employee stock-based awards		2,298		1,800		2,301		1,903
Assumed conversion of restricted stock		49		54		60		97
Diluted weighted-average common shares outstanding before participating security		82,105		80,312		81,941		80,189
Assumed conversion of preferred stock		8,624		8,624		8,624		8,624
Diluted weighted-average common shares outstanding		90,729		88,936		90,565		88,813

 

Options to purchase 1,604,583 shares and 935,147 shares were outstanding during the six months ended June 30, 2015 and 2014, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

 

The following table presents the calculation of basic EPS for the Company’s common stock (in thousands, except per share data):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Calculation of basic EPS:
Net income applicable to common stock		$	15,238		$	3,762		$	25,156		$	7,847
Weighted-average common shares outstanding		79,758			78,458			79,580			78,189
Basic EPS		$	0.19		$	0.05		$	0.32		$	0.10

 

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The following table presents the calculation of diluted EPS for the Company’s common stock (in thousands, except per share data):

 

		Three months ended June 30,						Six months ended June 30,
		2015			2014			2015			2014
Calculation of diluted EPS using two-class method:
Net income applicable to common stock		$	15,238		$	3,762		$	25,156		$	7,847
Diluted weighted-average common shares outstanding before participating security		82,105			80,312			81,941			80,189
Diluted EPS		$	0.19		$	0.05		$	0.31		$	0.10

 

Stock-Based Compensation

 

The Company accounts for stock compensation under ASC 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant.

 

The fair value for stock options was estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a term equal to the expected life assumed at the date of grant. Expected volatility was estimated based on the historical volatility of the Company’s stock price over a period of 5.45 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees.  The Company granted 1,689,357 stock options during the six months ended June 30, 2015.

 

Stock-based compensation expense for the three and six months ended June 30, 2015 was $2.3 million and $4.4 million, as compared to $2.5 million and $5.1 million for the three and six months ended June 30, 2014, respectively, and is included within the condensed consolidated statements of income under general and administrative expense.

 

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of three to five years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date.  The PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $11.9 million and $8.2 million at June 30, 2015 and December 31, 2014, respectively. For PSUs held by Penn employees, there was $25.2 million of total unrecognized compensation cost at June 30, 2015 that will be recognized over the grants remaining weighted average vesting period of 2.1 years. For the three and six months ended June 30, 2015, the Company recognized $5.0 million and $9.5 million of compensation expense associated with these awards, as compared to $1.2 million and $2.6 million for the three and six months ended June 30, 2014.  The increase was primarily due to the stock price increase for both Penn and GLPI awards held by Penn employees in the current year compared with stock price declines in the prior year.  Amounts paid by the Company for the three and six months ended June 30, 2015 on these cash-settled awards totaled $0.1 million and $5.3 million, as compared to $0.1 million and $6.0 million for the three and six months ended June 30, 2014, respectively.

 

For the Company’s stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $11.1 million and $6.3 million at June 30, 2015 and December 31, 2014, respectively. For SARs held by Penn employees, there was $10.2 million of total unrecognized compensation cost at June 30, 2015 that will be recognized over the awards remaining weighted average vesting period of 2.84 years. For the three and six months ended June 30, 2015, the Company recognized $2.5 million and $7.1 million of compensation expense associated with these awards, as compared to ($0.2) million and $0.1 million for the three and six months ended June 30, 2014, respectively. The increase was primarily due to the stock price increase for both Penn and GLPI awards held by Penn employees in the current year compared with stock price declines in the prior year.  Amounts paid by the Company for the three and six months ended June 30, 2015 on these cash-settled awards totaled $0.5 million and $2.3 million, as compared to $0.7 million and $1.2 million for the three and six months ended June 30, 2014, respectively.

 

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The following are the weighted-average assumptions used in the Black-Scholes option-pricing model at June 30, 2015 and 2014:

 

		2015		2014
Risk-free interest rate		1.75	%	1.68	%
Expected volatility		32.52	%	44.80	%
Dividend yield		—		—
Weighted-average expected life (years)		5.45		5.45

 

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, “Segment Reporting” (“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. The Company’s reportable segments are: (i) East/Midwest, (ii) West, and (iii) Southern Plains.

 

The East/Midwest 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 Lawrenceburg, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, which opened on August 28, 2014, Hollywood Gaming at Mahoning Valley Race Course, which opened on September 17, 2014, and Plainridge Park Casino, which opened on June 24, 2015.  It also includes the Company’s Casino Rama management service contract.

 

The West reportable segment consists of the following properties: Zia Park Casino and the M Resort, as well as the Hollywood Casino Jamul — San Diego project with the Jamul Indian Village, which the Company anticipates completing in mid-2016.  This segment will also include the results of Tropicana Las Vegas Hotel and Casino (“Tropicana Las Vegas” or “Tropicana”) once this acquisition is consummated.

 

The Southern Plains reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, and Hollywood Casino St. Louis, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway. On July 30, 2014, the Company closed Argosy Casino Sioux City.

 

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, as well as the Company’s 50% joint venture with the Cordish Companies in New York (which is in the process of being dissolved). 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.

 

See Note 8 for further information with respect to the Company’s segments.

 

Other Comprehensive Income

 

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income,” which establishes standards for the reporting and presentation of comprehensive income in the consolidated financial statements. The Company presents comprehensive income in two separate but consecutive statements. For the three and six months ended June 30, 2015 and 2014, the only component of accumulated other comprehensive income was foreign currency translation adjustments.

 

3.  New Accounting Pronouncements

 

In April 2015, the FASB issued revised guidance to simplify the presentation of debt issuance costs in the balance sheet.  The revised guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the existing presentation of debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by this revised guidance, and therefore there is no impact to the statement of income.  The revised guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this revised guidance is permitted for financial statements that have not been previously issued. An entity should apply the revised guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the revised guidance. The Company has elected to early adopt the revised guidance and as such debt issuance costs are now presented as a direct reduction of

 

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long-term debt on the Company’s condensed consolidated balance sheets.  See Note 6 for further information regarding debt issuance costs.

 

In February 2015, the FASB issued new consolidation guidance to modify the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The main provisions of the new guidance include modifying the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, and the effect of fee arrangements and related parties on the primary beneficiary determination, as well as provides a scope exception for certain investment funds. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period.  A reporting entity may apply the new guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the new guidance retrospectively.  Management is in the process of assessing the impact of the new guidance on existing consolidation conclusions and equity method investments, but does not anticipate any change.

 

In May 2014, the FASB issued new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance was originally to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. In April 2015, the FASB issued a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in fiscal year 2018.  Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the new revenue recognition guidance will have on the consolidated financial statements.

 

4.  Pending Acquisition

 

On April 29, 2015, the Company announced that it entered into a definitive agreement to acquire the Tropicana Las Vegas Hotel and Casino for approximately $360 million.  We believe the planned acquisition will fulfill an important long-term strategic objective of establishing a presence on the Las Vegas Strip.  The Tropicana is a quality facility 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.  The transaction is subject to customary closing conditions and regulatory approvals.  The purchase price will be funded by revolving commitments under the Company’s existing senior secured credit facility and approximately $280 million of incremental commitments under an amended senior secured credit facility.  The acquisition is expected to close later this year, subject to the timing of regulatory approvals and other closing conditions.

 

5.  Property and Equipment

 

Property and equipment, net, consists of the following:

 

		June 30,			December 31,
		2015			2014
		(in thousands)
Land and improvements		$	56,702		$	42,350
Building and improvements		294,187			173,043
Furniture, fixtures, and equipment		1,259,639			1,213,143
Leasehold improvements		248,447			246,047
Construction in progress		8,820			69,367
Total property and equipment		1,867,795			1,743,950
Less accumulated depreciation		(1,032,333		)	(974,805		)
Property and equipment, net		$	835,462		$	769,145

 

Property and equipment, net increased by $66.3 million for the six months ended June 30, 2015 primarily due to the City of Lawrenceburg’s conveyance of a hotel and event center near Hollywood Casino Lawrenceburg (see Note 6 for further detail) and

 

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construction costs for the development of Plainridge Park Casino as well as normal capital maintenance expenditures, all of which were partially offset by depreciation expense for the six months ended June 30, 2015.

 

Depreciation expense totaled $41.8 million and $84.7 million for the three and six months ended June 30, 2015, as compared to $42.0 million and $84.0 million for the three and six months ended June 30, 2014, respectively.  Interest capitalized in connection with major construction projects was $1.2 million and $1.8 million for the three and six months ended June 30, 2015, as compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2014, respectively.

 

6.  Long-term Debt

 

Long-term debt, net of current maturities, is as follows:

 

		June 30,			December 31,
		2015			2014
		(in thousands)
Senior secured credit facility		$	813,750		$	807,500
$300 million 5.875% senior unsecured notes due November 1, 2021		300,000			300,000
Other long term obligations		170,196			154,189
Capital leases		177			199
		1,284,123			1,261,888
Less current maturities of long-term debt		(44,015		)	(30,853		)
Less discount on senior secured credit facility Term Loan B		(972		)	(1,056		)
Less debt issuance costs, net of accumulated amortization of $9.7 million and $6.8 million, respectively		(22,228		)	(25,151		)
		$	1,216,908		$	1,204,828

 

The following is a schedule of future minimum repayments of long-term debt as of June 30, 2015 (in thousands, excluding other long-term obligations attributable to the contingent purchase price consideration related to the purchase of Plainridge Racecourse further discussed below):

 

Within one year		$	44,015
1-3 years		126,953
3-5 years		478,477
Over 5 years		614,781
Total minimum payments		$	1,264,226

 

Senior Secured Credit Facility

 

The senior secured credit facility consists of a five year $500 million revolver, a five year $500 million Term Loan A facility, and a seven year $250 million Term Loan B facility.  At June 30, 2015, the Company’s senior secured credit facility had a gross outstanding balance of $813.8  million, consisting of a $462.5 million Term Loan A facility, a $246.3 million Term Loan B facility, and $105.0 million outstanding on the revolving credit facility.  Additionally, at June 30, 2015, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.9 million, resulting in $372.1 million of available borrowing capacity as of June 30, 2015 under the revolving credit facility.

 

Other Long Term Obligations

 

Other long term obligations at June 30, 2015 of $170.2 million included $19.9 million for the contingent purchase price consideration related to the purchase of Plainridge Racecourse, $135.0 million related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, and $15.3 million related to the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg; all of which are more fully described below.

 

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Plainridge Racecourse

 

On April 11, 2014, the Company purchased Plainridge Racecourse in Massachusetts, at which the Company began to operate a slots-only gaming facility on June 24, 2015. The associated option and purchase agreement contained contingent purchase price consideration that is calculated based on the actual earnings over the first ten years of operations following the commencement of gaming. The first payment is due 60 days after the completion of the first four full fiscal quarters of operation following the commencement of gaming, and additional payments are due every year for nine years after the first payment. The fair value of this liability was based on an income approach from the Company’s internal earning projections and was discounted at a rate consistent with the risk a third party market participant would require holding the identical instrument as an asset. At each reporting period, the Company assesses the fair value of this obligation and changes in its value are recorded in earnings. The amount included in interest expense related to the change in fair value of this obligation was $0.3 million and $0.7 million for the three and six months ended June 30, 2015, respectively.

 

Ohio Relocation Fees

 

In June 2013, the Company finalized the terms of its memorandum of understanding with the State of Ohio, which included an agreement by the Company to pay a relocation fee in return for being able to relocate its existing racetracks in Toledo and Grove City to Dayton and Mahoning Valley, respectively. Upon opening of these two racinos in Ohio in the third quarter of 2014, the relocation fee for each new racino was recorded at the present value of the contractual obligation, which was calculated to be $75 million based on the 5% discount rate included in the agreement.  The relocation fee for each facility is payable as follows: $7.5 million upon the opening of the facility and eighteen semi-annual payments of $4.8 million beginning one year from the commencement of operations. This obligation is accreted to interest expense at an effective yield of 5.0%. The amount included in interest expense related to this obligation was $1.7 million and $3.4 million for the three and six months ended June 30, 2015, respectively.

 

Event Center

 

The City of Lawrenceburg Department of Redevelopment recently completed construction of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg. Effective in mid-January 2015, by contractual agreement, a repayment obligation for the hotel and event center was assumed by a wholly-owned subsidiary of the Company in the amount of $15.3 million, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment.  The Company is obligated to make annual payments on the loan of approximately $1 million for twenty years beginning January 2016. This obligation is accreted to interest expense at its effective yield of 3.0%. The amount included in interest expense related to this obligation was $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively.

 

Debt Issuance Costs

 

As discussed in Note 3, the Company elected to early adopt accounting guidance issued in April 2015 to simplify the presentation of debt issuance costs.  This change in accounting principle was implemented retrospectively as of March 31, 2015.  Debt issuance costs that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense using the effective interest method over the contractual term of the underlying indebtedness.  The Company has reclassified debt issuance costs as a direct reduction to the related debt obligation on the balance sheet as of December 31, 2014.

 

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, 2015, the Company was in compliance with all required financial covenants.

 

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7.  Commitments and Contingencies

 

Litigation

 

The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the ordinary course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

 

8.  Segment Information

 

The following tables present certain information with respect to the Company’s segments. Intersegment revenues between the Company’s segments were not material in any of the periods presented below.

 

		East/Midwest			West			Southern Plains			Other			Total
								(in thousands)
Three months ended June 30, 2015
Net revenues		$	417,756		$	63,664		$	213,689		$	5,847		$	700,956
Income (loss) from operations		27,853			7,410			26,333			(26,902		)	34,694
Depreciation and amortization		27,342			2,297			10,697			1,416			41,752
Income (loss) from unconsolidated affiliates		—			—			4,401			(247		)	4,154
Capital expenditures		60,150			2,363			8,003			1,184			71,700
Three months ended June 30, 2014
Net revenues		$	361,357		$	59,033		$	224,726		$	7,030		$	652,146
Income (loss) from operations		17,003			7,426			17,970			(19,017		)	23,382
Depreciation and amortization		25,911			1,692			17,573			2,007			47,183
Income (loss) from unconsolidated affiliates		—			—			2,621			(1,148		)	1,473
Impairment losses		4,560			—			—			—			4,560
Capital expenditures		16,988			9,617			13,990			2,678			43,273
Six months ended June 30, 2015
Net revenues		$	804,300		$	126,250		$	423,958		$	10,586		$	1,365,094
Income (loss) from operations		46,947			13,919			50,907			(53,601		)	58,172
Depreciation and amortization		55,614			4,685			21,480			2,895			84,674
Income (loss) from unconsolidated affiliates		—			—			8,189			(53		)	8,136
Capital expenditures		98,724			5,214			14,451			2,100			120,489
Six months ended June 30, 2014
Net revenues		$	710,805		$	119,953		$	448,483		$	13,985		$	1,293,226
Income (loss) from operations		26,605			15,482			39,197			(39,851		)	41,433
Depreciation and amortization		52,734			3,241			34,824			3,750			94,549
Income (loss) from unconsolidated affiliates		—			—			5,074			(1,118		)	3,956
Impairment losses		4,560			—			—			—			4,560
Capital expenditures		27,098			16,047			33,333			3,836			80,314
Balance sheet at June 30, 2015
Total assets		1,090,333			332,962			565,278			336,475			2,325,048
Investment in and advances to unconsolidated affiliates		91			—			109,658			63,977			173,726
Goodwill and other intangible assets, net		264,261			145,198			232,047			4,078			645,584
Balance sheet at December 31, 2014
Total assets		990,031			289,026			592,405			339,817			2,211,279
Investment in and advances to unconsolidated affiliates		94			—			115,469			63,988			179,551
Goodwill and other intangible assets, net		264,147			145,054			234,865			4,078			648,144

 

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