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PNK > SEC Filings for PNK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for PINNACLE ENTERTAINMENT INC.

Form 10-Q for PINNACLE ENTERTAINMENT INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

EXECUTIVE SUMMARY

Pinnacle Entertainment, Inc. is an owner, operator and developer of casinos and related hospitality and entertainment facilities. We operate L'Auberge Lake Charles in Lake Charles, Louisiana; River City Casino and Lumière Place in St. Louis, Missouri; Boomtown New Orleans in New Orleans, Louisiana; Belterra Casino Resort in Vevay, Indiana; and Boomtown Bossier City in Bossier City, Louisiana. We opened L'Auberge Baton Rouge in Baton Rouge, Louisiana on September 1, 2012. In addition, we own and operate a racetrack facility, River Downs, in Cincinnati, Ohio and a live and televised poker tournament series, Heartland Poker Tour. We also own a 26% stake in ACDL, a British Columbia corporation that is developing Vietnam's first integrated resort near Ho Chi Minh City. In June 2012, we closed the previously announced sale of our Boomtown Reno operations.

In April 2012, we entered into agreements to execute a series of transactions that would result in us acquiring 75.5% of the equity of Retama Partners, Ltd. ("RPL"), the owner of the racing license for Retama Park Racetrack. The acquisition of the equity of RPL is subject to the receipt of all applicable regulatory approvals and additional agreements with Retama Development Corporation, a local corporation organized and acting on behalf of the City of Selma as owner of Retama Park, with closing expected by the end of the first quarter of 2013.

We operate casino properties, all of which include gaming and dining facilities, and some of which include hotel, retail and other amenities. In addition, we operate one racetrack and a poker tour. Our operating results are highly dependent on the volume of customers at our properties, which, in turn, affects the price we can charge for our hotel rooms and other amenities. While we do provide casino credit in several gaming jurisdictions, most of our revenue is cash-based, with customers wagering with cash or paying for non-gaming services with cash or credit cards. Our properties generate significant operating cash flow. Our industry is capital-intensive, and we rely on the ability of our properties to generate operating cash flow to pay interest, repay debt costs and fund maintenance capital expenditures.

Our mission is to increase stockholder value. We seek to increase revenues through enhancing the guest experience by providing them with their favorite games, restaurants, hotel accommodations, entertainment and other amenities in attractive surroundings with high-quality guest service and guest rewards programs. We seek to improve margins by focusing on operational excellence and efficiency while meeting our guests' expectations of value. Our long-term strategy includes disciplined capital expenditures to improve and maintain our existing properties, while growing the number and quality of our facilities by pursuing gaming entertainment opportunities we can improve or develop. We intend to diversify our guest demographics and revenue sources by growing our portfolio of operating properties both domestic and foreign, while remaining gaming and entertainment centric. We intend to implement these strategies either alone or with third parties when we believe it benefits our stockholders to do so. In making decisions, we consider our stockholders, guests, team members and other constituents in the communities in which we operate.


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RESULTS OF OPERATIONS
The following table highlights our results of operations for the three and nine months ended September 30, 2012 and 2011. As discussed in Note 10 to our unaudited Condensed Consolidated Financial Statements, we report segment operating results based on revenues and Adjusted EBITDA. Such segment reporting is on a basis consistent with how we measure our business and allocate resources internally. See Note 10 to our unaudited Condensed Consolidated Financial Statements for more information regarding our segment information. The following table highlights our Adjusted EBITDA for each segment and reconciles Consolidated Adjusted EBITDA (defined below) to income (loss) from continuing operations in accordance with U.S. GAAP.
                                           For the three months ended
                                                  September 30,                 For the nine months ended September 30,
                                             2012                2011                2012                     2011
                                                                          (in millions)
Revenues:
L'Auberge Lake Charles                 $       99.5         $       98.2     $           297.3         $           283.1
St. Louis (a)                                  98.5                 98.4                 299.2                     288.5
Boomtown New Orleans                           27.9                 32.2                  92.6                     102.5
Belterra Casino Resort                         41.6                 42.1                 120.3                     117.4
Boomtown Bossier City                          19.8                 21.1                  62.8                      65.4
L'Auberge Baton Rouge                          13.1                    -                  13.1                         -
River Downs                                     3.5                  3.9                   9.9                       8.5
Other                                           0.3                    -                   0.3                         -
Total Revenue                          $      304.2         $      295.9                 895.5         $           865.4
Adjusted EBITDA (b):
L'Auberge Lake Charles                 $       31.5         $       29.7     $            91.6         $            79.5
St. Louis (a)                                  25.5                 22.3                  76.3                      63.3
Boomtown New Orleans                            7.7                 10.3                  28.7                      34.2
Belterra Casino Resort                          9.9                  8.7                  26.3                      21.9
Boomtown Bossier City                           4.3                  4.6                  14.8                      14.6
L'Auberge Baton Rouge                           1.5                    -                   1.5                         -
River Downs                                    (0.5 )               (0.7 )                (1.3 )                    (1.7 )
Other                                          (0.2 )                  -                  (0.2 )                       -
                                               79.7                 74.9                 237.7                     211.8
Corporate expenses                             (5.6 )               (6.2 )               (15.9 )                   (22.0 )
Consolidated Adjusted EBITDA (b)               74.1                 68.7                 221.8                     189.8
Other benefits (costs):
Depreciation and amortization                 (27.6 )              (25.8 )               (80.0 )                   (77.9 )
Pre-opening and development costs             (11.5 )               (2.5 )               (18.5 )                    (7.2 )
Share-based compensation expense               (1.7 )               (1.6 )                (7.0 )                    (5.3 )
Write-downs, reserves and recoveries,
net                                            (0.1 )               (1.3 )                (0.9 )                    (7.9 )
Net interest expense, net of
capitalized interest                          (23.0 )              (24.0 )               (67.4 )                   (75.7 )
Loss from equity method investment             (1.4 )               (0.5 )                (4.2 )                    (0.5 )
Loss on early extinguishment of debt              -                 (0.2 )               (20.7 )                    (0.2 )
Income tax expense                             (2.0 )               (1.0 )                (3.7 )                    (2.6 )
Income from continuing operations      $        6.8         $       11.8     $            19.4         $            12.5

(a) Our St. Louis segment consists of Lumière Place (which includes the Lumière Place Casino, the Pinnacle-owned Four Seasons Hotel St. Louis and HoteLumière) and River City.


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(b) We define Consolidated Adjusted EBITDA as earnings before depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, gain
(loss) on sale of certain assets, interest income and expense, income (loss) from equity method investments, loss on early extinguishment of debt, loss on sale of discontinued operations, discontinued operations and income taxes. We define Adjusted EBITDA for each segment as earnings before depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, gain
(loss) on sale of certain assets, interest income and expense and income taxes. We use Consolidated Adjusted EBITDA and Adjusted EBITDA for each segment to compare operating results among our properties and between accounting periods. Consolidated Adjusted EBITDA and Adjusted EBITDA have economic substance because they are used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel 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 eliminate the results from discontinued operations as they are discontinued. We also review pre-opening and development expenses separately, as such expenses are also included in total project costs when assessing budgets and project returns, and because such costs relate to anticipated future revenues and income. We believe that Consolidated Adjusted EBITDA and Adjusted EBITDA are useful measures for investors because it is an indicator of the strength and performance of ongoing business operations, including our ability to service debt and 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 of companies within our industry. In addition, our credit agreement and bond indentures require compliance with financial measures similar to Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Our calculation of Consolidated Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

Segment comparison of the three and nine months ended September 30, 2012 and 2011

L'Auberge Lake Charles
                     For the three months ended            Percentage            For the nine months ended           Percentage
                           September 30,              Increase/(Decrease)              September 30,             Increase/(Decrease)
                        2012             2011            2012 vs. 2011              2012            2011            2012 vs. 2011
                                                                      (in millions)
Gaming revenues    $        85.6     $     85.4                 0.2 %          $      257.8     $    248.3                  3.8 %
Total revenues              99.5           98.2                 1.3 %                 297.3          283.1                  5.0 %
Operating income            25.8           24.0                 7.5 %                  74.3           63.0                 17.9 %
Adjusted EBITDA             31.5           29.7                 6.1 %                  91.6           79.5                 15.2 %

L'Auberge Lake Charles, our largest property, had an increase in revenues and Adjusted EBTIDA for the three and nine months ended September 30, 2012 as compared to the prior-year period, as a result of the a continued focus on the efficiency of the operation and utilization of assets, and due to a non-recurring charge related to the launch of our mychoice customer loyalty program in 2011. In addition, improvements made throughout the property have helped increase gaming revenues. Operating efficiencies have been achieved through consolidating tasks through a shared services arrangement across our Louisiana properties. Despite increases to revenues and Adjusted EBITDA for the three and nine months ended September 30, 2012, operating performance was negatively impacted by Hurricane Isaac.


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St. Louis
                                                                                                                 Percentage
                     For the three months ended           Percentage            For the nine months ended        Increase/
                           September 30,              Increase/(Decrease)             September 30,              (Decrease)
                        2012             2011            2012 vs. 2011             2012            2011        2012 vs. 2011
                                                                  (in millions)
Gaming revenues    $        84.6     $     83.5                  1.4 %        $      257.8     $    247.8          4.0 %
Total revenues              98.5           98.4                  0.1 %               299.2          288.5          3.7 %
Operating income            11.7            7.7                 51.9 %                33.8           21.3         58.7 %
Adjusted EBITDA             25.5           22.3                 14.3 %                76.3           63.3         20.5 %

The St. Louis segment consists of River City and Lumière Place (which includes the Lumière Place Casino, the Pinnacle-owned Four Seasons Hotel St. Louis and HoteLumière). Revenues have remained consistent for the three months ended September 30, 2012 as compared to the prior-year period, and have increased during the nine months ended September 30, 2012 as compared to the 2011 period due to the maturation of the River City property. The Adjusted EBITDA increase reflects the benefits of a heightened focus on operating and marketing efficiencies primarily realized through our shared services arrangement in this market and due to a non-recurring charge related to the launch of our mychoice customer loyalty program in 2011. Beginning in the first quarter of 2012, we began accounting for medical claims through an enterprise-wide pooling of medical and related expenses, and allocating such expenses to each operating segment ratably based upon participant headcount. Previously, medical claims were expensed directly to the operating segment in which the participant resided. The use of medical claim pooling has no impact on Consolidated Adjusted EBITDA, but has impacted individual operating segments. For the nine months ended September 30, 2012, relative to using the prior medical expense allocation methodology, the use of medical pooling had a negative impact of $2.2 million on Adjusted EBITDA for St. Louis.
Boomtown New Orleans

                                                                                                                Percentage
                     For the three months ended            Percentage            For the nine months ended       Increase/
                           September 30,              Increase/(Decrease)              September 30,            (Decrease)
                                                                                                                 2012 vs.
                        2012             2011            2012 vs. 2011              2012             2011          2011
                                                                (in millions)
Gaming revenues    $        26.8     $     31.0              (13.5 )%          $        88.8     $     98.7        (10.0 )%
Total revenues              27.9           32.2              (13.4 )%                   92.6          102.5         (9.7 )%
Operating income             6.1            8.7              (29.9 )%                   26.0           29.2        (11.0 )%
Adjusted EBITDA              7.7           10.3              (25.2 )%                   28.7           34.2        (16.1 )%

Boomtown New Orleans' revenue and Adjusted EBITDA decreased for the three and nine months ended September 30, 2012 as compared to the prior-year period. Boomtown New Orleans performance was negatively impacted by Hurricane Isaac, as well as general difficult market conditions and operating challenges. We are making select facility improvements to increase the property's competitiveness, which includes plans to build a 150-room hotel tower with a budget of $20 million and completion expected in late-2013 or early-2014. We also continue to refine marketing programs to drive additional profitable revenue.


Table of Contents

Belterra Casino Resort
                                                                                                                   Percentage
                     For the three months ended            Percentage            For the nine months ended         Increase/
                           September 30,              Increase/(Decrease)              September 30,               (Decrease)
                        2012             2011            2012 vs. 2011              2012             2011        2012 vs. 2011
                                                                   (in millions)
Gaming revenues    $        35.2     $     35.2                 -  %           $       103.2     $     99.9          3.3 %
Total revenues              41.6           42.1              (1.2 )%                   120.3          117.4          2.5 %
Operating income             6.8            5.5              23.6  %                    17.1           12.2         40.2 %
Adjusted EBITDA              9.9            8.7              13.8  %                    26.3           21.9         20.1 %

During the three and nine months ended September 30, 2012, revenues for Belterra have remained consistent from the prior-year period, while Adjusted EBITDA has increased primarily due to expense controls and a non-recurring charge related to the launch of our mychoice customer loyalty program in 2011. Due to the change in medical claims expense discussed above, the use of medical pooling had a favorable impact of $1.3 million on Adjusted EBITDA for Belterra for the nine months ended September 30, 2012.

Boomtown Bossier City
                                                                                                                 Percentage
                     For the three months ended            Percentage            For the nine months ended        Increase/
                           September 30,              Increase/(Decrease)              September 30,             (Decrease)
                        2012             2011            2012 vs. 2011              2012             2011       2012 vs. 2011
                                                                 (in millions)
Gaming revenues    $        18.6     $     19.5              (4.6 )%           $        58.9     $     60.9         (3.3 )%
Total revenues              19.8           21.1              (6.2 )%                    62.8           65.4         (4.0 )%
Operating income             2.8            3.1              (9.7 )%                    10.2           10.0          2.0  %
Adjusted EBITDA              4.3            4.6              (6.5 )%                    14.8           14.6          1.4  %

Boomtown Bossier City's revenues and Adjusted EBITDA have declined for the three months ending September 30, 2012 compared with the results in the prior period while Adjusted EBITDA increased for the nine months ended September 30, 2012 compared with the results in the prior period. Boomtown Bossier City continues to face a very competitive operating environment, but cost discipline has permitted the property to maintain Adjusted EBITDA despite revenue challenges. The Adjusted EBITDA is also reflective of a non-recurring charge related to the launch of our mychoice customer loyalty program in 2011. L'Auberge Baton Rouge

                                                                     Percentage                                                          Percentage
                     For the three months ended September 30,    Increase/(Decrease)     For the nine months ended September 30,     Increase/(Decrease)
                           2012                     2011            2012 vs. 2011              2012                     2011            2012 vs. 2011
                                                                               (in millions)
Gaming revenues     $        11.5             $            -                      NM   $         11.5             $            -                      NM
Total revenues               13.1                          -                      NM             13.1                          -                      NM
Operating loss              (15.3 )                        -                      NM            (15.3 )                        -                      NM
Adjusted EBITDA               1.5                          -                      NM              1.5                          -                      NM

We opened L'Auberge Baton Rouge on September 1, 2012. As such, the three and nine months ended September 30, 2012 include only one month of operations. The first month of operations are not necessarily indicative of future performance, as they include many one time pre-opening and development charges, and we expect operating efficiencies as the property matures, consistent with most property openings.


Table of Contents

River Downs
                                                                                     Percentage                                                                        Percentage
                             For the three months ended September 30,           Increase/(Decrease)            For the nine months ended September 30,            Increase/(Decrease)
                                2012                          2011                 2012 vs. 2011                  2012                          2011                 2012 vs. 2011
                                                                                                 (in millions)
Gaming revenues        $             -               $             -                      NM             $             -               $             -                      NM
Total revenues                     3.5                           3.9                   (10.3 )%                      9.9                           8.5                    16.5  %
Operating loss                    (0.7 )                        (0.9 )                 (22.2 )%                     (2.0 )                        (2.2 )                  (9.1 )%
Adjusted EBITDA (loss)            (0.5 )                        (0.7 )                 (28.6 )%                     (1.3 )                        (1.7 )                 (23.5 )%

River Downs offers live thoroughbred horse racing from mid-April through Labor Day, as well as simulcast wagering throughout the year. Revenues increased during the nine months ended September 30, 2012 as compared to the prior-year period, despite declines during the third quarter. Adjusted EBITDA (loss) has decreased for the three and nine months ended September 30, 2012 as compared to 2011 due to improved cost efficiencies.

Other

Other results include results of our newly acquired Heartland Poker Tour, among
other items. In July 2012, we purchased the assets of Heartland Poker Tour for
total consideration of $4.6 million.

Other factors affecting income from continuing operations
The following is a description of the other costs and benefits affecting income
from continuing operations for the three and nine months ended September 30,
2012 and 2011, respectively:
                                                                                                                            Percentage
                                For the three months ended              Percentage            For the nine months ended      Increase/
                                       September 30,               Increase/(Decrease)              September 30,           (Decrease)
                                                                                                                             2012 vs.
                                  2012                2011            2012 vs. 2011             2012             2011          2011
                                                                           (in millions)
Other costs:
Corporate expenses           $     (5.6 )         $     (6.2 )             (9.7 )%          $   (15.9 )       $   (22.0 )      (27.7 )%
Depreciation and
amortization                      (27.6 )              (25.8 )              7.0  %              (80.0 )           (77.9 )        2.7  %
Pre-opening and development
costs                             (11.5 )               (2.5 )            360.0  %              (18.5 )            (7.2 )      156.9  %
Share-based compensation
expense                            (1.7 )               (1.6 )              6.3  %               (7.0 )            (5.3 )       32.1  %
Write-downs, reserves and
recoveries, net                    (0.1 )               (1.3 )            (92.3 )%               (0.9 )            (7.9 )      (88.6 )%
Loss from equity method
investment                         (1.4 )               (0.5 )            180.0  %               (4.2 )            (0.5 )      740.0  %
Loss on early extinguishment
of debt                               -                 (0.2 )               NM                 (20.7 )            (0.2 )         NM
Net interest expense, net of
capitalized interest              (23.0 )              (24.0 )             (4.2 )%              (67.4 )           (75.7 )      (11.0 )%
Income tax expense                 (2.0 )               (1.0 )            100.0  %               (3.7 )            (2.6 )       42.3  %

NM - Not Meaningful
Corporate expenses represent unallocated payroll and benefits, professional fees, rent, travel expenses and other general and administrative expenses not directly incurred by our casino and hotel operations. Efforts to eliminate . . .

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