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PNK > SEC Filings for PNK > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for PINNACLE ENTERTAINMENT INC.

Form 10-K for PINNACLE ENTERTAINMENT INC.


3-Mar-2014

Annual Report


Item 7. 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, our audited Consolidated Financial Statements and the notes thereto, included in this Annual Report on Form 10-K, and other filings with the Securities and Exchange Commission.

EXECUTIVE OVERVIEW

Pinnacle Entertainment, Inc. ("Pinnacle") is an owner, operator and developer of casinos and related hospitality and entertainment facilities. Excluding discontinued operations, we own 14 gaming properties in Colorado, Indiana, Iowa, Louisiana, Mississippi, Missouri and Nevada. We also own a racetrack in Ohio that is currently being re-developed into a new gaming entertainment facility and manage Retama Park Racetrack in San Antonio, Texas. In addition to these properties, we own and operate a live and televised poker tournament series under the trade name Heartland Poker Tour. We aggregate into the following reportable segments:

Midwest segment, which includes:                 Location
Ameristar Council Bluffs                         Council Bluffs, Iowa
Ameristar East Chicago                           East Chicago, Indiana
Ameristar Kansas City                            Kansas City, Missouri
Ameristar St. Charles                            St. Charles, Missouri
Belterra Casino Resort                           Florence, Indiana
Belterra Park Gaming & Entertainment Center
(formerly River Downs)                           Cincinnati, Ohio
River City Casino                                St. Louis, Missouri

South segment, which includes:                   Location
Ameristar Vicksburg                              Vicksburg, Mississippi
Boomtown Bossier City                            Bossier City, Louisiana
Boomtown New Orleans                             New Orleans, Louisiana
L'Auberge Baton Rouge                            Baton Rouge, Louisiana
L'Auberge Lake Charles                           Lake Charles, Louisiana

West segment, which includes:                    Location
Ameristar Black Hawk                             Black Hawk, Colorado
Cactus Petes                                     Jackpot, Nevada
The Horseshu                                     Jackpot, Nevada

We operate casino properties, all of which include gaming and dining facilities, and most of which include hotel, retail and other amenities. In addition, we operate two racetracks 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, develop, or acquire such as the acquisition of Ameristar. We intend to diversify our guest demographics and revenue sources by growing our portfolio of operating properties both domestically and internationally, while remaining gaming and entertainment centric. We intend to implement


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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.

RESULTS OF OPERATIONS
The following table highlights our results of operations for the years ended December 31, 2013, 2012 and 2011. As discussed in Note 13 to our 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 13 to our Consolidated Financial Statements for more information regarding our segment information. A reconciliation of Consolidated Adjusted EBITDA (defined below) to Income (loss) from continuing operations in accordance with U.S. GAAP is set forth below.
                                                           For the year ended December 31,
                                                       2013               2012             2011
                                                                     (in millions)
Revenues:
Midwest segment (a)                               $      650.9      $        367.3     $    346.7
South segment (b)                                        748.1               634.9          594.0
West segment (c)                                          82.9                   -              -
                                                       1,481.9             1,002.2          940.7
Corporate and other                                        6.0                 0.6            0.1
   Total revenues                                 $    1,487.9      $      1,002.8     $    940.8
Adjusted EBITDA (d):
Midwest segment                                   $      183.7      $         94.3     $     76.7
South segment                                            213.5               176.6          167.7
West segment                                              27.7                   -              -
                                                         424.9               270.9          244.4
Corporate expenses (e)                                   (54.3 )             (20.6 )        (28.4 )
Consolidated Adjusted EBITDA (d)                  $      370.6      $        250.3     $    216.0
Other benefits (costs):
Depreciation and amortization                     $     (148.5 )    $        (82.7 )   $    (70.2 )
Pre-opening and development costs                        (89.0 )             (21.5 )         (8.8 )
Non-cash share-based compensation                        (11.5 )              (8.5 )         (6.5 )
Write-downs, reserves and recoveries, net                (17.3 )              (0.8 )         (3.2 )
Net interest expense, net of capitalized interest       (169.8 )             (93.7 )        (95.3 )
Loss from equity method investment                       (92.2 )             (30.8 )         (0.6 )
Loss on early extinguishment of debt                     (30.8 )             (20.7 )         (0.2 )
Income tax (expense) benefit                              55.1                (4.8 )         (2.3 )
Income (loss) from continuing operations          $     (133.4 )    $        (13.2 )   $     28.9

(a) Our Midwest segment consists of Ameristar Council Bluffs, Ameristar East Chicago, Ameristar Kansas City, Ameristar St.
Charles, Belterra Casino Resort, Belterra Park (formerly River Downs) and River City.

(b) Our South segment consists of Ameristar Vicksburg, Boomtown Bossier City, Boomtown New Orleans, L'Auberge Baton Rouge and L'Auberge Lake Charles.

(c) Our West segment consists of Ameristar Black Hawk, Cactus Petes and the Horseshu.

(d) We define Consolidated Adjusted EBITDA as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, writedowns, reserves, recoveries, corporate-level litigation settlement costs, gain (loss) on sale of certain assets, loss on early extinguishment of debt, gain (loss) on sale of equity security investments, income (loss) from equity method investments, non-


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controlling interest and discontinued operations. We define Adjusted EBITDA for each operating segment as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, inter-company management fees, gain (loss) on sale of certain assets, gain (loss) on early extinguishment of debt, gain (loss) on sale of discontinued operations, and discontinued operations. We define Adjusted EBITDA margins as Adjusted EBITDA for the segment divided by segment revenue.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 measures to analyze the performance of our business and are especially relevant in evaluating large, long-lived casino-hotel projects because they provide a perspective on the current effects of operating decisions separated from the substantial nonoperational depreciation charges and financing costs of such projects. We eliminate the results from discontinued operations at the time they are deemed 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 they are indicators of the performance of ongoing business 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, or as an alternative to any other measure provided in accordance with GAAP. Our calculations of Adjusted EBITDA and Consolidated Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

(e) Corporate expenses represent unallocated payroll, professional fees, travel expenses and other general and administrative expenses not directly related to our casino and hotel operations. Other includes the Retama Park Racetrack (which we manage) and the Heartland Poker Tour.


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Change to Corporate Expense Accounting Methodology

Beginning in the third quarter of 2013, we changed the methodology used to allocate corporate expenses to our reportable segments. Historically, we allocated direct and some indirect expenses incurred at the corporate headquarters to each property. Expenses incurred at the corporate headquarters that were related to property operations, but not directly attributable to a specific property, were allocated, typically on a pro rata basis, to each property. Only the remaining corporate expenses that were not related to an operating property were retained in the Corporate expense category. Under our new methodology, only corporate expenses that are directly attributable to a property are allocated to each applicable property. All other costs incurred relating to management and consulting services provided by corporate headquarters to the properties are now allocated to those properties based on their respective share of the monthly consolidated net revenues in the form of a management fee. The corporate management fee is excluded in the calculation of segment Adjusted EBITDA and is completely eliminated in any consolidated financial results. The change in methodology increases Adjusted EBITDA and the related margin for the reportable segments with a corresponding increase in corporate expense, resulting in no impact to Consolidated Adjusted EBITDA. For the year ended December 31, 2013, the change in the corporate expense allocation methodology resulted in an increase in corporate expense of approximately $11.7 million, and increases in segment Adjusted EBITDA of approximately $4.0 million and $7.7 million for the South and Midwest segments, respectively.

Consolidated Overview

During 2013, consolidated loss from continuing operations was $133.4 million, consolidated revenues increased by $485 million, or 48.4% year over year to $1,487.8 million, and Consolidated Adjusted EBITDA was $370.6 million, an increase of $120 million, or 48.1%, year over year. The results reflect revenues of $425.8 million and Consolidated Adjusted EBITDA of $133.8 million from 141 days of Ameristar operations and the removal of Lumiere for all periods presented, which is being divested and now accounted for as a discontinued operation.

Segment comparison of years ended December 31, 2013, 2012, and 2011

Midwest Segment
                                    For the year ended December 31,             % Increase/(Decrease)
                                   2013           2012          2011       2013 vs. 2012     2012 vs. 2011
                                             (in millions)
Gaming revenues                $     586.0     $   323.0     $   302.9            81.4 %              6.6 %
Total revenues                       650.9         367.3         346.7            77.2 %              5.9 %
Operating income                     117.2          54.7          41.8           114.3 %             30.9 %
Adjusted EBITDA                      183.7          94.3          76.7            94.8 %             22.9 %

In the Midwest segment, total revenues increased by $283.6 million (77.2%) to $650.9 million for the year ended December 31, 2013. Adjusted EBITDA increased by $89.4 million (94.8%), to $183.7 million during the same period. During 2013, the Midwest segment's metrics improved year over year mostly as a result of the acquisition of the Ameristar properties, which contributed $303.1 million in total revenues, $65.3 million in operating income, and $93.1 million in Adjusted EBITDA in the period following the acquisition date.

In 2013, Midwest segment results were negatively affected by a generally challenging revenue environment in its core gaming markets. Belterra experienced year over year declines in its key metrics as a result of a new competitor in Cincinnati, Ohio ramping up its operations. However, a focus on cost control helped Belterra produce Adjusted EBITDA growth and margin expansion during the 2013 fourth quarter when compared to the prior-year fourth quarter. The new competing facility opened in March 2013 and incremental competition is expected to open in 2014.

The increase in revenue and Adjusted EBITDA in 2012 as compared to the year ended December 31, 2011, was a result of the continued ramp up of the River City property and a heightened focus on operating and marketing efficiencies primarily through our shared services arrangement in this market. Despite increases to revenue and Adjusted EBITDA for the year ended December 31, 2012, operating performance was negatively impacted by construction disruption during 2012 from our River City expansion project.


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South Segment
                                    For the year ended December 31,             % Increase/(Decrease)
                                   2013           2012          2011       2013 vs. 2012     2012 vs. 2011
                                             (in millions)
Gaming revenues                $     671.9     $   569.3     $   537.8            18.0 %           5.9  %
Total revenues                       748.1         634.9         594.0            17.8 %           6.9  %
Operating income                     136.7         119.9         130.9            14.0 %          (8.4 )%
Adjusted EBITDA                      213.5         176.6         167.7            20.9 %           5.3  %

For the year ended December 31, 2013, the South segment's total revenues increased by $113.2 million (17.8%) year over year to $748.1 million. Adjusted EBITDA increased by $36.9 million (20.9%), to $213.5 million. The addition of an Ameristar property contributed total revenues of $39.8 million and Adjusted EBITDA of $16.3 million for 141 days of operation.

In 2013, South segment performance was driven by strong revenue and cash flow performance at L'Auberge Lake Charles and L'Auberge Baton Rouge. L'Auberge Lake Charles delivered revenue, Adjusted EBITDA and Adjusted EBITDA margin growth in 2013 through the combination of strong regional demand trends and cost discipline. L'Auberge Baton Rouge continued to ramp up its revenue with further penetration of the Baton Rouge gaming market and increasing high end regional gaming volume. Adjusted EBITDA and Adjusted EBITDA margin performance at the property was a record in the 2013 fourth quarter, driven by revenue growth and cost efficiencies. Boomtown Bossier's 2013 financial performance was adversely impacted by the addition of a new competitor in the Bossier City/Shreveport gaming market in June 2013.

The increase in revenue and Adjusted EBITDA in 2012 as compared to the year ended December 31, 2011, was a result of the opening of L'Auberge Baton Rouge on September 1, 2012, a continued focus on the efficiency of the L'Auberge Lake Charles operations and utilization of assets, and improvements made throughout the L'Auberge Lake Charles property. Despite the increases to revenue and Adjusted EBITDA for the year ended December 31, 2012, operating performance was negatively impacted by Hurricane Isaac, a room remodeling program at L'Auberge Lake Charles, low table game hold at L'Auberge Lake Charles during the fourth quarter of 2012, as well as general difficult market conditions and operating challenges for Boomtown New Orleans and Boomtown Bossier City.

West Segment
                                       For the year ended December 31,                 % Increase/(Decrease)
                                      2013              2012           2011       2013 vs. 2012     2012 vs. 2011
                                                (in millions)
Gaming revenues                $           69.4     $        -     $        -                NA                NA
Total revenues                             82.9              -              -                NA                NA
Operating income                           17.6              -              -                NA                NA
Adjusted EBITDA                            27.7              -              -                NA                NA

N/A - Not Applicable

For the year ended December 31, 2013, our West segment's total revenues were $82.9 million and Adjusted EBITDA was $27.7 million. The segment's Adjusted EBITDA margin was 33.5%. The incorporation of financial results from Ameristar's properties comprised 100% of the total West segment results.

Severe weather and flooding constrained visitation to Ameristar Black Hawk in September 2013, which negatively affected the property's operating performance and West segment results.


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Other factors affecting income (loss) from continuing operations

                                        For the year ended December 31,              % Increase/(Decrease)
                                      2013             2012          2011       2013 vs. 2012     2012 vs. 2011
                                                 (in millions)
Other benefits (costs):
Corporate expenses and other      $    (54.3 )     $    (20.6 )   $   (28.4 )            NM             (27.5 )%
Depreciation and amortization
expense                               (148.5 )          (82.7 )       (70.2 )          79.6 %            17.8  %
Pre-opening and development
costs                                  (89.0 )          (21.5 )        (8.8 )            NM                NM
Non-cash share-based
compensation expense                   (11.5 )           (8.5 )        (6.5 )          35.3 %            30.8  %
Write-downs, reserves and
recoveries, net                        (17.3 )           (0.8 )        (3.2 )            NM             (75.0 )%
Interest expense, net                 (169.8 )          (93.7 )       (95.3 )          81.2 %            (1.7 )%
Loss from equity method
investment                             (92.2 )          (30.8 )        (0.6 )         199.4 %              NM
Loss on early extinguishment of
debt                                   (30.8 )          (20.7 )        (0.2 )            NM                NM
Income tax benefit (expense)            55.1             (4.8 )        (2.3 )            NM                NM

NM - Not Meaningful
Corporate expenses and other, which is principally comprised of corporate overhead expense, the Heartland Poker Tour and the Retama Park management operations, increased by $33.7 million year over year to $54.3 million for the year ended December 31, 2013. The increase in corporate overhead expense was driven by the change in allocation methodology and the acquisition of Ameristar. The decrease in corporate expense and other in 2012, as compared to 2011, was due to efforts to eliminate non-value added expenses at our Las Vegas headquarters, as well as the ramp up of cost savings and property allocations related to our shared service center supporting our properties. Additionally, for the year ended December 31, 2012, we incurred charges totaling $0.7 million related to severance costs and office relocation charges, as compared to $3.3 million in 2011.
Depreciation and amortization expense increased in 2013 as compared to 2012 due to the acquisition of Ameristar and the opening of L'Auberge Baton Rouge in September 2012. Depreciation and amortization expense increased in 2012 as compared to 2011 due to the opening of L'Auberge Baton Rouge and an acceleration of depreciation expense of $4.7 million at River Downs prior to the demolition of the existing grand stand and race book.
Pre-opening and development costs consist of the following:

                                                 For the year ended December 31,
                                                     2013                2012      2011
                                                          (in millions)
Ameristar acquisition (1)                 $      85.3                   $    -    $   -
Other                                             3.7                     21.5      8.8
Total pre-opening and development costs   $      89.0                   $ 21.5    $ 8.8

(1) Amounts principally comprised of legal and advisory expenses, severance charges and other costs and expenses related to the financing and integration of the acquisition of Ameristar.

Non-cash share-based compensation consists of the following:

For the year ended December 31,
2013 2012 2011
(in millions)

Non-cash share-based compensation expense $ 11.5 $ 8.5 $ 6.5

Share-based compensation expense for the year ended December 31, 2013 increased primarily due to new stock awards to employees associated with the Ameristar transaction.


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Write-downs, reserves and recoveries, net consist of the following:

                                                          For the year ended December 31,
                                                         2013           2012          2011
                                                                   (in millions)
Loss (gain) on disposal of assets, net               $       2.8     $    (1.2 )   $     2.4
Reserve on loan receivable                                   0.1           1.7             -
Impairment of long-lived assets                              2.9           0.3           0.4
Impairment of indefinite-lived intangibles                  10.0             -             -
Other write-downs, reserves and (recoveries)                 1.5             -           0.4
Write-downs, reserves and recoveries, net            $      17.3     $     0.8     $     3.2

Write-downs, reserves and recoveries, net consist of $17.3 million in losses for the year ended December 31, 2013. The losses were primarily a result of an impairment loss for our Boomtown Bossier City gaming license of $10 million, an impairment charge totaling $1.5 million related to a decline in value of our excess land in Lake Charles, Louisiana, and losses of $2.8 million from disposals of slot and other equipment at our properties in the normal course of business.
Interest expense, net of capitalized interest and interest income was as follows:

                                                           For the year ended December 31,
                                                         2013             2012          2011
                                                                    (in millions)
Interest expense                                     $    173.5       $    114.8     $   106.0
Interest income                                            (0.4 )           (0.8 )        (0.4 )
Capitalized interest                                       (3.3 )          (20.3 )       (10.3 )
Total interest expense, net of capitalized
interest and interest income                         $    169.8       $     93.7     $    95.3

The increase in gross interest expense is attributable to the additional debt incurred to fund our acquisition of Ameristar and other development projects. The decrease in capitalized interest for the year ended December 31, 2013 is mostly attributable to our ceasing of interest expense capitalization on L'Auberge Baton Rouge in August 2012 and on our investment in Asian Coast Development (Canada), Ltd. ("ACDL") at the end of the 2012 fourth quarter. In 2013, we primarily capitalized interest expense on our expenditures related to the River City expansion and Belterra Park redevelopment projects. We ceased capitalizing interest on the River City expansion at the end of August 2013 as a result of the completion of that expansion project. Excluded from the table above is interest expense and capitalized interest for the Ameristar Lake Charles development project totaling $2.9 million, which is included in discontinued operations.

ACDL Investment: We have a minority ownership interest in ACDL, which is accounted for under the equity method. Under the equity method, the carrying value is adjusted for our share of ACDL's earnings and losses, as well as capital contributions to and distributions from ACDL. During the three months . . .

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