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PNK > SEC Filings for PNK > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for PINNACLE ENTERTAINMENT INC.

Form 10-Q for PINNACLE ENTERTAINMENT INC.


12-May-2014

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, 2013.

EXECUTIVE SUMMARY

Pinnacle Entertainment, Inc. ("Pinnacle") is an owner, operator and developer of casinos and related hospitality and entertainment facilities. We own and operate 15 gaming entertainment properties, located in Colorado, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada and Ohio. We also hold a majority interest in the racing license owner, as well as a management contract, for Retama Park Racetrack outside of 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 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 own and operate gaming entertainment properties, all of which include gaming and dining facilities, and most of which include hotel, retail and other amenities. In addition, we manage a racetrack and own and operate 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


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properties both domestically and internationally, 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.

RESULTS OF OPERATIONS
The following table highlights our results of operations for the three months ended March 31, 2014 and 2013. 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 March 31,
                                                  2014                    2013
                                                         (in millions)
Revenues:
Midwest segment (a)                       $          280.2         $           87.1
South segment (b)                                    199.9                    178.8
West segment (c)                                      50.7                        -
                                                     530.8                    265.9
Corporate and other                                    2.0                      0.7
Total revenues                            $          532.8         $          266.6
Adjusted EBITDA (d):
Midwest segment (a)                       $           90.1         $           22.1
South segment (b)                                     64.6                     47.7
West segment (c)                                      18.3                        -
                                                     173.0                     69.8
Corporate and other (e)                              (19.8 )                   (5.0 )
Consolidated Adjusted EBITDA (d)          $          153.2         $           64.8
Other benefits (costs):
Depreciation and amortization                        (58.3 )                  (23.2 )
Pre-opening and development costs                     (3.4 )                   (7.6 )
Non-cash share-based compensation expense             (3.2 )                   (1.8 )
Write-downs, reserves and recoveries, net             (0.6 )                   (0.3 )
Interest expense, net                                (66.8 )                  (28.6 )
Loss from equity method investment                       -                    (92.2 )
Income tax benefit (expense)                          (2.2 )                    1.1
Income (loss) from continuing operations  $           18.7         $          (87.8 )

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

(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, write-downs, reserves, recoveries, corporate-level litigation settlement costs, gain (loss) on sale of certain assets, loss on early


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extinguishment of debt, gain (loss) on sale of equity security investments, income (loss) from equity method investments, non-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 margin as Adjusted EBITDA for the segment divided by segment revenues. 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 non-operational 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.

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.

Consolidated Overview

In the 2014 first quarter, consolidated income from continuing operations was $18.7 million, consolidated revenues increased by $266.2 million, or 99.8% year over year to $532.8 million, and Consolidated Adjusted EBITDA was $153.2 million, an increase of $88.4 million, or 136.4%, year over year. The first quarter of 2014 results reflect revenues of $279.9 million and Adjusted EBITDA of $101.3 million from the operations of the acquired Ameristar properties.


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Segment comparison of the three months ended March 31, 2014 and 2013

Midwest Segment
                                                 For the three months ended      Percentage
                                                          March 31,                change
                                                     2014            2013       2014 vs. 2013
                                                                (in millions)
Gaming revenues                                 $      256.5     $     78.4         227.2 %
Total revenues                                         280.2           87.1         221.7 %
Operating income                                        56.3           13.3         323.3 %
Adjusted EBITDA                                         90.1           22.1         307.7 %

In the Midwest segment, revenues increased by $193.1 million or 221.7% year over year to $280.2 million in the 2014 first quarter. Adjusted EBITDA increased by $68.0 million or 307.7% to $90.1 million. Adjusted EBITDA margin was 32.2%, an increase of 680 basis points year over year. The addition of Ameristar properties contributed $199.8 million to Midwest segment net revenues in the 2014 first quarter.
In the 2014 first quarter, Midwest segment results were negatively affected by a significant increase in winter weather days that reduced visitation to its properties, particularly in January and February, as well as a generally challenging revenue environment due to persistent macroeconomic softness. Operational efficiencies and cost controls limited the impact of revenue softness on Adjusted EBITDA performance. Belterra experienced year over year declines in its key metrics as a result of a new competitor in Cincinnati, Ohio. However, efficiencies and cost controls permitted margins at the property to remain unchanged year over year.
South Segment

                                                 For the three months ended
                                                          March 31,              Percentage change
                                                     2014            2013          2014 vs. 2013
                                                                   (in millions)
Gaming revenues                                 $      180.9     $    161.8               11.8 %
Total revenues                                         199.9          178.8               11.8 %
Operating income                                        44.7           33.7               32.6 %
Adjusted EBITDA                                         64.6           47.7               35.4 %

In the South segment, revenues increased by $21.1 million or 11.8% year over year to $199.9 million in the 2014 first quarter. Adjusted EBITDA increased by $16.9 million or 35.4% to $64.6 million. Adjusted EBITDA margin was 32.3%, an increase of 560 basis points year over year. The addition of Ameristar Vicksburg contributed $29.4 million to South segment net revenues in the 2014 first quarter.
In the 2014 first quarter, South segment results were driven by strong revenue and cash flow performance at the Company's L'Auberge Lake Charles and L'Auberge Baton Rouge properties. Lake Charles delivered solid Adjusted EBITDA and Adjusted EBITDA margin growth in the 2014 first quarter through a combination of strong regional demand trends and cost efficiencies. L'Auberge Baton Rouge continued to ramp up its revenue in the Baton Rouge gaming market and increase its high end regional gaming volume. Adjusted EBITDA and Adjusted EBITDA margin were positively impacted by the performance of L'Auberge Baton Rouge, driven by cost and marketing efficiencies and revenue growth. Boomtown Bossier continues to be negatively impacted by the addition of a new competitor in the Bossier City/Shreveport gaming market in June 2013.


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West Segment
                                                For the three months ended March   Percentage
                                                              31,                    change
                                                                                    2014 vs.
                                                      2014             2013           2013
                                                                (in millions)
Gaming revenues                                 $         42.7     $         -             NM
Total revenues                                            50.7               -             NM
Operating income                                          11.3               -             NM
Adjusted EBITDA                                           18.3               -             NM

NM - Not Meaningful

West segment revenues were $50.7 million in the 2014 first quarter, and Adjusted
EBITDA was $18.3 million. Adjusted EBITDA margin was 36.1%. Ameristar properties
comprised 100% of West segment revenues in the 2014 first quarter.

Other factors affecting income (loss) from continuing operations
The following is a description of the other costs and benefits affecting income
(loss) from continuing operations for the three months ended March 31, 2014 and
2013, respectively:
                                                   For the three months ended March 31,        Percentage change
                                                        2014                    2013             2014 vs. 2013
                                                                          (in millions)
Other (costs) benefits:
Corporate expenses and other                    $           (19.8 )       $          (5.0 )           296.0  %
Depreciation and amortization                               (58.3 )                 (23.2 )           151.3  %
Pre-opening and development costs                            (3.4 )                  (7.6 )           (55.3 )%
Share-based compensation expense                             (3.2 )                  (1.8 )            77.8  %
Write-downs, reserves and recoveries, net                    (0.6 )                  (0.3 )           100.0  %
Loss from equity method investment                              -                   (92.2 )          (100.0 )%
Interest expense, net                                       (66.8 )                 (28.6 )           133.6  %
Income tax benefit (expense)                                 (2.2 )                   1.1            (300.0 )%

NM - Not Meaningful

Corporate expenses and other, which is principally comprised of corporate overhead expenses, the Heartland Poker Tour and the Retama Park management operations, increased by $14.8 million year over year to $19.8 million for the three months ended March 31, 2014. The year over year increase in corporate overhead expenses in the 2014 first quarter was driven by the acquisition of Ameristar and due to the change in allocation methodology for corporate expenses implemented in the 2013 third quarter. The increase in corporate overhead was partially offset by the realization of synergies from the Ameristar merger and integration.

Depreciation and amortization expense increased for the three months ended March 31, 2014, as compared to the prior-year periods due to the acquisition of Ameristar.


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Pre-opening and development costs for the three months ended March 31, 2014 and 2013 consists of the following:

                                                            For the three months ended March
                                                                          31,
                                                                  2014               2013
                                                                     (in millions)
Ameristar acquisition                                      $             0.5     $      6.8
Belterra Park                                                            2.7            0.2
Other                                                                    0.2            0.6
Total pre-opening and development costs                    $             3.4     $      7.6

Share-based compensation expense for the three months ending March 31, 2014 increased primarily due to new stock awards to employees associated with the Ameristar transaction.
Write-downs, reserves and recoveries consist of $0.6 million and $0.3 million in losses during the three months ended March 31, 2014 and 2013, respectively, related to the disposal of slot and other equipment at our properties in the normal course of business.
Interest expense consists of the following:

                               For the three months ended March 31,
                                    2014                    2013
                                           (in millions)
Interest expense            $           68.6         $           29.1
Interest income                         (0.2 )                   (0.1 )
Capitalized interest                    (1.6 )                   (0.4 )
Total interest expense, net $           66.8         $           28.6

The increase in gross interest expense is attributable to the additional debt incurred to fund our acquisition of Ameristar and other development projects. The increase in capitalized interest in the 2014 first quarter is attributable to interest expense capitalization on our Belterra Park development.

Loss on equity method investment: We have a minority ownership interest in Asian Coast Development (Canada), Ltd. ("ACDL"). During the first quarter of 2013, we recorded an other-than-temporary impairment of approximately $92.2 million, fully impairing the remaining asset carrying value of our investment in ACDL. Income taxes: Our effective tax rate for continuing operations for the three months ended March 31, 2014 was 10.5%, or an expense of $2.2 million, as compared to an effective tax rate of (1.2)%, or benefit of $1.1 million for the corresponding prior-year period. Our tax rate differs from the statutory rate of 35.0% due to the effects of permanent items, deferred tax expense on tax amortization of indefinite-lived intangible assets, state taxes and a reserve for unrecognized tax benefits. Our state tax provision represents taxes in the jurisdiction of Indiana, Louisiana and the city jurisdictions of Missouri where we have no valuation allowance.
Discontinued operations: Discontinued operations consists of disposal groups classified as held for sale and measured at the lower of its carrying value or the fair value less cost to sell.
Lumiere Place Casino and Hotels: In August 2013, we entered into an Equity Interest Purchase Agreement with Tropicana St. Louis LLC, an affiliate of Tropicana Entertainment, Inc. ("Tropicana"), to sell the ownership interests in certain of our subsidiaries, which own and operate the Lumiére Place Casino, the Four Seasons Hotel St. Louis and HoteLumiére and related excess land parcels in St. Louis, Missouri. In April 2014, we completed the sale of the ownership interests in these subsidiaries for cash consideration of $260 million, subject to certain net working capital and other adjustments. During the first quarter of 2014, we recorded an impairment charge totaling $4.7 million, to reduce the carrying value of the assets to their net realizable value, less costs to sell.

Ameristar Casino Lake Charles: In July 2013, we entered into an agreement to sell all of the equity interests of Ameristar Casino Lake Charles, LLC ("Ameristar Lake Charles"), which is developing the Ameristar Lake Charles development project.


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In November 2013, we closed the sale of the equity interests of Ameristar Lake Charles. At closing, we received approximately $180 million in cash that excludes $35 million of deferred consideration, of which $25 million is restricted cash subject to release by the Louisiana Gaming Control Board and $10 million is in the form of a note receivable from the buyer due in July 2016. In April 2014, the Louisiana Gaming Control Board approved a resolution releasing us from the requirement to hold the aforementioned $25 million of restricted cash.

Boomtown Reno: We continue to hold approximately 810 acres of remaining excess land surrounding Boomtown Reno as a discontinued operation. Other than minimal costs associated with the remaining excess land, we expect no material financial impact from the Boomtown Reno operations.

Atlantic City: During the third quarter of 2013, we completed the sale of our land holdings in Atlantic City, New Jersey for total consideration of approximately $29.5 million. We expect no material ongoing financial impact from Atlantic City.

Springfield, Massachusetts: We own approximately 40 acres of land in Springfield, Massachusetts, originally purchased by Ameristar Casinos, Inc. in January 2012 as the site of a possible future casino resort. During the first quarter, we entered into an option agreement to sell this land.

Total discontinued operations: Revenues and net loss from discontinued operations are summarized as follows:

                                                           For the three months ended March
                                                                          31,
                                                                  2014              2013
                                                                     (in millions)
Revenues                                                   $           41.0     $     46.2
Operating income                                                        0.3            4.1
Income tax expense                                                        -           (1.7 )
Income from discontinued operations, net of taxes          $            0.3     $      2.4

Net assets for entities and operations included in discontinued operations are summarized as follows:

                                             March 31,      December 31,
                                                2014            2013
                                                    (in millions)
Assets:
Land, buildings, vessels and equipment, net $     271.3    $       275.3
Other assets, net                                  50.8             47.2
Total assets                                $     322.1    $       322.5
Liabilities:
. . .
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