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PNK > SEC Filings for PNK > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for PINNACLE ENTERTAINMENT INC.

Form 10-Q for PINNACLE ENTERTAINMENT INC.


11-Aug-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                         Florence, Indiana
Belterra Park                    Cincinnati, Ohio
River City                       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
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 cash flow 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 Casinos, Inc. in August 2013 ("Ameristar"). We intend to diversify our guest demographics and revenue sources by


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growing our portfolio of operating 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 and six months ended June 30, 2014 and 2013. As discussed in Note 10, Segment Information, 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, Segment Information, 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 June 30,       For the six months ended June 30,
                                                  2014                    2013               2014              2013
                                                                           (in millions)
Revenues:
Midwest segment (a)                       $          296.4         $           87.1           576.7               174.2
South segment (b)                                    203.7                    178.8     $     403.7       $       357.6
West segment (c)                                      53.7                        -           104.3                   -
                                                     553.8                    265.9         1,084.7               531.8
Corporate and other                                    1.4                      1.4             3.3                 2.1
Total revenues                            $          555.2         $          267.3     $   1,088.0       $       533.9
Adjusted EBITDA (d):
Midwest segment (a)                       $           84.2         $           23.0           174.3                45.1
South segment (b)                                     62.0                     46.2     $     126.7       $        93.9
West segment (c)                                      19.1                        -            37.3                   -
                                                     165.3                     69.2           338.3               139.0
Corporate and other (e)                              (24.7 )                   (6.4 )         (44.5 )             (11.4 )
Consolidated Adjusted EBITDA (d)          $          140.6         $           62.8     $     293.8       $       127.6
Other benefits (costs):
Depreciation and amortization                        (58.8 )                  (22.5 )        (117.1 )             (45.7 )
Pre-opening and development costs                     (6.9 )                  (17.2 )         (10.3 )             (24.8 )
Non-cash share-based compensation expense             (5.5 )                   (3.4 )          (8.7 )              (5.2 )
Write-downs, reserves and recoveries, net             (2.6 )                   (1.8 )          (3.2 )              (2.1 )
Interest expense, net                                (62.0 )                  (28.3 )        (128.8 )             (56.9 )
Loss from equity method investment                       -                        -               -               (92.2 )
Loss on early extinguishment of debt                  (8.2 )                      -            (8.2 )                 -
Income tax benefit (expense)                           1.1                      3.3            (1.1 )               4.4
Income (loss) from continuing operations  $           (2.3 )       $           (7.1 )   $      16.4       $       (94.9 )

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

(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 Horseshu.


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(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 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 second quarter, consolidated loss from continuing operations was $2.3 million, consolidated revenues increased by $287.9 million, or 107.7% year over year, to $555.2 million, and Consolidated Adjusted EBITDA was $140.6 million, an increase of $77.7 million, or 123.8%, year over year. For the three and six months ended June 30, 2014, results reflect revenues of $279.8 million and $559.7 million, respectively, and Adjusted EBITDA of $93.0 million and $194.4 million, respectively, from the operations of the acquired Ameristar properties.

The Company's revenue consists mostly of gaming revenue, which is primarily from slot machines and to a smaller extent, table games. The slot revenue represented approximately 79% and 78% of gaming revenue in 2013 and 2012, respectively. In analyzing the performance of our properties, the key indicators related to gaming revenue are slot handle and table game drop (which are volume indicators) and win or hold percentage.


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Slot handle represents the total amount wagered in a slot machine, and table games drop represents the total amount of cash and net markers issued that are deposited in gaming table drop boxes. Win represents the amount of wagers retained by us and recorded as casino revenue, and hold represents win as a percentage of slot handle or table games drop. Given the stability in our slot hold percentages, we have not experienced any significant impact on our results from operations as a result of changes in hold percentages.

For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table's drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. Our table game hold percentages are fairly stable. Therefore, changes in table game hold percentages do not typically have a material impact on our earnings.

Segment comparison of the three and six months ended June 30, 2014 and 2013

Midwest Segment
                    For the three months ended      Percentage                                           Percentage
                             June 30,                 change       For the six months ended June 30,       change
                        2014            2013       2014 vs. 2013          2014               2013       2014 vs. 2013
                                                             (in millions)
Gaming revenues    $      267.0     $     77.0         246.8 %     $           523.6     $    155.5         236.7 %
Total revenues            296.4           87.1         240.3 %                 576.7          174.2         231.1 %
Operating income           48.4           14.9         224.8 %                 104.7           28.2         271.3 %
Adjusted EBITDA            84.2           23.0         266.1 %                 174.3           45.1         286.5 %

In the Midwest segment, revenues increased by $209.3 million, or 240.3% year over year, to $296.4 million in the 2014 second quarter. Adjusted EBITDA increased by $61.2 million or 266.1% to $84.2 million. Adjusted EBITDA margin was 28.4%, an increase of 200 basis points year over year. The addition of Ameristar properties contributed $200.4 million to Midwest segment net revenues in the 2014 second quarter. Since its May 2014 opening, Belterra Park contributed $13.6 million to Midwest segment net revenues.
For the six months ended June 30, 2014, the Midwest segment's year-over-year improvements were due to the acquisition of the Ameristar properties. Ameristar properties contributed $400.2 million to Midwest segment net revenues during the six months ended June 30, 2014.
For the three and six months ended June 30, 2014, Midwest segment revenue results were negatively affected by a generally challenging revenue environment due to persistent macroeconomic softness, the ramp up of new competition in the Cincinnati, Ohio gaming market that continues to impact the operations of Belterra Resort, and systems integration related property shutdowns at the Company's Missouri properties.
Midwest segment Adjusted EBITDA was negatively impacted by $3.7 million due to the rollout of the mychoice customer loyalty program at the Ameristar-branded properties in the segment and severance expense. Operating results were also negatively impacted by systems integration related property shutdowns at the Company's Missouri properties.


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South Segment
                    For the three months ended      Percentage                                           Percentage
                             June 30,                 change       For the six months ended June 30,       change
                        2014            2013       2014 vs. 2013          2014               2013       2014 vs. 2013
                                                             (in millions)
Gaming revenues    $      181.4     $    158.8         14.2 %      $           362.3     $    320.6         13.0 %
Total revenues            203.7          178.8         13.9 %                  403.7          357.6         12.9 %
Operating income           42.3           31.4         34.7 %                   87.0           65.1         33.6 %
Adjusted EBITDA            62.0           46.2         34.2 %                  126.7           93.9         34.9 %

In the South segment, revenues increased by $24.9 million, or 13.9% year over year, to $203.7 million in the 2014 second quarter. Adjusted EBITDA increased by $15.9 million, or 34.2% year over year, to $62.0 million. Adjusted EBITDA margin was 30.4%, an increase of 460 basis points year over year. The addition of Ameristar Vicksburg contributed $25.7 million and $55.1 million to South segment net revenues for the three and six months ended June 30, 2014.
During the three and six months ended June 30, 2014, 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. L'Auberge Lake Charles delivered solid net revenue, Adjusted EBITDA and Adjusted EBITDA margin growth in the 2014 second quarter through a combination of strong regional demand trends and cost efficiencies. The property set second quarter records in Adjusted EBITDA, Adjusted EBITDA margin, cash non-gaming revenue, and table drop. The strong performance of L'Auberge Lake Charles occurred despite abnormally low table games hold percentage at the property.
L'Auberge Baton Rouge continued to ramp up its operations and refine its cost structure during the three and six months ended June 30, 2014. Adjusted EBITDA and Adjusted EBITDA margin performance of L'Auberge Baton Rouge were strong, driven by cost and marketing efficiencies. Boomtown Bossier continues to be negatively impacted by the ramp up of a new competitor that opened in the Bossier City/Shreveport gaming market in June 2013.
South segment Adjusted EBITDA was negatively impacted by $0.5 million due to a charge related to the rollout of the mychoice customer loyalty program at Ameristar Vicksburg and severance expense. Operating results was also negatively impacted by repair expenses and lost business volumes at the Company's Ameristar Vicksburg property due to water damage that required the removal of approximately half of the property's hotel rooms from service for 20 days in June 2014.
We have continued construction of a 150-guestroom hotel tower at our Boomtown New Orleans property. We originally expected the opening of the hotel tower to occur during the summer of 2014. However, the opening has been delayed due to certain construction related issues. We now expect the hotel tower to open by the end of 2014.

West Segment
                   For the three months ended June    Percentage    For the six months ended June     Percentage
                                 30,                    change                   30,                    change
                                                       2014 vs.                                        2014 vs.
                         2014             2013           2013            2014             2013           2013
                                                           (in millions)
Gaming revenues    $         44.8     $         -             NM   $         87.5     $         -             NM
Total revenues               53.7               -             NM            104.3               -             NM
Operating income             12.3               -             NM             23.6               -             NM
Adjusted EBITDA              19.1               -             NM             37.3               -             NM

NM - Not Meaningful

West segment revenues were $53.7 million in the 2014 second quarter, and Adjusted EBITDA was $19.1 million. Adjusted EBITDA margin was 35.4%. Ameristar properties comprised 100% of West segment net revenues for the three and six months ended June 30, 2014.
West segment Adjusted EBITDA was negatively impacted by $1.1 million due to a charge related to the rollout of the mychoice player loyalty program and severance expense.


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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 and six months ended June 30, 2014 and 2013, respectively:

                      For the three months ended June 30,        Percentage change        For the six months ended June 30,        Percentage change
                           2014                    2013            2014 vs. 2013             2014                   2013             2014 vs. 2013
                                                                             (in millions)
Other (costs)
benefits:
Corporate expenses
and other          $           (24.7 )       $         (6.4 )           285.9  %      $         (44.5 )       $         (11.4 )           290.4  %
Depreciation and
amortization                   (58.8 )                (22.5 )           161.3  %               (117.1 )                 (45.7 )           156.2  %
Pre-opening and
development costs               (6.9 )                (17.2 )           (59.9 )%                (10.3 )                 (24.8 )           (58.5 )%
Share-based
compensation
expense                         (5.5 )                 (3.4 )            61.8  %                 (8.7 )                  (5.2 )            67.3  %
Write-downs,
reserves and
recoveries, net                 (2.6 )                 (1.8 )            44.4  %                 (3.2 )                  (2.1 )            52.4  %
Loss from equity
method investment                  -                      -                NM                       -                   (92.2 )              NM
Loss on early
extinguishment of
debt                            (8.2 )                    -                NM                    (8.2 )                     -                NM
Interest expense,
net                            (62.0 )                (28.3 )           119.1  %               (128.8 )                 (56.9 )           126.4  %
Income tax benefit
(expense)                        1.1                    3.3             (66.7 )%                 (1.1 )                   4.4            (125.0 )%

NM - Not Meaningful

Corporate expenses and other is principally comprised of corporate overhead expenses, the Heartland Poker Tour and the Retama Park management operations. For the three and six months ended June 30, 2014, the increase in corporate expenses was driven by the acquisition of Ameristar, the change in allocation methodology for corporate expenses, implemented in the 2013 third quarter, and $3.6 million in additional expenses from referendum opposition costs and severance. The increase in corporate expenses was partially offset by the realization of synergies from the Ameristar merger and integration.

Depreciation and amortization expense increased for the three and six months ended June 30, 2014, as compared to the prior-year periods due to the acquisition of Ameristar and the opening of Belterra Park in May 2014.

Pre-opening and development costs for the three and six months ended June 30, 2014 and 2013 consists of the following:

                                         For the three months ended June
                                                       30,                  For the six months ended June 30,
                                               2014              2013              2014              2013
                                                                    (in millions)
Ameristar acquisition                   $            2.0     $     16.6     $            2.4     $     23.3
Belterra Park                                        4.7            0.1                  7.4            0.3
Other                                                0.2            0.5                  0.5            1.2
Total pre-opening and development costs $            6.9     $     17.2     $           10.3     $     24.8

Share-based compensation expense for the three and six months ending June 30, 2014 increased primarily due to new stock awards to employees associated with the Ameristar transaction.
Write-downs, reserves and recoveries consist of $2.6 million and $3.2 million in losses during the three and six months ended June 30, 2014, respectively. The losses related to a $2.9 million lease abandonment charge from the consolidation of our


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Las Vegas headquarters recognized during the second quarter of 2014, offset by gains during the three months ended June 30, 2014, and net losses from the disposal of slot and other equipment at our properties in the normal course of business during the six months ended June 30, 2014. During the three and six months ended June 30, 2013, we recognized net losses of $1.8 million and $2.1 million, respectively, related primarily to a $1.1 million second quarter impairment charge on our Sales Tax Anticipation Revenue ("STAR") bonds, issued . . .

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