Full House Resorts, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Full House owns or operates casinos in Mississippi, Indiana and Nevada, and earns management fees from Buffalo Thunder in New Mexico. The 2012 comparison includes the FireKeepers management business through its March 30, 2012 sale; Silver Slipper, acquired October 1, 2012, contributes to 2013 results but not the comparable quarter.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $39.1 million | $33.3 million |
| Operating costs and expenses | $36.0 million | $27.8 million |
| Operating income | $3.1 million | $46.3 million |
| Net income attributable to Full House | $0.6 million | $25.8 million |
| Operating cash flow | $5.3 million | $8.1 million |
| Capital expenditures | $1.2 million | $1.0 million |
- Revenue rose 17%, primarily reflecting $13.7 million of Gulf Coast revenue from Silver Slipper. This was partly offset by lower Midwest revenue and the loss of FireKeepers management fees.
- Operating margin was approximately 8% in Q1 2013. Q1 2012 operating income and earnings included a $40.8 million gain on the sale of the GEM joint venture; without that unusual gain, the periods are not directly comparable.
- Net income attributable to the Company was $0.03 per share, versus $1.38 per share in Q1 2012. Interest expense increased $1.2 million year over year, largely reflecting debt used to acquire Silver Slipper. The estimated effective tax rate was approximately 53%, versus 38%, primarily due to state taxes and the impact of nondeductible Indiana gaming taxes.
- Cash and equivalents were $24.6 million at March 31, 2013, up from $20.6 million at year-end. Management estimated approximately $15 million was needed for day-to-day operations. Current assets were $33.4 million and current liabilities $16.6 million.
- Debt totaled $68.8 million: $50.0 million first-lien and $20.0 million second-lien term loans, less scheduled principal repayments. The first-lien loan bore 4.75% during the quarter; the second-lien loan bears 13.25%. A $5.0 million revolving facility remained undrawn and available. Debt is secured by substantially all Company assets and includes covenants and events of default.
Material changes, outlook and risks
- Silver Slipper’s addition lifted Gulf Coast revenue, while Rising Star revenue fell approximately 13%, with slot and table game declines attributed primarily to increased competition. Management also cited reduced operating costs at Rising Star partly due to lower gaming volume.
- Operating cash flow declined $2.8 million year over year, attributed primarily to lower net income and the absence of FireKeepers management fees, partly offset by lower income tax payments. Management believes current resources and potential external financing can support its growth plans, but cautioned that weaker gaming activity, competition and tight credit could constrain cash flow and development.
- No specific earnings or revenue guidance was provided. Management expected a new 104-room hotel near Rising Star, being built by third parties, to open in late 2013 and believed it could benefit casino visits and revenue.
- The Buffalo Thunder management agreement runs through September 2014; there is no assurance it will be extended. Management said the FireKeepers sale and Silver Slipper acquisition completed a strategic shift toward owned and operated regional casinos.
- Risks include economic weakness, local competition, access to capital, construction and development uncertainty, extensive gaming regulation and taxation, and seasonal effects. Management noted possible impairment uncertainty in goodwill and indefinite-lived intangibles tied to future earnings assumptions. It reported no material off-balance-sheet arrangements.
- After quarter-end, the Grand Lodge lease was amended to extend its initial term through August 31, 2018. Silver Slipper’s land lease was extended through April 30, 2058; its purchase option is exercisable only after February 26, 2019 and includes a potential 3% retained interest in operations.
- Disclosure controls were assessed as effective at a reasonable assurance level. Management was still assessing internal controls at the acquired Silver Slipper property.
Important facts for investors to verify
- Whether Silver Slipper’s contribution and Rising Star’s competitive trends sustain revenue and operating cash flow.
- Debt service, covenant compliance, interest costs and availability of the undrawn revolving facility.
- Whether Buffalo Thunder’s management agreement is renewed beyond September 2014.
- Progress and expected opening of the Rising Star-area hotel, and any related benefit to casino performance.
- Assumptions supporting goodwill and intangible asset values, and completion of Silver Slipper internal-control assessment.