Full House Resorts, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2011; financial statements are unaudited. Full House owns and operates Stockman’s Casino and, following acquisitions, Rising Star Casino Resort in Indiana (April 1) and Grand Lodge Casino in Nevada (September 1). It also consolidates its 50%-owned FireKeepers management joint venture, GEM, and held a 50% interest in GED, whose Harrington management contract expired August 31, 2011. Results are not directly comparable with 2010 because the acquired casinos contributed revenue only in 2011.
Financial results and liquidity
- Revenue: Q3 revenue was $33.5 million versus $8.6 million; nine-month revenue was $72.9 million versus $25.0 million. The increases chiefly reflect Rising Star and Grand Lodge. Q3 casino revenue was $25.1 million, including the acquired properties.
- Profitability: Q3 operating income was $1.6 million, down from $6.6 million; nine-month operating income was $14.2 million versus $17.8 million. Net income attributable to Full House was a Q3 loss of $1.14 million versus income of $2.24 million, and nine-month income of $1.86 million versus $5.72 million. Q3 diluted/basic earnings per share as reported were a loss of $0.06 versus earnings of $0.12.
- Margins: Operating income was 4.7% of revenue in Q3 2011 and 19.5% for the first nine months. Comparisons are affected by acquisitions and significant impairment charges.
- Unusual charges and taxes: Q3 included $4.92 million of impairment losses, primarily a $4.5 million Stockman’s goodwill and related-asset impairment and a $0.42 million write-down of the Nambé note receivable. Q3 reported a $1.00 million income tax benefit; nine-month tax expense was $1.87 million.
- Cash flow: Nine-month operating cash flow was $21.0 million versus $12.8 million. Investing used $20.7 million, principally for the Rising Star acquisition; financing provided $2.9 million. Cash increased $3.2 million to $16.5 million.
- Debt and liquidity: At quarter-end, current debt was $6.6 million and long-term debt, including the recorded swap liability, was $23.7 million. Cash was $16.5 million and $4.5 million remained available on the revolving facility. The Wells Fargo term loan’s reported rate was 7.0% for the quarter. On October 21, the company prepaid a scheduled $1.65 million principal payment; it reported the loan balance then at $28.1 million.
- Other balance-sheet changes: Total assets rose to $97.5 million from $56.5 million at year-end 2010, chiefly reflecting the acquisitions. Current liabilities were $17.0 million; stockholders’ equity including non-controlling interest was $54.8 million.
Material changes, outlook, and risks
- Rising Star was acquired for approximately $42.4 million before working-capital adjustments, cash and fees. The company borrowed $33.0 million under its Wells Fargo facility to fund the acquisition. Grand Lodge’s operating assets were acquired for approximately $0.7 million, and the company entered a five-year lease at $125,000 monthly rent.
- The company began managing Buffalo Thunder and related New Mexico casino facilities on September 23 under a three-year agreement, with a $100,000 monthly base fee plus a success fee. Management expected minimal incremental operating costs.
- Management said it expected adequate resources for its current plans from operating cash flow and external financing, but cautioned that economic weakness, competition, credit availability and operating performance could constrain growth and liquidity. No specific earnings or revenue guidance was provided.
- Competition from new Michigan casinos could pressure FireKeepers results and management fees. The FireKeepers contract runs through August 2016, with no assurance of renewal; the Harrington contract has ended. The filing also cites acquisition-integration, regulatory and licensing, development, seasonal, and interest-rate risks.
- The $20 million interest-rate swap was amended in September; the floating-rate floor became 1.5% and the fixed rate increased to 3.06%. The company reported a $0.56 million nine-month derivative loss and a $0.59 million fair-value liability. Debt is secured by substantially all company assets and subject to financial covenants.
- The IRS was reviewing a potential GEM tax liability estimated at $0.5 million, half of which would be RAM’s responsibility. Management said a potential payment would likely reduce deferred tax liability without affecting net income.
- Management reported disclosure controls effective at a reasonable-assurance level. Assessment of internal controls at the newly acquired properties remained in progress.
Important facts for investors to verify
- How much of the reported revenue and cash generation from Rising Star and Grand Lodge is sustainable, and how the acquired properties perform against integration expectations.
- The basis and sensitivity of the $4.5 million Stockman’s impairment valuation and the fully reserved Nambé receivable, for which recovery is uncertain.
- Debt amortization, covenant headroom, interest-rate exposure and the effect of the revised swap terms; confirm the post-quarter debt balance and payment treatment.
- The financial impact of the Harrington contract expiration, Michigan competition and the economics of the new Buffalo Thunder agreement.
- The outcome of the IRS review and completion of internal-control assessments for the acquired operations.