Full House Resorts, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company owns or operates Silver Slipper, Rising Star, Stockman’s and Grand Lodge, and earns management fees from Buffalo Thunder. Amounts below are in millions, except per-share data and ratios.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $37.4 | $30.1 | $113.3 | $91.3 |
| Operating income (loss) | ($1.2) | $3.0 | $3.9 | $50.8 |
| Net income (loss) attributable to company | ($2.2) | $2.1 | ($1.6) | $28.7 |
| Diluted/basic earnings (loss) per share as reported | ($0.11) | $0.11 | ($0.09) | $1.53 |
| Operating margin, calculated | (3.3%) | 10.0% | 3.5% | 55.6% |
| Net margin, calculated | (5.7%) | 6.9% | (1.4%) | 31.4% |
Q3 revenue rose 24%, primarily because Silver Slipper contributed $13.0 million after its October 2012 acquisition. Rising Star revenue declined 24% amid new Ohio casino competition. Q3 operating expenses rose 28%, including Silver Slipper costs, and results included a $4.0 million Stockman’s goodwill impairment and $1.8 million of interest expense. The nine-month comparison is particularly affected by 2012’s $41.2 million gain on the sale of GEM and its FireKeepers management rights; 2013 also included a $4.0 million impairment. Interest expense was $5.6 million for the first nine months of 2013 versus $0.8 million in 2012.
Cash, debt and liquidity
- At September 30, 2013, cash and equivalents were $25.4 million; current assets were $35.0 million and current liabilities $14.2 million, a calculated current ratio of approximately 2.5.
- Total debt was $66.3 million: $46.3 million under the first-lien term loan and $20.0 million under the second-lien loan. The first-lien rate was 5.36% in Q3; the second-lien rate is fixed at 13.25%. The $5.0 million revolving facility and an additional $10.0 million first-lien term-loan commitment were undrawn at quarter-end.
- Nine-month operating cash flow was $11.0 million; investing cash outflow was $3.6 million, including $3.3 million of property and equipment purchases; financing cash outflow was $2.7 million, including $2.5 million of debt repayment. Cash increased $4.8 million from year-end 2012.
- Debt fell from $68.8 million at December 31, 2012 to $66.3 million at September 30, 2013. The company subsequently prepaid $2.5 million of scheduled principal on November 1, 2013.
Material changes and outlook
- The August 2013 credit amendments reduced the first-lien interest rate by 1%, extended its maturity to June 29, 2016, increased the term-loan commitment by $10.0 million, and revised certain financial covenants.
- The company planned a six-story, 142-room Silver Slipper hotel costing approximately $17.7 million, with construction expected to begin in November 2013 and take about a year. It expected to fund $10.0 million with the available term-loan commitment and $7.7 million from cash; $0.4 million had been spent on pre-construction by quarter-end.
- Under an August agreement, the company will operate a 104-room hotel beside Rising Star, expected to open in Q4 2013. The company assumes operating results and responsibilities, pays approximately $83,000 monthly rent beginning January 2014, and has an option to purchase; the agreement also provides for a possible purchase obligation at the end of its 10-year term.
- Management said it believed cash flows and external financing would provide adequate resources for its current growth plan, but noted uncertainty from economic conditions, competition, cash flow pressure and access to credit. No formal earnings guidance was provided.
- Indiana gaming-tax legislation reduced Rising Star gaming taxes; the company reported $0.8 million of savings for the nine months and $0.2 million for Q3. It said further relief of about $2.5 million annually beginning July 2014 may be available if Rising Star’s gross gaming revenue is below $75 million in the state fiscal year ending June 30, 2014.
Risks, contingencies and unusual items
Management cited increased competition, especially at Rising Star from Ohio casinos, weak consumer spending, economic and financing conditions, construction risks, gaming regulation and taxation, and seasonality. Buffalo Thunder’s management agreement ends in September 2014, with no assurance of extension. Stockman’s impairment reflected weaker-than-expected results; Rising Star’s estimated fair value exceeded carrying value by only about 2.6%, and management cautioned that future cash-flow estimates could lead to further impairment. An IRS informational-return late-filing matter may result in a penalty; the company requested a waiver and believes its position is supportable. Management did not expect pending ordinary-course legal proceedings to materially affect the company. Disclosure controls were deemed effective at a reasonable-assurance level.
Investor verification priorities
- Track Rising Star revenue and competitive trends, and verify whether its narrow goodwill valuation cushion changes.
- Verify Silver Slipper hotel construction timing, total cost, funding draws and cash remaining for other needs.
- Review debt balances, covenant compliance, repayment requirements and the cost of the 13.25% second-lien debt.
- Assess the Rising Star hotel’s operating performance, rent burden and lease/purchase terms after opening.
- Monitor the Buffalo Thunder contract’s expiration and any renewal, and the outcome of the IRS penalty request.
- Separate recurring operating performance from the prior-year GEM sale gain and the 2013 Stockman’s impairment when evaluating comparisons.