Full House Resorts, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the same periods in 2012. Figures below are in millions of dollars unless stated otherwise. The company owns or operates casinos in Mississippi, Indiana and Nevada, and earns management fees from the Buffalo Thunder operation in New Mexico. Results reflect its transition toward owning and operating regional casinos, including the October 2012 acquisition of Silver Slipper.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $36.7 | $27.8 | $75.8 | $61.2 |
| Operating income | $2.0 | $1.4 | $5.1 | $47.7 |
| Net income (loss) attributable to company | $(0.04) | $0.7 | $0.5 | $26.6 |
| Operating margin | 5.5% | 5.1% | 6.8% | 78.1% |
Q2 revenue rose 32%, principally from Silver Slipper’s $13.4 million contribution, partly offset by a 20% decline in Midwest revenue. First-half revenue rose 24%, with Silver Slipper adding $27.1 million; lower Midwest revenue and the loss of FireKeepers-related management revenue partly offset the increase. The Midwest decline was driven mainly by intensified Ohio casino competition, including the March 2013 opening of Horseshoe Cincinnati.
The first-half 2012 comparison includes a $41.2 million gain on sale of the GEM joint venture; excluding that gain, prior-year operating income was approximately $6.5 million. Higher selling, general and administrative expense and depreciation reflected the acquired Silver Slipper operations. Interest expense was $1.9 million in Q2 and $3.8 million in the first half, primarily from the acquisition-related debt. The first-half effective tax rate was approximately 60%, which management attributed mainly to state taxes and restricted-stock tax deductions.
Cash, debt and liquidity
- Cash and equivalents were $22.8 million at June 30, 2013, versus $20.6 million at year-end. Current assets were $33.7 million and current liabilities $15.2 million.
- First-half operating cash flow was $7.1 million, compared with cash used of $2.0 million in the prior-year period. Capital expenditures were $2.3 million. Cash ended the period at $22.8 million, versus $27.9 million a year earlier.
- Total debt was $66.25 million, down from $68.75 million at December 31, 2012. The first-lien loan carried a 5.75% rate during Q2; the $20 million second-lien loan bears 13.25%. A $5 million revolver remained undrawn. The loans are secured by substantially all company assets and contain financial and other covenants.
- Management estimated that about $15 million of cash was needed for day-to-day operations and stated it expected operating cash flow and external financing to support its plans, while acknowledging uncertainty from competition, economic conditions and access to credit.
Outlook, material items and risks
- On August 2, 2013, after quarter-end, the company received a conditional $10 million Capital One loan commitment. Proposed terms include increasing the first-lien facility by $10 million, reducing its interest rate by 1 percentage point, extending maturity to June 29, 2016, and revising certain financial covenants. Documentation was still being prepared at filing.
- The proposed loan would fund part of a planned $17.5 million, 140-room Silver Slipper hotel; the company expected to fund the remaining $7.5 million from available cash. Management anticipated construction taking about a year after groundbreaking. These were plans, not completed financing or construction.
- Indiana legislation provided $0.7 million of Rising Star gaming-tax savings for the fiscal year ended June 30, 2013. Management expected approximately $0.2 million per quarter from tax-free free play in the next fiscal year and estimated possible additional annual relief of about $2.5 million from July 2014 if Rising Star gross gaming revenue is below $75 million.
- The Buffalo Thunder management agreement runs through September 2014; the company gave no assurance it would be extended. Management cited economic conditions, gaming competition, regulation and taxation, construction and development risks, and availability of financing as significant uncertainties.
- The Rising Star was expected to benefit from a separate 104-room hotel project near the property, then under construction and expected to open in late 2013. Management stated the additional room supply could improve casino revenue and visitor counts.
- Management reported disclosure controls were effective at a reasonable-assurance level. Its assessment of internal controls at the acquired Silver Slipper was still in progress.
Investor facts to verify
- Whether the proposed $10 million loan closed, the final rate and maturity, and the resulting covenant terms.
- Whether Silver Slipper hotel construction began, its final cost and funding mix, and progress against the expected schedule.
- Whether Rising Star revenue and gaming volume stabilized amid competition from Ohio casinos, and whether expected tax relief was realized.
- Whether Buffalo Thunder’s management agreement was extended beyond September 2014.
- Whether Silver Slipper’s internal-control assessment identified any material issues.