Full House Resorts, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Results are unaudited. The October 1, 2012 Silver Slipper acquisition occurred after the balance-sheet date and is described as a subsequent event.
Business context and reporting period
Full House owned and operated Rising Star in Indiana, Stockman’s in Nevada, and Grand Lodge in Nevada, and managed Buffalo Thunder in New Mexico. Its strategy was to shift toward casino operations and revenue from owned properties rather than management fees. The company sold its interest in GEM and the FireKeepers management agreement on March 30, 2012; the Harrington management agreement had ended in 2011.
Financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2012: $30.1 million; 2011: $33.5 million, down 10% | 2012: $91.3 million; 2011: $72.9 million, up 25% |
| Operating income | 2012: $3.0 million; 2011: $1.6 million | 2012: $50.8 million; 2011: $14.2 million |
| Net income (loss) attributable to Full House | 2012: $2.1 million; 2011: $(1.1) million; diluted/basic per-share figure reported as $0.11 and $(0.06) | 2012: $28.7 million; 2011: $1.9 million; per-share figure $1.53 and $0.10 |
| Net cash from operating activities | Not presented separately for the quarter | 2012: $(0.4) million; 2011: $21.0 million |
- Nine-month 2012 operating income included a $41.2 million gain on the GEM sale. The gain was the principal reason reported operating income and net income rose sharply; it is not recurring casino operating performance.
- Quarterly revenue fell mainly because FireKeepers management fees ended, alongside weaker Rising Star revenue. Nevada revenue rose substantially because the prior-year quarter included only one month of Grand Lodge operations.
- Nine-month revenue growth reflected the inclusion of Rising Star and Grand Lodge operations. Management-fee revenue declined as FireKeepers ended and the Harrington agreement was no longer active.
- For Q3, casino revenue was $27.7 million versus $25.1 million; food and beverage revenue was $1.3 million versus $1.5 million; management fees were $0.3 million versus $6.1 million.
- Reported operating margin was approximately 10.0% for Q3 2012 versus 4.7% in Q3 2011. The nine-month 2012 margin was materially affected by the GEM sale gain.
Balance sheet, debt and liquidity
- At September 30, 2012, cash and equivalents were $21.5 million, total current assets $27.6 million, current liabilities $12.5 million, and total assets $94.2 million. Stockholders’ equity was $81.7 million.
- Long-term debt was zero at September 30, compared with $27.0 million of total debt at December 31, 2011. During the first quarter, the company repaid $25.3 million of Wells Fargo debt and swap liability using GEM sale proceeds.
- Cash declined by $0.4 million from operating activities in the first nine months. Investing activities provided $37.4 million, primarily from GEM sale proceeds, while financing activities used $30.3 million, primarily for debt repayment and joint-venture distributions.
- Management stated that about $3.9 million of cash was reserved for remaining GEM-sale tax liability and $12.0 million was dedicated to ongoing operations. At September 30, $9.2 million was held in long-term deposits for the Silver Slipper purchase.
- On October 1, the company completed the approximately $70 million Silver Slipper acquisition, funded with a $50 million first-lien term loan and a $20 million second-lien term loan. The $5 million first-lien revolving facility remained undrawn. The first- and second-lien debt is secured by substantially all company assets; the second-lien loan carries 13.25% interest. The acquisition therefore materially changed debt and leverage after quarter-end.
Outlook, commentary and risks
- Management expected Silver Slipper and a full year of Rising Star and Grand Lodge operations to help offset lost FireKeepers and Harrington management revenue. No numerical earnings or revenue guidance was provided.
- Management said it believed resources would be adequate for its current growth plan through operating cash flow and external financing, but cautioned that weak gaming activity, competition and tight credit could pressure cash flow and plans.
- Rising Star faced increased competition, including Scioto Downs, which opened in June 2012, and the planned Horseshoe Casino Cincinnati, expected in spring 2013. Management cited reduced Rising Star slot volume and lower table-game hold amid weakness in its regional market.
- The Buffalo Thunder management agreement was due to end in September 2014, with no assurance of extension. The filing also identifies economic conditions, access to financing, regulatory and tax changes, gaming-license approvals, acquisition integration, construction and broader competitive pressures as risks.
- Management’s goodwill review estimated fair value above carrying value by only about 2% for Stockman’s and 19% for Rising Star, based on an earnings-multiple approach; estimates depend on future earnings assumptions and remain uncertain.
- The Silver Slipper purchase-price allocation was provisional and subject to final valuation and working-capital adjustments. The company also had a $0.1 million GEM sale holdback receivable, subject to potential claims or liabilities.
- A proposed 100-room hotel near Rising Star had received local approvals; construction was expected to begin in Q4 2012, with opening anticipated in late 2013 or early 2014. The hotel was to be developed by third parties on land to be sold by Full House.
Most important facts for investors to verify
- Post-acquisition debt balances, interest expense, leverage, covenant headroom and the effect of the 13.25% second-lien rate.
- Silver Slipper’s actual results after acquisition and final purchase-price allocation, including working-capital and cash adjustments.
- Underlying operating performance excluding the $41.2 million GEM sale gain, including trends at Rising Star and Grand Lodge.
- Cash available after the GEM-related tax liability, operating needs and acquisition-related requirements.
- Progress and cost exposure for the Rising Star hotel project, and renewal prospects for the Buffalo Thunder agreement.
- Whether goodwill valuation headroom remains adequate if operating forecasts weaken, particularly at Stockman’s.