Full House Resorts, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Comparisons are with Q1 2011 unless stated otherwise. The company owns and operates casinos and provides casino management services. The period reflects a full quarter of Rising Star and Grand Lodge operations, and the March 30 sale of its interest in the FireKeepers joint venture (GEM).
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $33.3 million | $8.3 million |
| Operating income | $46.3 million | $5.8 million |
| Net income attributable to Full House | $25.8 million ($1.38 per share) | $1.6 million ($0.09 per share) |
| Net cash provided by operating activities | $8.1 million | $5.4 million |
| Cash and equivalents at quarter-end | $38.3 million | $11.4 million |
| Total debt at quarter-end | $0 | Not stated in the presented comparison |
- Revenue growth primarily reflected Rising Star and Grand Lodge, acquired in 2011. Casino revenue was $25.7 million; management fees were $5.8 million, down from $6.4 million.
- Operating income and net income were substantially boosted by the $40.8 million gain on the GEM sale. Excluding this unusual gain, reported operating income is not a measure of recurring operating performance. The filing does not provide a clear adjusted profit measure or consolidated margin.
- Operating expenses were $27.8 million, including $8.6 million of selling, general and administrative expense and $1.9 million of depreciation and amortization. Other expense included a $1.7 million debt-extinguishment charge and $0.7 million interest expense.
- Cash from investing activities was $45.1 million, including $48.7 million of net sale proceeds and $2.5 million in Silver Slipper acquisition deposits and costs. Financing activities used $29.5 million, including $26.9 million to repay debt and terminate the swap.
- At March 31, current assets were $45.3 million and current liabilities were $28.0 million. Income taxes payable were $17.7 million. Stockholders’ equity was $78.2 million.
Material changes and unusual items
- On March 30, the company and its joint-venture partner sold GEM and the FireKeepers management agreement for total proceeds of $97.5 million, split approximately equally. Full House received about $48.7 million at closing; sale proceeds funded repayment of its remaining Wells Fargo debt and swap obligation. The company reported a $40.8 million gain and had a $1.3 million receivable for its share of March management fees and estimated wind-up fee. A holdback is payable in December 2012, subject to possible offsets.
- The debt payoff eliminated the Wells Fargo credit facility and interest-rate swap. A $1.7 million charge reflected unamortized loan fees and administrative costs. No long-term debt remained at quarter-end.
- The company’s strategy is to shift toward owned casino operations and reduce reliance on management fees. The FireKeepers sale and the August 2011 end of the Harrington management contract reduce management-related revenue; Buffalo Thunder is a management agreement through September 2014.
- Q1 2012 income tax expense was $15.9 million; management cited an estimated effective annual rate of approximately 38%, versus 47% in Q1 2011, partly because the GEM-sale gain was subject only to federal tax.
Outlook, risks and contingencies
- The company agreed to acquire Silver Slipper Casino for $70 million, subject to customary adjustments, financing, licensing and other closing conditions. On May 2, 2012, it obtained commitments for $75 million of new facilities ($55 million first-lien and $20 million second-lien), with an expected weighted average cash interest cost of about 8%; documentation and other conditions remained outstanding. Management anticipated a third-quarter 2012 closing, but gave no assurance the transaction would occur.
- Management said operating cash flow and external financing should support its growth plan, while warning that economic weakness, competition, constrained credit availability and potential negative casino cash flow could affect plans. Competition, including new Ohio gaming facilities and possible gaming expansion in neighboring states, is a stated risk.
- The Rising Star hotel development faced a local planning commission denial; the company was reviewing alternatives. The Nambé Pueblo note receivable, with a stated amount of $661,600, remained fully reserved because repayment depends on a project that may not be developed.
- Gaming operations are subject to extensive regulation, licensing and taxation. The company reported no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level; assessment of Grand Lodge internal controls was ongoing.
Important facts for investors to verify
- Whether the Silver Slipper acquisition closes, receives required approvals, and obtains fully documented financing on the anticipated terms.
- The final amount and collection of the GEM sale wind-up fee, holdback and related receivable, including any adjustments to the reported gain.
- Post-sale recurring earnings and cash flow from casino operations, particularly after the loss of FireKeepers management fees and the expiration of the Harrington agreement.
- Performance and competitive trends at Rising Star, Grand Lodge and Stockman’s, and progress on the Rising Star hotel alternatives.
- Quarter-end cash and debt position in light of planned acquisition borrowing, taxes payable and future operating and development needs.