Business context and reporting period
Full House Resorts, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. The company owns and operates Rising Star, Silver Slipper, and Stockman’s casinos; leases and operates Grand Lodge Casino; and manages casinos for the Pueblo of Pojoaque. During 2012 it shifted toward owned operations: it sold its interest in the FireKeepers management venture on March 30 and acquired Silver Slipper on October 1.
Key financial results
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $128.8 million | $105.5 million |
| Operating costs and expenses | $120.3 million | $84.7 million |
| Operating income | $49.6 million | $19.2 million |
| Income before income taxes | $45.2 million | $15.8 million |
| Net income attributable to Full House | $27.8 million | $2.3 million |
| Cash provided by (used in) operations | $(4.3) million | $27.0 million |
| Cash and equivalents at year-end | $20.6 million | $14.7 million |
Revenue increased 22%, reflecting Rising Star and Grand Lodge operating for more of the year and three months of Silver Slipper results. Casino revenue was $112.6 million versus $74.7 million; management fees fell to $7.2 million from $24.2 million. Operating costs rose 42%, including the costs of the expanded owned-property portfolio.
Reported 2012 operating income includes a $41.2 million gain on the FireKeepers venture sale; net income therefore substantially reflects a nonrecurring transaction. The sale generated $49.7 million in reported investing cash proceeds. Operating cash flow was negative, and the company reported approximately $14.4 million of taxes paid related to the gain. Cash paid for income taxes totaled $21.9 million.
At December 31, 2012, total debt was $68.8 million: $48.8 million under the first-lien term loan and $20.0 million under a second-lien loan. The second-lien loan bears 13.25% annual interest; the first-lien loan was reported at 4.75% for the quarter and year. A $5.0 million revolving facility remained undrawn. Debt is secured by substantially all company assets, subject to financial covenants; management reported covenant compliance. Management estimated $15.0 million of cash was needed for day-to-day operations.
Current assets were $32.3 million and current liabilities $15.3 million. Property and equipment, net, was $83.7 million, and stockholders’ equity was $81.1 million. The company reported no material off-balance-sheet arrangements. No standalone Q4 results or EBITDA figure is provided in the filing text.
Changes, outlook, and risks
- The FireKeepers sale generated the $41.2 million accounting gain and ended the related management fees; those fees were $5.3 million in 2012 versus $23.3 million in 2011. The company used part of the sale proceeds to repay its former debt and interest-rate swap.
- Silver Slipper was acquired for approximately $69.3 million, excluding working-capital balances, fees, and expenses, funded with the new first- and second-lien borrowing. Silver Slipper contributed $12.9 million of 2012 segment revenue following its October acquisition.
- Management expected a new 104-room hotel adjacent to Rising Star to open in late 2013 and believed it could improve visitation and revenue. The filing provides no quantified earnings or revenue guidance. Management said current growth plans depended on operating cash flow and access to external debt or equity financing.
- Management cited economic weakness, consumer spending and gaming trends, competition, capital availability, interest costs, gaming regulation and licensing, weather, and acquisition or construction execution as risks. New Ohio casinos were expected to compete with Rising Star in 2013; Gulf Coast and Santa Fe markets also faced substantial competition.
- The Buffalo Thunder management agreement is stated in different places as expiring in May 2014 and September 2014; management cautioned that an extension was not assured. The Silver Slipper land lease was amended in February 2013, extending its term to April 30, 2058, with a land-purchase option subject to specified timing and price terms.
- Management reported effective disclosure controls and internal control over financial reporting, but its assessment of Silver Slipper’s controls was still in progress following the October 2012 acquisition. The independent auditor gave an unqualified opinion on the financial statements and did not express an opinion on internal controls.
- Legal and administrative proceedings were described as ordinary-course matters; management did not expect their outcomes to materially adversely affect financial position or results.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring after excluding the FireKeepers gain and associated taxes.
- Property-level performance and integration of Silver Slipper, including its full-year contribution, and the operating trends at Rising Star and Grand Lodge.
- Debt repayment capacity, interest expense, covenant headroom, and the terms and availability of the undrawn revolver.
- The actual expiration date and renewal prospects for the Buffalo Thunder agreement, given the filing’s conflicting dates.
- Progress, funding, and expected impact of the Rising Star-area hotel, along with Silver Slipper lease-option obligations and purchase terms.
- Completion and conclusions of the Silver Slipper internal-control assessment.