Full House Resorts, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The company owns or operates casinos in Indiana and Nevada and manages a New Mexico casino; results also reflect the March 30 sale of its interest in the FireKeepers joint venture and management contract.
Financial performance and position
- Q2 revenue: $27.84 million, down 11% from $31.12 million. Casino revenue rose 9% to $25.35 million, while management fees fell to $0.40 million from $5.91 million, principally because the FireKeepers agreement ended with the sale. Grand Lodge, which began operating in September 2011, contributed to casino revenue growth.
- Q2 earnings: Operating income was $1.42 million versus $6.83 million; net income attributable to the company was $0.73 million ($0.04 per share) versus $1.40 million ($0.08 per share). Operating margin was approximately 5.1% versus 21.9%; the reported figures include operating gains.
- First-half revenue and earnings: Revenue was $61.17 million, up 55% from $39.47 million. Operating income was $47.75 million and company-attributable net income was $26.58 million, versus $12.66 million and $3.00 million, respectively. The 2012 results include a $41.2 million gain on the GEM sale; the resulting approximately 78.1% operating margin is not representative of recurring operations. The prior-year comparison also includes only partial-period operations for acquired properties.
- Cash flow: First-half operating cash flow was negative $1.96 million, compared with positive $11.24 million a year earlier. Investing activities provided $45.42 million, chiefly from $49.67 million of net proceeds from the joint-venture sale; financing activities used $30.26 million, including $26.94 million to repay debt and the swap liability. Cash increased $13.20 million to $27.90 million.
- Liquidity and debt: At June 30, cash was $27.90 million and current assets were $35.77 million against current liabilities of $16.39 million (current ratio approximately 2.2). Management said approximately $12 million of cash was dedicated to ongoing operations. The company reported no debt outstanding after repaying its Wells Fargo debt and terminating the related swap on March 30. The Capital One facility had not yet been funded.
- Balance sheet: Total assets were $95.65 million and stockholders’ equity was $79.26 million at June 30. Accounts receivable declined to $2.32 million from $4.87 million at year-end; long-term deposits increased to $2.72 million, including the Silver Slipper escrow deposit.
- Taxes and costs: First-half income tax expense was $16.55 million; the estimated effective tax rate was approximately 38%, affected by the sale gain being subject only to federal tax. The debt payoff generated a $1.72 million loss on extinguishment, principally from writing off unamortized loan fees.
Material changes versus the prior comparable period
- Revenue mix shifted toward owned casino operations and away from management fees. First-half management fees fell to $6.21 million from $12.28 million, including the loss of FireKeepers fees after March 30 and the prior-year Harrington contract, which ended in 2011.
- First-half casino revenue benefited from full-period Rising Star operations and Grand Lodge, which was not in the comparable 2011 first half. For Q2, management cited lower Rising Star slot and table-game revenue and win percentages.
- The company sold its 50% GEM interest and FireKeepers management rights for gross proceeds of $48.8 million to the company, recorded a $41.2 million gain, and used part of the proceeds to eliminate its Wells Fargo debt.
Outlook, risks, and notable items
- The company planned to acquire the Silver Slipper casino for $70 million, subject to customary adjustments, regulatory approvals, and other conditions. Management expected a closing near the beginning of Q4 2012, but stated the transaction might not occur. Financing plans included a Capital One facility with up to a $50 million term loan and $5 million revolver, at least $20 million of committed second-lien financing, and cash on hand; funding remained conditional.
- Management said the Silver Slipper acquisition, if completed, and full-year operations at Rising Star and Grand Lodge were expected to help offset lost FireKeepers revenue. This is an expectation, not formal earnings guidance.
- A proposed Rising Star hotel was expected to begin construction in Q4 2012 and open in 2013, subject to remaining approvals. Management believed it could benefit visitation and revenue.
- Key risks include economic weakness and gaming competition, including new or proposed facilities in nearby markets; the ability to obtain financing and gaming approvals; and the Buffalo Thunder management agreement’s expiration in September 2014, with no assurance of extension. Gaming regulation, taxes, seasonality, and acquisition and construction execution also present risks.
- The Nambé Pueblo note receivable remained fully reserved at zero. Management reported no material off-balance-sheet arrangements and concluded disclosure controls were effective at a reasonable-assurance level; assessment of Grand Lodge’s internal controls was still ongoing.
Investor verification priorities
- Confirm whether the Silver Slipper acquisition closed, its final purchase price and financing terms, and the resulting debt and liquidity position.
- Assess recurring earnings and cash generation excluding the $41.2 million GEM sale gain, sale-related costs, and other nonrecurring items.
- Track casino-level trends, especially Rising Star performance, Grand Lodge contribution, and the effect of lost FireKeepers management fees.
- Review remaining regulatory and development approvals, the Rising Star hotel timeline, and the status and renewal prospects of the Buffalo Thunder agreement.