Monarch Casino & Resort, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Resort Spa Black Hawk in Colorado. Unless noted, amounts below are in millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $133.7 | $111.6 | $357.3 | $284.3 |
| Income from operations | $36.4 | $29.0 | $83.4 | $64.1 |
| Net income | $27.5 | $22.3 | $65.0 | $48.6 |
| Diluted EPS | $1.41 | $1.15 | $3.33 | $2.51 |
| Operating cash flow | Not separately presented | Not separately presented | $106.2 | $96.3 |
- Q3 revenue rose 19.8%, operating income 25.2%, and net income 23.2% year over year. For the nine-month period, revenue rose 25.7%, operating income 30.1%, and net income 33.8%.
- Operating margin was approximately 27.2% in Q3 2022 versus 26.0% in Q3 2021, and 23.3% for the first nine months of 2022 versus 22.5% in 2021. Net margin was approximately 20.6% and 20.0% for the respective Q3 periods.
- Cash and cash equivalents were $33.1 at September 30, 2022, versus $33.5 at year-end 2021. Current assets were $82.0 and current liabilities $140.6, a working capital deficit of approximately $58.6.
- Nine-month investing cash outflow was $40.5, mainly reflecting property and equipment spending; financing cash outflow was $66.0, including $63.0 of debt principal payments and $6.5 of share repurchases. Cash declined $0.4 over the period.
- Gross term-loan principal was $27.0, reported net of $0.8 in debt issuance costs; all outstanding principal was classified as current and due within 12 months. The company had no revolver borrowings and $69.4 of revolver availability, subject to a $0.6 letter of credit. Debt facility maturity is September 3, 2023.
Changes and operating drivers
- Growth reflected the completed Monarch Black Hawk expansion and more available gaming devices and hotel rooms, as well as higher guest spending. The expansion added a 23-story hotel tower with 516 rooms and expanded casino and dining offerings; the final specialty restaurant opened in February 2022.
- Q3 casino revenue increased 20.3%; food and beverage revenue rose 20.6%; hotel revenue rose 19.9%. Hotel ADR increased to $177.74 from $154.11, occupancy to 86.8% from 83.4%, and RevPAR to $170.14 from $142.39.
- For the first nine months, casino revenue increased 20.8%, food and beverage 33.5%, and hotel 35.9%. Hotel ADR was $178.15 versus $138.04, occupancy 81.7% versus 78.6%, and RevPAR $159.08 versus $119.18.
- Expense trends were mixed: Q3 food and beverage and hotel expense ratios improved, while SG&A dollars increased with labor, utilities, and advertising. Nine-month casino expense as a share of casino revenue increased, primarily due to promotional allowances; overall SG&A as a share of revenue declined.
- Comparison periods were affected by COVID-19: 2021 included capacity restrictions early in the year and pent-up demand in the second and third quarters. Management also cited continued cost pressure, including labor and commodity costs.
Outlook, risks, and unusual items
- No specific numerical revenue or earnings guidance was provided. Management said operating cash flow and available revolver capacity were expected to support operations for the 12 months following the filing and planned capital expenditures, while warning that adverse operating or economic conditions could undermine that expectation.
- The company reported $6.5 of construction-litigation expense for the first nine months of 2022, versus $3.0 in the comparable 2021 period. Q3 2022 litigation expense was $2.8. The dispute with PCL concerns the Black Hawk expansion; the Denver trial was continued and reset for September 5, 2023. The company said it could not determine the likelihood of the outcome or reasonably estimate any loss or gain. A related mechanics’ lien case remains stayed pending the Denver action.
- Debt covenants required a maximum total leverage ratio of 4.0:1 and minimum fixed-charge coverage ratio of 1.15:1; reported ratios were 0.2:1 and 3.8:1, respectively. The company made $48 of optional and $15 of mandatory term-loan prepayments during the first nine months. A potential excess-cash-flow prepayment may apply beginning with the fiscal 2022 compliance certificate.
- Key risks discussed include inflation and wage pressure, interest-rate increases and refinancing, dependence on two resorts, construction litigation, COVID-19 and other disruptions, competition, and regulatory and licensing matters. The filing reported no material changes to previously disclosed risk factors.
- The company reported $24.6 of income taxes receivable, including $26.9 of expected federal and state refunds for tax years 2020 and 2021. No uncertain tax positions were recorded.
Investor verification points
- Review the September 2023 credit-facility maturity, refinancing or repayment plans, and the availability and conditions of the revolver.
- Track the PCL trial and related lien proceedings, legal spending, and any changes in the company’s ability to estimate potential exposure.
- Verify realization and timing of the expected tax refunds, which exceed the reported net income-tax receivable balance.
- Assess whether Black Hawk expansion-driven growth and hotel performance can continue as labor, utility, and other costs evolve.
- Consider the impact of COVID-19 and the 2021 capacity-restriction and pent-up-demand comparisons when evaluating year-over-year trends.