Monarch Casino & Resort, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; the two properties are reported as one segment. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $63.0 | $57.1 | $174.7 | $161.4 |
| Income from operations | $13.3 | $12.3 | $32.5 | $28.4 |
| Net income | $9.0 | $7.8 | $21.1 | $18.1 |
| Diluted EPS | $0.49 | $0.45 | $1.16 | $1.03 |
| Operating cash flow | Not separately stated | Not separately stated | $34.7 | $29.2 |
- Q3 net revenue rose 10.4%, net income 15.3%, and diluted EPS 8.9% year over year. Nine-month net revenue increased 8.2%, net income 16.8%, and diluted EPS 12.6%.
- Q3 gross revenue was $75.4 million, less $12.4 million in promotional allowances. Casino revenue increased 10.7% in Q3 and 7.6% year to date; nine-month food and beverage and hotel revenue grew 6.3% and 6.5%, respectively.
- Q3 operating margin was approximately 21.0% of net revenue, compared with 21.5% in Q3 2016. Nine-month operating margin was approximately 18.6%, versus 17.6%.
- Nine-month investing cash outflow was $34.3 million, principally for the Black Hawk expansion and other property improvements. Cash increased $0.4 million to $26.8 million; there were no financing cash flows in the period.
Financial position, debt and liquidity
- At September 30, 2017, total assets were $322.5 million and stockholders’ equity was $260.2 million. Current assets were $42.2 million versus current liabilities of $36.1 million.
- Long-term debt was $26.2 million under a $250 million revolving facility maturing July 2021. The company reported $223.2 million of remaining availability and a $0.6 million standby letter of credit, with no draws on the letter of credit.
- The facility’s leverage and fixed-charge coverage ratios were 0.4:1 and 41.3:1, respectively, against limits of no more than 3.5:1 and no less than 1.15:1. Borrowings were priced at LIBOR plus 1.00% at quarter end; management estimated that a 1% rate increase would add about $0.3 million to annual interest cost.
- Management said cash, operating cash flow and available borrowing capacity should fund operations, debt obligations and capital plans for the next 12 months, while noting that adverse conditions could require changes to capital spending or other financing actions.
Changes, outlook and notable items
- Black Hawk’s nine-story parking structure opened in November 2016; demolition of the former structure was completed in Q1 2017, and construction of the hotel tower and casino expansion began in February 2017. The plan includes a 23-story tower with about 500 rooms, expanded casino space, spa and pool facilities, restaurants and bars. Completion was expected in Q2 2019, at an estimated total cost of $229–$234 million; remaining estimated cost at September 30 was $218–$225 million. Management cautioned that timing, budget and returns are not assured.
- Nine-month capital expenditures were approximately $34.4 million, up from $19.8 million, funded from operating cash flow. Construction in progress increased to $39.3 million from $9.8 million at year-end 2016.
- Revenue grew across major categories, but higher payroll and employee benefits, maintenance and other costs pressured expenses. Q3 hotel expense was 37.4% of hotel revenue, versus 28.4% a year earlier; nine-month hotel expense was 37.5%, versus 30.1%. Management cited labor pressure in both markets.
- Adoption of the stock-compensation accounting update reduced tax expense by $0.1 million for Q3 and $0.5 million year to date, increasing nine-month EPS by about $0.03. Nine-month 2016 stock-compensation expense was unusually low following forfeited options and reversal of expense related to a former CFO’s resignation.
- The company planned to adopt the new revenue standard on January 1, 2018, using modified retrospective adoption. Expected effects include changes to complementary and loyalty-program revenue accounting and promotional-allowance presentation; quantitative effects had not been determined. The company was also assessing the future lease-accounting standard.
- Related-party leases with entities connected to major stockholders include a 20-year parking-lot lease and a driveway lease; reported rent paid under both was $0.8 million for the first nine months of 2017. The company reported no purchases under its authorized stock repurchase plan.
Risks and contingencies
Risks discussed include competition, including California tribal casinos and potential new gaming near Denver or in key feeder markets; economic weakness and fuel costs; labor and construction execution, financing and cost risks; gaming regulation and licensing; and cybersecurity or system disruption. Management reported no material change to the risk factors in its 2016 Form 10-K. Routine legal claims were not expected by management to materially affect financial condition, cash flows or results, although outcomes are uncertain. Contractual cash obligations were reported at $65.7 million, including operating leases, purchase obligations and current facility borrowings; substantial portions of the expansion work had not yet been contracted.
Key facts for investors to verify
- Progress, remaining cost, financing needs and schedule for the Black Hawk expansion, including whether the Q2 2019 completion expectation remains achievable.
- Whether revenue growth can continue while labor, hotel, maintenance and other operating costs remain elevated.
- Actual remaining credit availability, borrowing costs and covenant compliance as construction spending increases.
- The eventual quantified effects of the revenue-standard adoption on promotional allowances, loyalty programs, reported revenue and expenses.
- Terms, ongoing payments and potential obligations associated with related-party leases, including the $1.6 million payment obligation if the parking-lot lease renewal option is not exercised.