Monarch Casino & Resort, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; dollar figures below are in millions unless noted. Monarch operates Atlantis Casino Resort Spa in Reno and Monarch Casino Black Hawk in Colorado; the two properties are reported as one segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Net revenue | $58.2 | $54.6 | $111.6 | $104.3 |
| Operating income | $11.6 | $8.9 | $19.3 | $16.1 |
| Net income | $7.2 | $5.7 | $12.1 | $10.3 |
| Diluted EPS | $0.40 | $0.32 | $0.67 | $0.58 |
| Operating margin | 19.8% | 16.4% | 17.3% | 15.4% |
Q2 net revenue grew 6.7%; casino revenue rose 7.9%, food and beverage 0.1%, hotel 3.5%, and other revenue 8.6%. H1 net revenue increased 7.0%; casino revenue grew 6.0%, food and beverage 7.2%, hotel 6.7%, and other revenue 6.3%. H1 net income rose 17.9% and diluted EPS 15.5%.
Promotional allowances were $12.0 million in Q2 and $23.8 million in H1, equal to 17.1% and 17.6% of gross revenue, respectively, down from 17.8% and 18.1% in the comparable 2016 periods. Q2 SG&A increased to $15.1 million but declined to 25.9% of net revenue from 26.6%; H1 SG&A rose to $29.7 million, or 26.6% of revenue versus 26.5%. Hotel expense ratios worsened, reflecting payroll and benefits and expanded shuttle and valet services. Casino expense ratios improved.
Cash flow, balance sheet and debt
- H1 operating cash flow was $18.3 million, up from $17.1 million. Investing cash outflow was $20.5 million, primarily for the Black Hawk expansion and other property projects. Financing cash flow was zero; cash declined $2.2 million to $24.2 million.
- At June 30, cash was $24.2 million and current assets were $37.0 million versus current liabilities of $30.7 million. Total assets were $305.1 million; stockholders’ equity was $248.1 million.
- Long-term debt was $26.2 million, unchanged from year-end 2016. The $250 million credit facility matures July 2021; $223.2 million was available, with a $0.6 million standby letter of credit and no draws against it. Debt is secured by substantially all real and personal property. Borrowing pricing was LIBOR plus 1.00% at quarter-end; a 1 percentage-point rate increase would add about $0.3 million to annual interest cost.
- Leverage ratio was 0.5:1 against a maximum of 3.5:1; fixed-charge coverage was 46.7:1 against a minimum of 1.15:1. Management said cash, operating cash flow and available credit should fund operations, debt obligations and planned capital spending for the next 12 months, while noting that adverse conditions could require spending cuts, asset sales, debt restructuring or new equity.
Changes, outlook and risks
Black Hawk’s nine-story parking facility opened in November 2016, and demolition of the old garage was completed in Q1 2017. Construction of the new hotel tower and casino expansion began in February 2017. The plan adds approximately 500 rooms, nearly doubles casino space, and includes a spa, pool and additional restaurants. Management expected completion in Q2 2019. The filing estimates total project cost at approximately $229–$234 million and separately estimates remaining cost at $230–$237 million; investors should clarify these differing estimates. H1 capital expenditures were approximately $20.6 million, versus $14.8 million in H1 2016.
No specific revenue or earnings guidance was provided. Management cited increased labor costs and competitive marketing pressure at Atlantis, while noting operating efficiencies in casino operations. Principal risks include competition (including California tribal casinos and potential new gaming near Denver), economic weakness in feeder markets, construction delays or overruns, regulatory and licensing matters, interest-rate exposure, and cybersecurity or system disruption. Management reported no material changes to previously disclosed risk factors and said known legal matters were not expected to materially affect results, though outcomes are uncertain.
Accounting and other notable items: adoption of the new stock-based compensation guidance reduced tax expense and increased net income by $0.2 million in Q2 and $0.2 million in H1. The company plans to adopt the revenue-recognition standard in 2018; the quantitative impact remained under analysis. Related-party leases with entities connected to major stockholders include parking and driveway arrangements; the parking lease carries a $1.6 million payment obligation if the company does not renew. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Project budget and schedule: reconcile the stated total cost of $229–$234 million with the estimate of $230–$237 million remaining, and monitor completion timing and funding needs.
- Operating momentum and cost pressures by property, especially hotel payroll, benefits, shuttle and valet costs, and Atlantis labor and competitive-marketing pressure.
- Credit-facility terms and covenant headroom as construction spending and borrowings increase, including the facility’s planned reduction and loan conversion after expansion completion.
- Potential effects of the 2018 revenue-recognition standard on loyalty programs, complimentary offerings and promotional-allowance presentation; the filing had not quantified the impact.
- Related-party lease economics and renewal/termination obligations, alongside competition, regulatory, construction and cybersecurity risks.