Monarch Casino & Resort, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; substantially all operating cash flow comes from these two properties.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Gross revenue | $279.3 million | $264.1 million | +5.7% |
| Net revenue | $230.7 million | $217.0 million | +6.3% |
| Income from operations | $40.7 million | $38.5 million | +5.5% |
| Net income | $25.5 million | $24.6 million | +3.9% |
| Diluted EPS | $1.39 | $1.39 | Unchanged |
| Operating cash flow | $49.5 million | $43.7 million | +13.1% |
| Capital expenditures | $46.8 million | $24.9 million | +$21.9 million |
- Casino revenue rose 5.8%; food and beverage revenue rose 5.2%; hotel revenue rose 6.0%. At Atlantis, occupancy improved to 89.4% from 88.2%, ADR to $81.46 from $79.52, and RevPAR to $82.40 from $77.50.
- Operating income grew more slowly than net revenue: operating margin was approximately 17.6% of net revenue versus 17.8% in 2016. SG&A rose to $62.7 million from $57.7 million, principally reflecting higher payroll and benefits.
- Cash and cash equivalents were $29.2 million at year-end. Debt outstanding was $26.2 million under a $250 million revolving facility, with $223.2 million available and a $0.6 million standby letter of credit. The facility matures July 2021 and is secured by substantially all company assets.
- Year-end leverage and fixed-charge coverage ratios were 0.5:1 and 40.9:1, respectively, against covenant limits of no more than 3.5:1 and at least 1.15:1. The floating-rate borrowing was priced at one-month LIBOR plus 1.00%; a 1 percentage-point rate increase would raise annual interest cost by about $0.3 million.
- Investing cash outflow was $46.7 million; there were no financing cash flows in 2017. Total assets were $332.1 million and stockholders’ equity was $266.5 million at year-end.
Fourth-quarter results and changes versus prior periods
Fourth-quarter 2017 net revenue was $56.1 million, compared with $55.6 million in Q4 2016. Operating income was $8.1 million versus $10.2 million, and net income was $4.4 million versus $6.5 million; diluted EPS was $0.23 versus $0.36. The quarter included the noncash deferred-tax-asset revaluation associated with the 2017 Tax Cuts and Jobs Act, which reduced FY2017 net income by approximately $1.5 million, or $0.08 per basic and diluted share.
For the full year, casino revenue increased at both properties. Management cited stronger regional conditions benefiting Atlantis and increased Black Hawk market share despite expansion-related disruption. Promotional allowances fell to 17.4% of gross revenue from 17.8%. Higher labor and other costs pressured margins, including hotel operating expenses, which rose to 37.6% of hotel revenue from 30.9%.
Outlook, projects, and risks
- The Black Hawk expansion was under construction after breaking ground in February 2017. The planned 23-story tower will add approximately 500 rooms, nearly double casino space, and include a spa, pool, restaurants and bars. Management expected completion in Q2 2019 at an estimated total cost of $229–$234 million, funded through operating cash flow and the credit facility.
- Management said cash balances, operating cash flow and available facility borrowings should fund operations, debt obligations and planned capital spending over the next 12 months. This expectation is subject to business and market conditions; construction delays, cost overruns, permitting, financing availability and covenant compliance remain risks.
- Management noted continued Northern Nevada economic activity but also rising labor costs and aggressive competitor marketing. Material broader risks include dependence on two resorts, local economic and weather conditions, intense gaming competition, gaming-license regulation, variable interest rates, cybersecurity, and possible increases in operating costs or gaming taxes.
- The Tax Act reduced the federal corporate tax rate to 21%; the company recorded a provisional $1.461 million tax expense from revaluing deferred taxes and said its accounting was not complete. New revenue guidance adopted January 1, 2018 was expected to change loyalty-program accounting and presentation; management estimated a $4.9 million cumulative reduction to retained earnings, with no effect on net revenue.
- Management reported no material adverse impact expected from ordinary-course legal claims. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Track Black Hawk construction progress, final project costs, opening timing, and the expected operating and cash-flow contribution.
- Review cash generation against the expansion’s remaining spend, facility availability, post-completion facility reduction and debt repayment provisions.
- Assess whether revenue growth can offset rising payroll, hotel and marketing costs, and monitor operating margins at both properties.
- Check subsequent tax-law guidance and the final impact of the Tax Act, along with the loyalty-program accounting transition.
- Consider concentration in two resort markets, regulatory and competitive developments, weather exposure, and the related-party leases with Biggest Little Investments, including their terms and payments.