Monarch Casino & Resort, Inc. — Q1 2016 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2016. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; the two properties are reported as one segment.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Gross revenue | $60.9 million | $57.9 million | +5.3% |
| Net revenue, after promotional allowances | $49.7 million | $47.2 million | +5.5% |
| Operating income | $7.2 million | $6.5 million | +10.6% |
| Net income | $4.6 million | $4.0 million | +13.2% |
| Diluted EPS | $0.26 | $0.24 | +8.3% |
| Operating cash flow | $10.8 million | $8.2 million | +30.6% |
- Operating margin on net revenue was approximately 14.4%, up from 13.7%; net margin was approximately 9.2%, up from 8.6%.
- Casino revenue rose 6.1%; hotel revenue increased 7.7%; food and beverage revenue increased 2.4%; other revenue increased 2.7%.
- Hotel ADR rose to $72.87 from $68.43, while occupancy eased to 83.9% from 84.4%. RevPAR increased to $68.06 from $63.88.
- Cash and cash equivalents were $18.4 million at quarter-end, down from $21.2 million at December 31, 2015. Total assets were $276.6 million and stockholders’ equity was $209.0 million.
- Debt was $35.4 million, down $5.5 million during the quarter. The company had $11.6 million of remaining availability under its $47.0 million credit facility. The entire debt balance was classified as current because the facility matures November 15, 2016.
- Cash used in investing activities was $8.5 million, primarily for the Black Hawk garage, Atlantis buffet work, and equipment. Cash used in financing was $5.1 million, principally debt repayment. Cash decreased by $2.8 million.
Material changes and unusual items
- The Toucan Charlie’s Buffet at Atlantis was closed for 70 days for redesign and upgrade work, limiting food and beverage growth. Related repair and maintenance costs contributed to higher food and beverage expense as a share of revenue (43.1%, versus 39.8%).
- SG&A increased to $13.2 million from $12.6 million, mainly from higher wages and benefits and rent under the Atlantis parking lot lease. Depreciation and amortization declined to $3.7 million from $4.1 million, principally due to revised depreciation of the existing Black Hawk parking structure.
- The parking-structure depreciation estimate increased Q1 2016 depreciation expense by $133,000 and reduced net income by $87,000 (about $0.01 per share). The comparable Q1 2015 effects were $451,000 and $293,000 (about $0.02 per share).
- Interest expense, net of capitalized amounts, declined to $85,000 from $219,000, reflecting lower average debt. The effective tax rate was 35.3% in both quarters.
Outlook, commitments and risks
- Monarch expects the new Black Hawk parking structure to be completed in Q2 2016. It expects to begin the hotel tower and casino expansion in Q4 2016, with the full project targeted for Q3 2018. The planned project includes about 500 rooms and nearly doubles casino space; estimated cost is $229–$234 million.
- The current credit facility matures in November 2016. Management expects to negotiate a new or amended facility to refinance debt and fund the expansion, but gives no assurance of timely financing or favorable terms. Management says liquidity should be sufficient for the next 12 months subject to obtaining that financing; failure to secure financing or generate adequate cash could require reducing or delaying capital spending, asset sales, debt restructuring, or equity financing.
- Management cited competitive gaming, economic conditions in Northern Nevada and Denver-area feeder markets, labor-cost pressure, gaming regulation, construction timing and cost, and cybersecurity as risks. New gaming near Denver could affect Black Hawk and the expansion plan. Legal claims are described as arising in the ordinary course, with no expected material adverse effect.
- Contractual cash obligations totaled $79.9 million, including $35.4 million of facility borrowings due within one year, $8.6 million of garage construction commitments, and operating leases. The company disclosed related-party leases with BLI, whose beneficial owners include major company stockholders and executives’ family members; Q1 rent was $174,000 for the parking lot lease and $94,000 for the driveway lease.
- No earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported.
Key facts for investors to verify
- Progress, remaining cost, and schedule for the Black Hawk garage and planned resort expansion.
- Whether Monarch refinances the $35.4 million credit-facility balance before its November 2016 maturity, and on what terms and borrowing capacity.
- Cash generation and liquidity as expansion spending rises, including the impact of operating performance and construction commitments.
- Effects of competitive pressure, labor costs, the Atlantis buffet reopening, and related-party lease arrangements on operating margins.