Monarch Casino & Resort, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. Monarch owns and operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. The company aggregates the two properties into one reporting segment.
Financial performance
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross revenues | $65.5 | $60.0 | $184.4 | $173.4 |
| Promotional allowances | $11.9 | $11.4 | $33.6 | $31.4 |
| Net revenues | $53.6 | $48.6 | $150.8 | $141.9 |
| Income from operations | $10.0 | $6.7 | $24.6 | $17.5 |
| Net income | $6.4 | $4.1 | $15.5 | $10.4 |
| Diluted EPS | $0.37 | $0.24 | $0.90 | $0.61 |
- Net revenue increased 10.2% in Q3 and 6.2% year to date. Casino revenue rose 10.3% and 6.9%, respectively; food and beverage revenue rose 8.5% and 7.1%. Hotel revenue rose 4.8% in Q3 and 1.2% year to date.
- Operating income increased 50.8% in Q3 and 40.7% year to date; net income increased 56.9% and 49.8%. Operating margin, calculated as operating income divided by net revenue, was approximately 18.8% versus 13.7% in Q3 and 16.3% versus 12.3% year to date.
- Q3 hotel occupancy was 97.3% versus 95.2%; average daily room rate was $82.75 versus $80.21. Year-to-date occupancy was 90.4% in both periods.
- Operating cash flow was $28.4 million for the first nine months, up from $22.8 million. Investing activities used $24.6 million, principally for property upgrades and expansion; property and equipment acquisitions were $26.6 million. Financing activities used $6.1 million, including $8.4 million of debt principal payments.
- Cash was $19.2 million at September 30, 2015, versus $21.6 million at year-end 2014. Long-term debt was $37.9 million, down from $46.3 million. The company reported $27.1 million of remaining availability under its $65.0 million facility. Current assets were $32.9 million and current liabilities $31.8 million.
Changes, outlook and notable items
- Revenue and earnings improved, with growth across casino, food and beverage, hotel, and other revenue. Management cited stronger gaming at both properties and improved hotel rates and occupancy in Q3. Higher labor, repairs and maintenance, marketing, and gaming-related costs remained pressures.
- The company is expanding Monarch Black Hawk. The new nine-story parking structure is now expected to be completed in Q2 2016, later than the prior December 2015 estimate. The planned hotel tower and casino expansion is expected to begin in the second half of 2016 and finish in Q3 2018. Estimated tower project cost is $229–$234 million; remaining parking-structure work is estimated at $18–$21 million. Funding is expected from operating cash flow and an expanded or replacement credit facility; completion, timing, budget, financing and returns are not assured.
- The existing credit facility matures November 15, 2016. Management said available cash, operating cash flow and facility borrowings should fund operations, debt obligations and planned capital spending for the next twelve months, but acknowledged that failure to generate sufficient cash or amend or replace the facility could require spending reductions, asset sales, debt restructuring or new equity. Reported leverage and fixed-charge coverage ratios were 0.8:1 and 38.7:1, respectively, against covenant limits of no more than 2.0:1 and at least 1.15:1.
- In August 2015, the company entered a 20-year lease with an entity affiliated with controlling stockholders for adjacent Atlantis property to create about 300 parking spaces. Minimum annual rent is $695,000 beginning November 17, 2015. If the company does not renew, it must pay $1.6 million for the demolished building’s residual value. The related-party driveway lease was also amended and extended.
- A revised estimate of the existing Black Hawk parking structure’s useful life increased depreciation expense by $0.4 million in Q3 and $1.4 million year to date, reducing net income by $0.3 million and $0.9 million, respectively. Following a further construction delay disclosed in October, the company expects to reduce monthly depreciation on that structure beginning October 2015.
- Q3 2014 included $0.8 million of Colorado ballot initiative campaign costs; the nine-month 2014 amount was $1.8 million. The company said these costs were not deductible for income-tax purposes. The 2015 periods had no such costs.
- Risks discussed include competition from casinos in California and potential new gaming near Denver or other feeder markets, economic weakness and reduced discretionary spending, construction and financing uncertainties, regulatory and licensing matters, and cybersecurity or system disruptions. Management reported no material change to previously disclosed risk factors and no legal proceedings expected to materially affect results.
Key facts for investors to verify
- Progress, costs and schedule for the Black Hawk parking structure and hotel/casino expansion, including access to replacement financing before the existing facility matures.
- Whether operating cash flow can sustain planned capital expenditure while debt is repaid and cash balances remain adequate.
- Performance drivers and cost trends at each property; the filing reports combined results rather than separate segment financials.
- Terms and continuing costs of the related-party parking and driveway leases, including the residual-value obligation.
- Impact of the parking-structure depreciation estimate and any subsequent change in construction timing on future expense.