Business context and reporting period
Monarch Casino & Resort, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; the properties are reported together as one segment.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gross revenue | $61.0 | $58.0 | $118.9 | $113.4 |
| Promotional allowances | $11.0 | $10.2 | $21.7 | $20.1 |
| Net revenue | $50.0 | $47.8 | $97.2 | $93.3 |
| Operating income | $8.0 | $5.5 | $14.5 | $10.8 |
| Net income | $5.1 | $3.0 | $9.1 | $6.3 |
| Diluted EPS | $0.29 | $0.18 | $0.53 | $0.37 |
- Net revenue rose 4.6% in Q2 and 4.2% for the first half. Operating margin was approximately 16.1% in Q2 versus 11.4%; first-half margin was 14.9% versus 11.6%.
- Casino revenue increased 6.3% in Q2 and 5.1% year to date; food and beverage revenue rose 5.8% and 6.3%, respectively. Hotel revenue declined 3.4% in Q2 and 1.0% for the first half. Other revenue increased in both periods.
- Q2 hotel occupancy fell to 90.3% from 93.3%; first-half occupancy was 86.9% versus 88.0%. Lower occupancy and convention/transient demand weighed on room revenue and RevPAR.
- Promotional allowances rose to 18.0% of gross revenue in Q2 from 17.5%, and 18.3% for the first half from 17.7%, reflecting increased complimentary offers and guest-reward marketing. Casino costs as a share of casino revenue also increased; food and beverage cost ratios improved.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $14.9 million, versus $14.1 million; investing cash outflow was $14.7 million versus $9.3 million, primarily reflecting property upgrades and equipment; financing cash outflow was $1.9 million versus $7.0 million.
- Cash was $19.8 million at June 30, 2015, down from $21.6 million at year-end 2014. Property and equipment purchases were $15.2 million. Long-term debt was $42.2 million, down from $46.3 million.
- The credit facility had a $66.5 million maximum commitment, of which $42.2 million was drawn and $24.3 million remained available. The company permanently reduced facility capacity by $20 million during Q2. The facility matures November 15, 2016; management expects to negotiate a new or amended facility before then.
- Debt pricing was LIBOR plus 1.25%; a one-percentage-point rate increase on the outstanding balance would raise annual interest cost by about $0.4 million. Leverage and fixed-charge coverage ratios were 0.9:1 and 32.0:1, respectively, against covenant limits of no more than 2.0:1 and at least 1.15:1.
- Management expects cash, operating cash flow and available borrowing capacity to fund operations, debt service and planned capital spending for the next 12 months, while noting that results and funding depend on factors beyond its control.
Outlook, developments and risks
- Management expected the third phase of the Monarch Black Hawk casino-floor redesign to finish in Q3 2015. Estimated remaining cost was $17–$19 million, expected to be funded from operating cash flow.
- The new nine-story parking structure, intended to increase on-site parking from about 500 to 1,500 spaces, was expected to finish in late 2015. Remaining parking-related work was estimated at $24–$27 million, funded primarily by operating cash flow and partly by the credit facility.
- Construction of a planned 23-story hotel tower and casino expansion was expected to begin in Q2 2016, with full completion anticipated in late 2017. The project is expected to nearly double casino space and add about 500 rooms, a spa and pool, restaurants and bars. Estimated total cost is $229–$234 million; funding is expected from operating cash flow and an expanded or replacement credit facility.
- Contractual cash obligations totaled $81.9 million, including $25.9 million of construction contracts, $11.7 million of purchase obligations and $42.2 million of debt. The filing notes that substantial portions of the planned expansion were not yet under contract.
- Unusual items include accelerated depreciation related to the planned demolition of the existing Black Hawk parking structure: it increased Q2 depreciation by $0.5 million and reduced net income by $0.3 million ($0.02 per share); first-half depreciation rose $1.0 million and net income fell $0.6 million ($0.04 per share). Q2 2014 included $1.0 million of Colorado ballot-initiative campaign costs and a $0.3 million loss on slot-machine disposals.
- Risks cited include competition from California tribal casinos and potential new gaming near Denver or in feeder markets, economic weakness, construction and financing risks, regulation and licensing, and cybersecurity or systems disruption. The company reported ordinary-course legal claims that management did not expect to have a material adverse effect. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- The company has an authorized plan to repurchase up to 3 million shares but reported no purchases under the plan. Related-party arrangements include a leased driveway and other services or space involving affiliates of controlling stockholders.
Key facts for investors to verify
- Progress, timing and remaining costs for the parking structure, casino-floor work and planned hotel/casino expansion.
- Availability and terms of replacement or expanded financing ahead of the November 2016 credit-facility maturity.
- Whether promotional spending and complimentary offers continue to rise, and their effect on casino margins.
- Trends in hotel occupancy, convention demand and RevPAR, particularly at Atlantis.
- Compliance with debt covenants, liquidity needs and the effect of variable interest rates.
- Construction commitments, related-party lease terms and the accounting impact of the revised parking-structure depreciation estimate.