Monarch Casino & Resort, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $48.6 | $49.0 | $141.9 | $144.2 |
| Income from operations | $6.7 | $8.9 | $17.5 | $26.3 |
| Net income | $4.1 | $5.5 | $10.4 | $15.9 |
| Diluted EPS | $0.24 | $0.32 | $0.61 | $0.95 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $22.8 | $28.4 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $13.0 | $8.2 |
Q3 net revenue decreased 0.8%, operating income fell 25.4%, and net income fell 26.2% year over year. For the nine-month period, net revenue declined 1.6%, operating income 33.6%, and net income 34.8%. Approximate operating margins were 13.7% versus 18.2% in Q3 and 12.3% versus 18.2% year to date; approximate net margins were 8.4% versus 11.3% and 7.3% versus 11.0%, respectively.
For the first nine months, cash provided by operations declined 19.7% year over year. Investing activities used $12.2 million, primarily for Black Hawk renovations and gaming equipment and other upgrades; financing activities used $12.4 million, including $10.4 million in debt repayments. Cash decreased $1.8 million to $17.5 million.
At September 30, 2014, current assets were $33.2 million and current liabilities $26.6 million. Long-term debt was $43.4 million, down from $53.8 million at December 31, 2013; the company reported $47.6 million of remaining credit-facility availability. Stockholders’ equity was $172.7 million.
Drivers and material changes
- Casino revenue fell 1.4% in Q3 and 4.4% year to date, reflecting lower revenue at both properties. Black Hawk was affected by renovation disruption, including approximately 13% fewer slot machines on the floor during construction, and a change from cash-voucher promotions to free play credits. Atlantis casino revenue was pressured by lower business volume.
- Food and beverage revenue rose 6.1% in Q3 and 5.0% year to date. Hotel revenue fell 4.0% in Q3 and 6.9% year to date, with lower room rates and occupancy; management cited reduced Reno convention and meeting demand. Other revenue increased.
- Q3 operating expenses included $0.8 million of Colorado ballot-initiative campaign costs; the nine-month expense was $1.8 million and was nondeductible for tax purposes. The nine-month results also included a $0.25 million loss on asset disposal.
- Depreciation and amortization increased to $4.2 million in Q3 and $13.5 million year to date, partly due to accelerated depreciation of the Black Hawk parking structure and assets placed in service during renovations. The shortened estimated life reduced nine-month net income by approximately $1.5 million and EPS by $0.09; the Q3 effects were approximately $0.3 million and $0.02 per share.
- Interest expense declined to $0.3 million in Q3 and $0.8 million year to date, mainly due to lower borrowings and borrowing rates. The effective tax rate for the first nine months rose to 37.7% from 35.9%, primarily because the Colorado campaign expense was nondeductible.
Outlook, liquidity, and risks
Management said cash, operating cash flow, and available credit should fund operations, debt obligations, and planned capital expenditures for the next 12 months. This is not a quantified earnings or revenue forecast. Management cautioned that results depend on economic, competitive, regulatory, and other factors outside its control.
Black Hawk’s staged renovation was underway; phase one opened in August 2014, with all renovation phases estimated to finish by the end of Q3 2015. A larger master expansion plan, including a hotel and expanded casino and amenities, remained subject to design, cost estimates, financing, and a decision to proceed. Total expansion cost was not finalized. The existing credit facility matures November 15, 2016, is secured by substantially all company property, and had $43.4 million outstanding. The company reported compliance with its leverage and fixed-charge covenants at quarter-end.
Reported contractual obligations totaled $61.8 million, including $9.3 million of construction contracts, $7.3 million of purchase obligations, and $43.4 million of facility borrowings. Approximately $7.3 million of purchase and construction commitments were cancelable on 30 days’ notice. A 1% increase in the interest rate on outstanding debt would increase annual interest cost by approximately $0.4 million.
Key risks cited include gaming competition, economic weakness and reduced discretionary spending, construction disruption and financing availability, and possible gaming expansion in or near Denver, a principal Black Hawk feeder market. The filing also identifies cybersecurity and information-system risks. Monarch Interactive was not operating and the company planned to let its gaming approval lapse pending more favorable market conditions. Management said disclosure controls were effective; routine legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Progress, cost, schedule, and financing plans for Black Hawk renovations and the proposed larger expansion.
- Effects of Colorado gaming developments on Black Hawk’s feeder market and expansion decision.
- Whether casino revenue and hotel demand recover, and how renovation disruption and promotional changes affect performance.
- Debt repayment, facility availability, covenant headroom, interest-rate exposure, and the November 2016 maturity.
- Ongoing impact of accelerated parking-structure depreciation and the related estimate and demolition timeline.
- Terms and governance of the related-party shopping-center lease and other affiliate transactions.