Monarch Casino & Resort, Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Amounts are in millions except per-share data and operating statistics.
Financial performance and condition
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $58.7 | $56.3 | Up 4.4% |
| Income from operations | $8.7 | $8.6 | Up $0.2 |
| Net income | $7.0 | $6.7 | Up 4.1% |
| Diluted EPS | $0.38 | $0.36 | Up 5.6% |
| Operating cash flow | $13.5 | $13.0 | Up 3.4% |
| Cash and equivalents, quarter-end | $23.8 | $29.4 | Down from $30.5 at Dec. 31, 2018 |
- Revenue by category: casino $29.0 (down 3.2%); food and beverage $17.7 (up 4.5%); hotel $8.5 (up 33.7%); other $3.6 (up 18.0%). Hotel growth reflected higher average daily room rate (ADR), including complimentary rooms valued at retail prices; occupancy was 84.3%, versus 85.5%.
- Total operating expenses rose to $50.0 from $47.7. SG&A increased to $16.5 from $15.2, with higher wages and benefits among the main drivers. Operating income margin was approximately 14.8%, compared with 15.2%.
- Q1 operating cash flow was $13.5; investing cash outflow was $36.1, primarily for the Black Hawk expansion and property upgrades. The company borrowed $16.0 under its credit facility. Cash declined by $6.6 during the quarter.
- At March 31, long-term debt was $110.5, up from $94.5 at year-end; available facility borrowings were $138.9, plus a $0.6 standby letter of credit with no draws. The $250.0 facility matures July 20, 2021. Borrowings are variable-rate and secured by substantially all company property. A 1 percentage-point rate increase would add an estimated $1.1 of annual interest cost.
- Current assets were $37.5 versus current liabilities of $60.6. The balance sheet also included $16.2 of right-of-use assets and $16.2 of lease liabilities following adoption of ASC 842 on January 1, 2019; prior-year figures were not recast.
Material changes and notable items
- Casino revenue fell as promotional allowances, primarily hotel-related, were recorded as contra-revenue under the revenue recognition standard. Food-and-beverage expense as a share of category revenue increased to 79.1% from 77.3%, reflecting higher labor and product costs.
- Hotel ADR rose to $122.04 from $87.82; RevPAR increased to $114.72 from $85.80. Hotel expense as a share of hotel revenue declined to 36.8% from 55.0%.
- Interest paid and accrued was capitalized in Q1 2019 because facility borrowings were used for the Black Hawk expansion; Q1 2018 included $0.08 of net interest expense. Thus, the income statement reports no net interest expense for Q1 2019.
- Stock-based compensation expense was $0.9, versus $0.6. The company also reported a $9.4 estimated players’ club obligation included in accrued expenses.
Outlook, risks, and contingencies
- The Black Hawk expansion budget is approximately $264–$269, with an estimated $100–$107 remaining to complete at March 31. The contractor was targeting completion of the expanded casino, hotel tower, restaurants, and retail areas by the end of Q3 2019; final phasing and opening dates were expected in Q2. Upgrades to the existing casino were expected to finish in Q4 2019, with the first full year of expanded operations anticipated in 2020. These are expectations, not guarantees.
- Management said cash, operating cash flow, and available credit should be sufficient for operations, debt service, and planned capital expenditures over the next 12 months. It cautioned that lower cash generation or needs exceeding borrowing capacity could require delaying or reducing capital spending, asset sales, debt restructuring, or equity financing.
- Expansion risks include schedule and cost overruns, contractor disagreements, work outside any guaranteed maximum price agreement (which had not yet been executed), and whether the completed facilities generate expected returns. Other disclosed exposures include variable interest rates, competition, labor cost pressure, regulatory and licensing matters, and dependence on two resorts.
- Financial covenants were met: total leverage ratio was 1.8:1 against a maximum of 4.75:1; fixed-charge coverage was 15.5:1 against a minimum of 1.15:1. Routine legal claims were not expected by management to have a material adverse effect, though outcomes are inherently uncertain. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Progress against the Black Hawk expansion’s remaining $100–$107 cost estimate, target dates, and final opening phasing.
- Whether the expansion is completed on budget and whether new capacity delivers the expected revenue and earnings, particularly as 2020 becomes the first full year of expanded operations.
- Cash usage, further facility draws, variable-rate exposure, and any potential excess-cash-flow prepayment requirement by December 31, 2019.
- Underlying performance trends: casino revenue and promotional allowances, hotel ADR and occupancy, and labor and product cost inflation.
- Impact of the new lease accounting presentation and retail valuation of complimentary goods and services on comparisons with prior periods.