Monarch Casino & Resort, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request references 2018 Q4, this filing reports full-year results and unaudited quarterly data. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are shown in millions.
Business context
Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. The company depends on these two properties for its operating cash flow. Atlantis includes a hotel; Black Hawk did not yet have one at year-end and was undergoing a major expansion. Atlantis business is seasonal, with stronger summer and weaker winter activity.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Net revenue | $240.3 | $230.7 | Up 4.2% |
| Income from operations | $42.8 | $40.7 | Up 5.3% |
| Net income | $34.1 | $25.5 | Up 33.5% |
| Diluted EPS | $1.83 | $1.39 | Up 31.7% |
| Operating margin | 17.8% | 17.6% | Calculated as operating income divided by net revenue |
| Net cash from operations | $58.8 | $49.5 | Up 18.8% |
| Capital expenditures | $125.7 | $46.8 | Primarily Black Hawk expansion |
| Cash and cash equivalents, year-end | $30.5 | $29.2 | |
| Long-term debt, year-end | $94.5 | $26.2 | Variable-rate credit facility |
Operating cash flow less capital expenditures was approximately negative $67.0 million in 2018. Investing cash outflow was $125.7 million and financing cash inflow was $68.3 million, primarily facility borrowings. Current assets were $46.7 million and current liabilities $59.4 million, a calculated working-capital deficit of approximately $12.8 million.
At December 31, 2018, the company reported $154.9 million of remaining borrowing availability under its $250 million amended credit facility, in addition to $94.5 million drawn; a $0.6 million standby letter of credit was outstanding with no withdrawals. The facility matures July 20, 2021, is secured by substantially all company assets, and bears variable interest. Year-end pricing was one-month LIBOR plus 1.25% (LIBOR 2.53%). Management stated that cash, operating cash flow and available borrowings were expected to fund operations, debt obligations and planned capital spending over the next 12 months.
Reported casino revenue fell 29.5% because of the new revenue standard’s reclassifications; management said casino revenue would have increased 3.8% under the prior standard. The standard shifted complimentary revenue and related costs between categories and eliminated promotional allowances. Its adoption increased reported 2018 net revenue by $0.9 million versus the prior-method presentation, had no impact on 2018 net income, and resulted in a $4.86 million reduction to opening retained earnings related to players’ club accounting. Accordingly, many category-level revenue and expense comparisons are not directly comparable.
Material changes and fourth-quarter results
- Atlantis hotel revenue increased 23.1% for the year, with ADR rising to $104.61 from $81.46; occupancy was nearly unchanged at 89.3% versus 89.4%. Management attributed much of the ADR increase to valuing complimentary rooms at retail rather than discounted rates under the new standard.
- Food and beverage revenue rose 12.3%; management cited higher average revenue per cover and slightly more covers served. Labor costs and accounting reclassifications affected departmental expense ratios.
- SG&A increased to $65.8 million from $62.7 million, primarily due to higher wages and benefits, utilities and professional fees. Management also cited increased labor costs and competitive marketing as pressures on Atlantis operating costs.
- FY 2018 Q4 net revenue was $59.8 million, operating income $9.1 million and net income $7.3 million. The comparable 2017 quarter reported $56.1 million, $8.1 million and $4.4 million, respectively. 2017 Q4 net income included a $1.5 million non-cash deferred-tax-asset revaluation charge related to the Tax Cuts and Jobs Act.
Outlook, expansion and risks
- Black Hawk expansion: The project is expected to nearly double casino space and add a 23-story tower with approximately 500 rooms, a spa and pool, three additional restaurants, bars and related amenities. Management expected the new tower, expanded casino, restaurants and retail areas to open in Q3 2019, with upgrades to the existing casino completed in Q4 2019.
- The 2018 scope changes included approximately 6,500 additional square feet of casino and associated amenities. The estimated project budget was increased by $35 million to approximately $264–$269 million; estimated remaining cost at year-end was $129–$136 million. The company had not yet executed a guaranteed maximum price amendment with its general contractor, and disclosed risks of delay, cost overruns and construction disputes.
- The expansion was being funded through operating cash flow and credit-facility borrowings. After completion, the revolving commitment is scheduled to reduce to $50 million, with outstanding borrowings converted to a term loan; excess-cash-flow prepayments may also be required depending on leverage.
- At year-end, Monarch reported compliance with its credit covenants: total leverage ratio of 1.6:1 against a maximum 4.75:1, and fixed-charge coverage of 24.4:1 against a minimum 1.15:1. A hypothetical one-percentage-point increase in rates on year-end debt would raise annual interest cost by approximately $0.9 million.
- Key risks include reliance on two resorts and local consumer demand, intense gaming competition, construction execution and financing, variable interest rates, gaming licenses and regulation, labor and operating-cost inflation, severe weather, cybersecurity and insurance limitations. The company also noted that additional gaming near Reno or Denver could harm results.
- Related-party arrangements merit attention: Atlantis leases parking and driveway property from Biggest Little Investments, a partnership in which major Farahi family shareholders have interests. The parking lease has minimum annual rent of $695,000 and a $1.6 million payment obligation if Monarch does not exercise its renewal option. The filing reports no material subsequent events and no material adverse effect from ordinary-course legal claims.
- No specific revenue, earnings or cash-flow guidance was provided. The filing states that Monarch does not anticipate cash dividends in the foreseeable future. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Actual completion timing and total cost of the Black Hawk expansion, including whether a guaranteed maximum price agreement was reached and whether remaining cost estimates changed.
- Post-opening visitation, hotel occupancy, room rates, gaming performance and returns on the substantial expansion investment.
- Cash generation relative to remaining capital spending, debt levels, facility availability, covenant headroom and the scheduled reduction/conversion of the credit facility.
- Comparable operating trends after separating economic performance from ASC 606 reclassifications, especially casino revenue, promotional allowances and departmental expense ratios.
- Exposure to labor-cost increases, local competition and consumer spending, as well as the terms and ongoing governance of related-party leases.