Monarch Casino & Resort, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; selected unaudited Q4 results are also summarized below. The company operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net revenue | $187.8 million | $188.7 million | Down 0.5% |
| Income from operations | $22.2 million | $30.5 million | Down 27.2% |
| Net income | $14.2 million | $18.0 million | Down 21.1% |
| Diluted EPS | $0.83 | $1.06 | Down 21.7% |
| Operating margin on net revenue | 11.8% | 16.1% | Lower |
- Gross revenue was $229.6 million, including casino revenue of $145.1 million, food and beverage revenue of $52.3 million, hotel revenue of $21.7 million and other revenue of $10.4 million. Promotional allowances were $41.8 million, leaving net revenue of $187.8 million.
- Casino revenue fell 3.2%, reflecting lower volume at both properties. Black Hawk results were affected by construction disruption, fewer slot machines on the floor and a change from cash-voucher promotions to free-play credits. Atlantis casino revenue declined primarily on lower business volume.
- Food and beverage revenue rose 5.4%; hotel revenue declined 4.2%. Atlantis occupancy was 89.1% versus 89.5%, ADR was $73.66 versus $77.78, and RevPAR was $72.26 versus $75.41. Management cited fewer Reno conventions and meetings as a factor in lower room rates.
- Operating expenses increased to $165.5 million from $158.3 million. Casino expenses rose with lower casino revenue, higher complimentary costs and payroll. SG&A increased to $53.0 million from $52.3 million.
- Operating cash flow was $31.2 million, down 13.6% from $36.1 million. Investing activities used $19.8 million, principally for property upgrades and equipment; capital expenditures were $21.7 million versus $12.4 million. Financing activities used $9.1 million, including $7.5 million of debt repayment.
- Year-end cash was $21.6 million. Total assets were $252.3 million and stockholders’ equity was $177.0 million. Credit Facility debt was $46.3 million, down from $53.8 million; the filing reports leverage of 1.1x and fixed-charge coverage of 30.0x. The facility’s stated borrowing capacity was $89.5 million at year-end, with maturity on November 15, 2016.
- Cash paid for interest was $0.9 million. The effective income tax rate was 32.8%, compared with 37.2% in 2013.
Fourth-quarter results
Unaudited Q4 net revenue was $45.9 million, compared with $44.5 million in Q4 2013. Operating income was $4.8 million versus $4.2 million, and net income was $3.8 million versus $2.1 million. Diluted EPS was $0.22 versus $0.12.
Material changes, outlook and notable items
- Management said the Reno/Sparks gaming market was flat in 2014 and expected macroeconomic uncertainty and competitors’ aggressive marketing to continue pressuring Atlantis revenue.
- Black Hawk’s first casino-remodel phase opened in August 2014. Remaining casino renovation work was estimated at $17–$19 million, expected to be funded from operating cash flow. A new parking structure was anticipated to open in late 2015, with remaining costs estimated at $33–$36 million.
- The company expected to begin the hotel-tower and casino expansion in Q2 2016, with the full 23-story, approximately 500-room project expected to open in late 2017. Estimated total cost was $229–$234 million, expected to be funded with operating cash flow and an expanded or replacement credit facility. These are plans and estimates, not guarantees.
- FY2014 included $1.9 million of costs opposing a proposed Colorado gaming ballot initiative. A change in the estimated demolition timing for Black Hawk’s existing parking structure increased 2014 depreciation by $2.9 million and reduced net income by $1.9 million, or $0.11 per share.
- Contractual cash obligations totaled $92.2 million, including $36.0 million of construction contracts, $8.0 million of purchase obligations and $46.3 million of facility borrowings. Management stated that cash, operating cash flow and available facility borrowings should fund operations and planned expenditures over the next 12 months, while noting exposure to factors beyond its control.
- The company authorized repurchases of up to 3.0 million shares in October 2014 but made no purchases under the plan during the year. It has never paid cash dividends and did not anticipate doing so in the foreseeable future.
Risks, contingencies and governance
- Key risks include economic weakness and discretionary-spending sensitivity in Reno, Denver and feeder markets; intense casino competition and possible legalization of additional gaming; gaming-license and regulatory requirements; and increases in gaming taxes or fees.
- Expansion entails construction-cost, schedule, permitting, funding and operational-disruption risks. The company’s credit facility matures in 2016, before the planned major expansion, and refinancing or expanded borrowing is not assured.
- Other disclosed exposures include variable-rate debt (a 1 percentage-point rate increase was estimated to add about $0.5 million in annual interest cost), extreme weather, potentially insufficient insurance, cybersecurity incidents, environmental liabilities near historic mining activity in Black Hawk, and dependence on key personnel.
- The Farahi family beneficially owned approximately 41% of outstanding shares. A lease for Atlantis driveway access is with a shopping-center entity whose owners include controlling stockholders; 2014 rent was $350,000, plus related operating expenses.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. Management stated that ordinary-course legal claims were not expected to have a material adverse impact.
Important facts for investors to verify
- Whether Black Hawk renovation and parking work meet the disclosed budgets and schedules, and whether the projected hotel expansion receives approvals and financing on acceptable terms.
- How much undrawn borrowing capacity remains after facility terms, quarterly capacity reductions and operating needs, and the company’s refinancing plan before the November 2016 maturity.
- Whether casino revenue and operating margins recover, particularly given 2014 volume declines, construction disruption and ongoing competitive pressure.
- The continuing effect of accelerated depreciation and other unusual costs on reported earnings and cash generation.
- Material changes in regulatory, tax, environmental, insurance, related-party lease or other contingent exposures.