Monarch Casino & Resort, Inc. — Q1 2014 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2014, compared with Q1 2013. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Gross revenue | $55.422 | $56.527 |
| Net revenue | $45.508 | $45.605 |
| Operating income | $5.331 | $7.185 |
| Operating margin | 11.7% | 15.8% |
| Net income | $3.276 | $4.262 |
| Diluted EPS | $0.19 | $0.26 |
| Operating cash flow | $7.848 | $11.854 |
| Capital expenditures | Approximately $5.0 | Approximately $2.4 |
- Net income declined 23.3%; diluted EPS declined 26.9%. Net revenue was nearly flat, but operating expenses rose to $40.177 million from $38.420 million, principally reflecting higher SG&A and casino costs.
- Casino revenue decreased 2.6%; food and beverage revenue increased 3.1%; hotel revenue declined 12.6%. Hotel occupancy was 83.5% versus 84.9%, and ADR was $67.86 versus $77.27. Management cited the absence of a major convention held in Q1 2013.
- Cash and equivalents were $17.093 million at March 31, 2014, versus $19.330 million at year-end 2013. Total current assets were $31.544 million and current liabilities $27.388 million.
- Long-term debt was $48.9 million, down from $53.8 million at December 31, 2013 after $4.9 million of principal repayments. The $94.0 million credit facility had $45.1 million available and matures November 15, 2016. The company reported covenant ratios of 1.1:1 leverage against a 2.5:1 maximum and 19.9:1 fixed-charge coverage against a 1.15:1 minimum.
- Interest expense was $0.287 million, compared with $0.566 million. Debt pricing was LIBOR plus 1.5%; the filing estimates a 1 percentage-point rate increase would add approximately $0.5 million to annual interest cost.
Material changes, outlook, and risks
- Black Hawk operations were affected by severe winter weather: the property had 50% more snow days than in Q1 2013, and all but one weekend was affected.
- Depreciation expense increased by $0.936 million because the existing Black Hawk parking structure’s estimated remaining life was shortened ahead of its planned demolition. Management said this reduced Q1 net income by $0.605 million and basic and diluted EPS by $0.04.
- Monarch is upgrading Black Hawk and has zoning approval for a proposed expansion that would add a 507-room hotel and other resort facilities. The final cost estimate, construction timetable, and financing plan were not yet complete; additional debt financing may be needed, with no assurance it will be available on acceptable terms.
- Management believes cash, operating cash flow, and available facility borrowings should fund operations, debt obligations, and planned capital expenditures for the next 12 months, but notes that results depend on factors beyond its control. No specific earnings or revenue guidance was provided.
- Risks cited include competition and aggressive marketing, weak or unstable economic conditions, discretionary-spending pressure, gaming expansion near feeder markets, fuel costs, weather, construction and financing risks, and regulatory matters. Contractual cash obligations totaled $72.1 million, including $13.5 million of construction contracts and $48.9 million of credit-facility borrowings; some purchase and construction commitments were cancelable on 30 days’ notice.
- The 2013 comparative presentation was reclassified for an immaterial promotional-allowance error, with no effect on previously reported operating income, net income, or cash flows. The company withdrew approximately $1.6 million in Nevada use-tax refund claims under an industry agreement; no refund had been recognized.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Ordinary-course legal claims were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether operating performance and cash generation recover, particularly at Atlantis and Black Hawk, given Q1 revenue mix, expense increases, and weather effects.
- The final scope, cost, schedule, and financing for the Black Hawk expansion, including the existing garage demolition and related accelerated depreciation.
- Credit-facility availability, covenant compliance, debt repayment capacity, and sensitivity to floating interest rates.
- Whether competitive, economic, regulatory, and construction conditions materially affect management’s stated 12-month liquidity expectations.