Monarch Casino & Resort, Inc. — Q3 2013 Form 10-Q
Business context and reporting period: The quarter and nine months ended September 30, 2013. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Black Hawk was acquired on April 26, 2012, so year-to-date comparisons include a longer period of Black Hawk operations in 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $49.0 million | $46.0 million | $144.2 million | $121.4 million |
| Income from operations | $8.9 million | $6.9 million | $26.3 million | $13.1 million |
| Net income | $5.5 million | $4.1 million | $15.9 million | $7.6 million |
| Diluted EPS | $0.32 | $0.25 | $0.95 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $12.8 million | $12.3 million | $39.7 million | $28.5 million |
Q3 net revenue rose 6.4% and net income rose about 33%; nine-month net revenue increased 18.8% and net income more than doubled. Operating margin was approximately 18.2% in Q3 2013 versus 14.9% a year earlier, and approximately 18.2% for the nine months versus 10.8%. Net margin was approximately 11.3% in Q3 versus 9.0%, and 11.0% year to date versus 6.2%.
Cash flow and investment: Nine-month operating cash flow was $28.4 million, up from $20.7 million. Capital expenditures were $8.2 million, compared with $8.0 million. Investing cash outflow was $8.2 million, versus $74.7 million in 2012, which included the Black Hawk acquisition. Financing used $21.7 million, primarily reflecting $24.8 million of debt repayments. Cash declined $1.5 million to $17.5 million.
Debt and liquidity: Long-term debt was $56.3 million at September 30, 2013, down from $81.1 million at December 31, 2012. The company reported $40.7 million available under its credit facility, with a $97.0 million maximum principal amount and maturity on November 15, 2016. The facility is secured by substantially all company property. Reported leverage and fixed-charge coverage ratios were 1.2:1 and 13.7:1, respectively; required limits are no more than 3.0:1 and at least 1.15:1.
Material changes versus prior periods
- Atlantis Q3 net revenue increased 6.3%, with higher gaming, food and beverage, and hotel revenue. Hotel ADR increased to $85.16 from $79.09, while occupancy edged down to 95.4% from 96.1%.
- Black Hawk Q3 net revenue increased 6.4%. Management said severe flooding blocked access for four days and disrupted feeder markets. Its new buffet opened during the period; related opening costs and higher food costs pressured food-and-beverage expenses.
- Lower depreciation and amortization contributed to Q3 operating-income growth: assets from the 2008 Atlantis expansion became fully depreciated, and the Riviera trade name became fully amortized in April 2013. Prior-year results also included $0.5 million of Q3 acquisition costs and $2.2 million for the first nine months.
- Year-to-date improvement reflects both operating performance and the inclusion of Black Hawk for all nine months in 2013 versus only post-acquisition operations in 2012.
- Promotional allowances fell as a share of gross revenue: 18.0% versus 19.3% in Q3 and 17.7% versus 18.9% year to date.
Outlook, risks and unusual items
- Management noted continuing competitive and macroeconomic pressure in northern Nevada, including competition from California tribal casinos, customer sensitivity to discretionary spending, and potential effects from fuel costs and new gaming facilities.
- Black Hawk’s conditionally approved expansion plan would nearly double casino space and add a 507-room hotel tower, spa and pool, restaurants, and parking. Management expected to finalize cost and construction timing and identify financing, likely through a financial-institution credit facility; it anticipated announcing details in late 2013 or Q1 2014. No finalized project cost or committed financing was provided.
- Expansion risks include construction delays and cost overruns, permits and regulatory conditions, access to financing, and demand and broader economic conditions. The project was not included in contractual-obligations totals because costs and commitments had not been finalized.
- A Nevada ruling in June 2013 ended sales taxation of complimentary and employee meals. Monarch reversed a $0.6 million accrued expense in Q2, while withdrawing its pending $1.6 million use-tax refund claims; the refunds had not been recognized as assets.
- The filing describes an immaterial correction of promotional-item accounting and prior-period reclassifications. Management said these did not materially affect previously reported operating income, Adjusted EBITDA, net income, or cash flows.
- A 1% increase in the interest rate on outstanding debt would increase annual interest cost by approximately $0.6 million. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Black Hawk expansion costs, timing, permits, and financing are finalized on terms the company can support.
- How sustainable revenue and margin growth is, particularly given competition, macroeconomic exposure, and the temporary disruption from flooding.
- Debt repayment capacity and availability under the secured credit facility as capital spending increases.
- The effect of operating-cost pressures, including payroll, food commodities, and marketing, on segment profitability.
- Any subsequent developments in gaming regulation, tax matters, or other contingencies; the filing says ordinary-course claims are not expected to have a material adverse effect.