Monarch Casino & Resort, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Monarch operates Atlantis in Reno, Nevada, and Monarch Black Hawk in Colorado. The Black Hawk expansion was completed in February 2022. Unless noted otherwise, financial figures are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $115.3 | $97.7 | $223.6 | $172.7 |
| Operating income | $25.7 | $23.8 | $47.0 | $35.0 |
| Net income | $19.4 | $18.1 | $37.6 | $26.3 |
| Diluted EPS | $0.99 | $0.93 | $1.92 | $1.36 |
| Operating margin | 22.3% | 24.3% | 21.0% | 20.3% |
For Q2, revenue grew 18.0%, while net income rose 7.1%. For the first half, revenue increased 29.5% and net income 42.8%. Reported operating margins above are calculated from filing figures.
- Revenue drivers: Q2 casino revenue rose 10.7%, food and beverage 28.7%, and hotel 31.1%. For the first half, these categories increased 21.1%, 42.2%, and 48.3%, respectively. Management attributed growth to Black Hawk’s expanded capacity and facilities, higher guest spending, improved hotel rates, and recovery from prior-year COVID-related restrictions.
- Hotel metrics: Q2 occupancy was 81.0% versus 80.1%; average daily rate was $185.28 versus $140.65, and RevPAR was $162.47 versus $122.91. First-half occupancy was 78.8% versus 75.9%; ADR was $178.40 versus $127.93, and RevPAR was $152.90 versus $105.92.
- Expense and margin factors: Q2 SG&A rose to $23.1 million from $20.6 million, but declined as a share of revenue to 20.0% from 21.1%. Casino expense as a share of casino revenue increased to 36.5% from 31.7%, reflecting higher promotional allowances and labor costs. Food and beverage and hotel expense ratios improved. First-half litigation-related professional fees were $3.7 million, versus $1.5 million a year earlier.
Cash flow, liquidity, and debt
- First-half operating cash flow was $60.6 million, compared with $55.2 million. Investing cash outflow was $35.2 million, including $26.7 million of property and equipment purchases; financing cash outflow was $28.3 million. Cash declined $2.9 million to $30.6 million.
- At June 30, cash was $30.6 million and current assets were $80.3 million, compared with current liabilities of $130.7 million. Income taxes receivable were $28.3 million, including $26.9 million of expected federal and state refunds for 2020 and 2021.
- Term-loan principal outstanding was $65.0 million; $20.0 million of required principal payments due within 12 months was classified as current debt. The company had no revolver borrowings, a $0.6 million letter of credit, and $69.4 million available under the revolving facility. The facility matures September 3, 2023. Its stated interest rate was 2.67% at quarter-end; management estimated a 1 percentage-point rate increase would raise annual interest cost by about $0.7 million.
- Monarch made $25.0 million of term-loan principal payments in the first half, including $15.0 million of optional prepayments. It also repurchased 100,000 shares for $6.5 million. The company stated that expected operating cash flow and available credit should cover operations and planned capital expenditures for the next 12 months, subject to risks.
Outlook, risks, and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects the completed Black Hawk resort expansion to support further market-share and revenue growth, while citing increased costs and labor shortages.
- Management identified inflation and wage pressure, supply-chain interruptions, COVID-19 impacts, economic conditions, rising interest rates, competition, and dependence on two resorts as risks. The filing also notes potential effects from weather and wildfires, regulation, and other factors.
- Construction litigation with PCL and related subcontractor lien claims remains unresolved. The Denver trial was scheduled for September 6, 2022; the related Gilpin County action was stayed pending that case. The company said it could not determine the outcome or reasonably estimate any loss or gain. Litigation fees were included in other operating items.
- The credit agreement includes financial covenants and may require excess-cash-flow prepayments beginning with the fiscal 2022 compliance certificate. The filing gives differing maximum leverage covenant figures: 4.5:1 in Note 6 and 4.0:1 in MD&A. The reported June 30 leverage ratio was 0.4:1 and fixed-charge coverage ratio was 3.6:1.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the covenant maximum leverage ratio discrepancy (4.5:1 in the note versus 4.0:1 in MD&A) and confirm applicable covenant terms.
- Monitor the PCL construction litigation, the scheduled trial, related liens, and the timing and potential financial impact of any resolution.
- Assess whether operating cash flow and revolver availability remain adequate for the $20.0 million of scheduled debt payments, capital spending, and other cash needs as the facility approaches its September 2023 maturity.
- Track realization and timing of the $26.9 million of expected tax refunds, along with labor, promotional, and other operating-cost trends.