Monarch Casino & Resort, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Both properties were ordered to close in mid-March because of COVID-19. The filing was submitted June 22, 2020, after a delay related to the pandemic and lender discussions.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $51.0 | $58.7 | Down 13.2% |
| Income from operations | $2.1 | $8.7 | Down 75.8% |
| Net income | $2.0 | $7.0 | Down 71.2% |
| Diluted EPS | $0.11 | $0.38 | Down 71.1% |
| Net cash from (used in) operating activities | $(7.5) | $13.5 | Negative swing |
| Cash used in investing activities | $(13.7) | $(36.1) | Lower spending |
- Revenue by category: casino $27.1 million, down 6.6%; food and beverage $14.8 million, down 16.6%; hotel $6.4 million, down 24.6%; and other $2.8 million, down 22.5%.
- Operating margin was approximately 4.1%, versus 14.8% a year earlier; net margin was approximately 4.0%, versus 11.9%.
- Casino expense was 35.5% of casino revenue, versus 37.3%. Food and beverage expense rose to 84.8% of category revenue from 79.1%, and hotel expense rose to 46.6% from 36.8%. SG&A was $17.2 million, or 33.7% of revenue, versus $16.5 million, or 28.0%.
- Hotel occupancy fell to 75.4% from 84.3%; ADR increased to $126.31 from $122.04, while RevPAR decreased to $100.57 from $114.72.
- The income tax provision was a $0.1 million benefit, compared with $1.7 million expense; the effective tax rate was 4.3% versus 19.6%, reflecting tax credits, stock-option tax benefits, and lower quarterly income.
Financial position and liquidity
- At March 31, cash and cash equivalents were $39.4 million, down from $60.5 million at year-end; management separately cited $37.3 million in an interest-bearing money-market fund. Current assets were $55.9 million and current liabilities $62.7 million.
- Debt principal outstanding under the credit facility was $196.3 million; the balance sheet reported $195.5 million of debt net of issuance costs, including $22.5 million current. The facility had $50.0 million of unused revolver capacity and a $0.6 million standby letter of credit. Debt is variable-rate and secured by substantially all company property.
- At March 31, the stated leverage ratio was 3.5:1, at the facility’s maximum, and fixed-charge coverage was 3.5:1 against a 1.15:1 minimum. A $22.5 million mandatory principal payment was estimated due over the next twelve months; the lender waived the $5.0 million payment due March 31.
- Capital expenditures and construction spending remained significant: cash used for investing was $13.7 million. The Black Hawk expansion’s total budget was estimated at $264–269 million, with $15–22 million estimated remaining to complete at March 31.
Material changes, outlook, and risks
- Management reported that January and February consolidated revenue, net income, and Adjusted EBITDA increased year over year by 14.2%, 37.6%, and 26.1%, respectively. For March alone, revenue declined 59.6%, net income 179.4%, and Adjusted EBITDA 126.2% year over year. These monthly comparisons are management disclosures; the filing does not provide a clear full-quarter Adjusted EBITDA figure in the supplied text.
- Atlantis reopened with limited operations on June 4, 2020, and Black Hawk reopened with limited operations on June 17. Reduced seating, fewer active slot machines, and restrictions on services applied; management expected lower hotel, convention, and guest demand and could not predict when activity would return to pre-pandemic levels.
- On June 9, lenders extended specified operational and financial-covenant default waivers through September 2020. The amendment requires operational liquidity of at least $25 million and restricts use of borrowing above $26 million to expansion retainage and PCL litigation settlement or judgment costs. Pricing was temporarily set at LIBOR plus 2.50% or base rate plus 1.50%, with a 0.45% commitment fee. Further lender relief was not assured.
- Management forecast sufficient liquidity for the next twelve months and expected to remain covenant-compliant under its forecasts, which assumed reopening and reduced-capacity operations. The company warned that prolonged closures, weak demand, cash-flow shortfalls, or insufficient borrowing capacity could require cuts or delays to capital spending, asset sales, debt restructuring, or equity issuance.
- The Black Hawk expansion was delayed by COVID-19 and litigation with general contractor PCL; no definitive opening timeline was given. The company sought phased occupancy, while PCL opposed it; occupancy also requires authority approvals. The company recorded $0.1 million of litigation expense in Q1, and the outcome and potential loss were not reasonably estimable.
- Q1 other operating items included $0.8 million of expansion pre-opening expense, $0.1 million of construction litigation expense, and $0.4 million of Colorado lobbying expense. Goodwill impairment testing found estimated fair value approximately 24% above carrying value, with no impairment recorded; management cautioned that estimates could change.
Important facts for investors to verify
- Whether limited reopenings sustain demand and cash generation amid capacity restrictions, possible renewed closures, and weaker travel and convention activity.
- Compliance with the amended credit facility’s $25 million operational-liquidity minimum, the availability and permitted use of revolver capacity, upcoming principal payments, and the July 2021 facility maturity.
- The Black Hawk expansion’s completion and occupancy approvals, remaining costs, construction defects or retainage, and the outcome and financial exposure of the PCL litigation.
- Whether cash, borrowing availability, and operating cash flow are sufficient to fund operations, debt service, and capital commitments if recovery is slower than management forecasts.
- Changes in goodwill valuation assumptions and the company’s ability to maintain margins while operating at reduced capacity.