Monarch Casino & Resort, Inc. — Q3 2019 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2019. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Black Hawk’s hotel and casino expansion was under construction during the period.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $65.6 | $64.4 | $187.1 | $180.5 |
| Operating income | $11.5 | $13.9 | $31.9 | $33.8 |
| Net income | $9.3 | $10.9 | $25.6 | $26.8 |
| Diluted EPS | $0.50 | $0.58 | $1.37 | $1.44 |
| Operating margin | 17.6% | 21.5% | 17.0% | 18.7% |
| Operating cash flow | — | $48.0 | $45.0 | |
| Cash and equivalents at period end | $29.1 | — | ||
| Long-term debt at period end | $155.9 | — |
- Q3 revenue grew 1.9%, while operating income fell 16.9% and net income fell 14.1%. Nine-month revenue increased 3.6%, but operating income declined 5.6% and net income declined 4.5%.
- Q3 casino revenue rose 2.0%; food and beverage revenue fell 0.7%; hotel revenue rose 7.8%. Nine-month increases were 1.5%, 2.0%, and 15.1%, respectively.
- Nine-month investing cash outflow was $110.7 million, primarily for the Black Hawk expansion and other property improvements. Financing provided $61.4 million from facility borrowings; cash declined $1.4 million from year-end to $29.1 million.
- At September 30, debt was $155.9 million, versus $94.5 million at December 31, 2018. The $250 million facility had approximately $93.5 million available after outstanding borrowings and a $0.6 million standby letter of credit. Working capital was negative $15.6 million, based on current assets of $46.0 million and current liabilities of $61.6 million.
Material changes and management commentary
- Profitability weakened despite revenue growth. Q3 selling, general and administrative expense rose to $17.9 million from $16.8 million; food and beverage costs increased, including payroll, healthcare, and cost of goods sold. The quarter also included $1.0 million of Black Hawk pre-opening expense and $0.2 million of construction litigation expense, neither incurred in Q3 2018.
- Hotel revenue benefited from higher average daily rates, partly offset by lower occupancy. Management noted that the cancellation of Reno’s 2019 Interbike conference reduced hotel and food and beverage cash revenues relative to the prior-year quarter.
- All $4.2 million of interest for the first nine months of 2019 was capitalized to construction, compared with $1.3 million capitalized and $0.2 million expensed in the comparable 2018 period. No net interest expense was reported in Q3 2019.
- Management expects the Black Hawk expansion, including the hotel, expanded casino, restaurants, and certain public areas, to open in Q1 2020; remaining remodeling is expected in Q2 2020. The overall project budget is approximately $264–$269 million, with an estimated $39–$46 million remaining to complete at September 30, 2019. Management cautions that timing, costs, and anticipated benefits are not assured.
- Management believes cash, operating cash flow, and available facility borrowings will fund operations, debt obligations, and planned capital spending over the next 12 months, while noting that results and funding needs are exposed to factors beyond its control.
Risks, contingencies, and unusual items
- The facility’s revolving commitment is scheduled to reduce to $50 million on December 31, 2019, with outstanding revolving loans up to $200 million converting to a term loan. A prepayment may be required depending on the company’s leverage ratio. The facility matures July 20, 2021 and is secured by substantially all company assets.
- The company was compliant with its financial covenants at quarter-end: total leverage ratio 2.6:1 against a maximum 4.75:1, and fixed charge coverage ratio 8.0:1 against a minimum 1.15:1. Debt carries variable rates; a hypothetical 1 percentage-point rate increase would raise annual interest cost by approximately $1.6 million.
- PCL Construction Services sued the company and Colorado subsidiaries on August 30, 2019, alleging breach of contract and implied warranties related to the Black Hawk expansion. Monarch intends to defend and bring counterclaims, but says the case is preliminary and any loss or gain cannot presently be estimated.
- ASC 842 adoption added right-of-use assets and lease liabilities in 2019; period-end lease liabilities were $15.8 million. The filing also reports related-party leases with entities associated with significant stockholders, including $10.9 million of right-of-use assets and liabilities for the parking lot lease and $4.2 million for the driveway lease.
- The company reported no material changes to the risk factors in its 2018 Form 10-K. It identifies construction delays and cost disputes, litigation, debt and interest-rate exposure, cash-flow and financing needs, competition, regulation, and reliance on two resorts among relevant risks.
Most important facts for investors to verify
- Progress, final costs, opening timetable, and expected returns of the Black Hawk expansion; compare remaining cost estimates with subsequent filings.
- Outcome and potential financial exposure from the PCL lawsuit, including any counterclaims and additional litigation costs.
- Debt terms and availability after the December 31, 2019 facility commitment reduction, including any required prepayment and subsequent covenant compliance.
- Whether revenue growth can translate into improved margins given labor, healthcare, promotional, and other operating cost pressures.
- Related-party lease terms and obligations, and the company’s ability to fund capital spending while maintaining adequate liquidity.