Business context and reporting period
Monarch Casino & Resort, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. The Black Hawk property was undergoing a major hotel and casino expansion.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the same 2018 period.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $62.8 | $59.9 | $121.5 | $116.2 |
| Income from operations | $11.6 | $11.3 | $20.4 | $19.9 |
| Net income | $9.3 | $9.2 | $16.3 | $16.0 |
| Diluted EPS | $0.50 | $0.50 | $0.88 | $0.86 |
| Operating margin | 18.5% | 18.9% | 16.8% | 17.1% |
- Q2 revenue increased 4.8%; net income rose 0.4%. Six-month revenue increased 4.6%, net income 2.0%, and diluted EPS 2.3%.
- Q2 casino revenue rose 5.4%, food and beverage 2.6%, and hotel 8.8%; other revenue was essentially flat. For the first half, casino revenue rose 1.2%, food and beverage 3.5%, hotel 19.7%, and other revenue 8.8%.
- Hotel revenue growth reflected higher average daily rates (Q2 $129.91 versus $108.73; first half $126.06 versus $100.57), partly offset by lower occupancy (Q2 88.3% versus 91.5%; first half 86.3% versus 88.5%).
- Cost pressures included higher food and beverage labor and goods costs, and higher SG&A wages and benefits. Food and beverage expense rose to 79.6% of that revenue in Q2 from 75.2%; casino expense improved to 34.5% from 34.9%. SG&A was 26.3% of revenue in Q2 versus 27.0%.
Cash flow, debt and liquidity
- First-half operating cash flow was $31.7 million, up 11.2% from $28.5 million. Investing cash outflow was $73.6 million, versus $41.3 million; capital spending principally funded the Black Hawk expansion, Atlantis suite renovations, and equipment. Financing provided $38.0 million from credit-facility borrowings.
- Cash declined to $26.5 million at June 30, 2019, from $30.5 million at year-end. Current assets were $41.1 million and current liabilities $64.4 million.
- Long-term debt was $132.5 million. The $250 million credit facility had $116.9 million of remaining availability and matures July 2021. Borrowings were secured by substantially all company property; the June 30 rate was LIBOR plus 1.50% (one-month LIBOR approximately 2.20%).
- The company reported compliance with credit covenants: total leverage ratio 2.1:1 against a 4.75:1 maximum, and fixed-charge coverage 10.1:1 against a 1.15:1 minimum. A 1 percentage-point rate increase on outstanding debt would raise annual interest cost by approximately $1.3 million.
- Operating lease liabilities totaled approximately $16.0 million after adoption of ASC 842 in January 2019. The company said cash, operating cash flow, and available borrowings should fund operations, debt service, and capital plans for the next 12 months, subject to business and market risks.
Outlook, risks and unusual items
- The Black Hawk expansion budget was approximately $264–$269 million; remaining cost was estimated at $70–$77 million. The contractor expected the first five floors, including expanded casino areas, late Q3 or early Q4 2019, with the remaining tower and amenities in Q4. The filing gave no numerical earnings or revenue guidance and cautioned that completion timing, budget, and returns were not assured.
- The revolving commitment was scheduled to reduce to $50 million upon the earlier of the first full quarter after expansion completion or December 31, 2019; outstanding revolving borrowings up to $200 million would convert to term debt. Depending on leverage, the company might have to prepay debt by December 31, 2019.
- Management cited labor-cost pressure, competition, construction delays or cost overruns, contractor and labor availability, debt and interest-rate exposure, and dependence on two resorts among its risks. No material risk-factor changes from the 2018 Form 10-K were reported.
- Related-party leases with entities linked to the Farahi family include the Atlantis parking lot and driveway; their recorded right-of-use asset and liability balances were $10.9 million and $4.2 million, respectively. Management said known legal matters were not expected to materially affect results or financial condition.
- All first-half 2019 interest was capitalized to construction, compared with $0.1 million expensed in the first half of 2018. Adoption of ASC 842 added right-of-use assets and lease liabilities; prior-year statements were not recast.
Key facts for investors to verify
- Progress, final costs, and opening schedule for the Black Hawk expansion, including whether the contractor’s projected dates and remaining-cost estimate hold.
- Post-expansion borrowing levels, facility commitment reduction, any required debt prepayment, and covenant compliance.
- Whether revenue growth can offset labor, food, and other operating-cost pressures, particularly as hotel occupancy declined.
- Cash generation and liquidity relative to expansion spending, contractual commitments, and variable-rate debt exposure.