Monarch Casino & Resort, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Monarch operates Atlantis Casino Resort Spa in Reno and Monarch Casino Black Hawk in Colorado. The unaudited interim results are not necessarily indicative of full-year results. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net revenue | $56.3 | $53.4 | +5.3%; comparisons are affected by ASC 606 adoption |
| Income from operations | $8.6 | $7.7 | Operating margin 15.2% vs. 14.5% |
| Net income | $6.7 | $4.9 | +38.4%; net margin 12.0% vs. 9.1% |
| Diluted EPS | $0.36 | $0.27 | +33.3% |
| Operating cash flow | $13.0 | $10.3 | +26.4% |
| Cash and cash equivalents | $29.4 | $29.2 at Dec. 31, 2017 | Quarter-end balance |
| Debt | $26.2 | — | Credit facility borrowings; no clear comparable-period debt value is provided here |
Investing activities used $12.8 million of cash, primarily for the Black Hawk expansion and equipment. No financing cash flows were reported. Quarter-end current assets were $43.0 million and current liabilities were $47.7 million. The company reported $223.2 million of remaining borrowing availability under its $250 million facility, plus a $0.6 million standby letter of credit.
Interest expense, net of amounts capitalized, was $0.08 million versus $0.27 million. The company’s effective tax rate was 20.5%, down from 34.6%, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act. Reported casino operating expense was 35.7% of casino revenue versus 42.8%; food and beverage expense was 77.3% versus 40.4%, and hotel expense was 55.0% versus 39.1%. These departmental ratios are materially affected by ASC 606 presentation changes and should not be read as like-for-like cost trends.
Material changes and accounting comparability
- Monarch adopted ASC 606 on January 1, 2018 using the modified retrospective method. It recorded a $4.86 million opening retained-earnings adjustment for changing the accounting for players’ club points to deferred revenue. Q1 2017 was not restated.
- ASC 606 changed the presentation of complimentary goods and services and related expenses, among other reclassifications. It eliminated promotional allowances from the 2018 income statement and increased reported net revenue by $0.145 million versus the pre-adoption presentation, with no effect on Q1 net income.
- Reported casino revenue fell 27.5%, largely because of reclassifications; excluding the stated revenue-standard effect, casino revenue increased 5.8%. Food and beverage revenue rose 9.3%; covers fell 3.4%. Hotel revenue rose 12.8%, while occupancy declined to 85.5% from 87.5%. Reported ADR was $87.82 versus $78.22, with the increase partly reflecting complimentary-room valuation changes.
- SG&A increased to $15.2 million from $14.6 million, primarily from higher salaries, wages and benefits and utilities. Depreciation and amortization declined to $3.7 million from $3.9 million.
Outlook, risks and contingencies
- Black Hawk expansion: The project is expected to add a 23-story tower with approximately 500 rooms, nearly double casino space, and add restaurants, spa and pool facilities. The company expects completion in Q2 2019. It revised the project scope, including approximately 6,500 additional square feet, and increased the stated completion budget to approximately $264–$269 million from $229–$234 million. The filing cautions that timing, cost and anticipated earnings benefits are not assured.
- Expansion spending is expected to be funded through operating cash flow and the credit facility. The company states that cash, operating cash flow and available facility borrowings should fund operations, debt obligations and capital plans for the next 12 months, but notes that adverse conditions or insufficient cash generation could require reducing or delaying capital spending, selling assets, restructuring debt or raising equity.
- The credit facility matures July 20, 2021, is secured by substantially all company property, and bears variable-rate interest. At quarter-end, pricing was one-month LIBOR plus 1.00%; a 1 percentage-point rate increase on outstanding borrowings would increase annual interest cost by approximately $0.3 million. The company reported covenant ratios of 0.45:1 leverage against a maximum of 3.5:1 and 39.9:1 fixed-charge coverage against a minimum of 1.15:1. After expansion completion, the revolving commitment is scheduled to fall to $50 million, with qualifying outstanding borrowings converted to term debt.
- Management cited higher labor costs and competitive marketing pressure at Atlantis, as well as the effect of expanding California tribal casinos on Nevada gaming. Broader risks include construction cost and execution, access to capital, interest rates, competition, regulatory and licensing matters, cybersecurity, and dependence on two resorts.
- Contractual obligations totaled $67.6 million, including $26.2 million of facility borrowings, $26.1 million of operating leases and $15.3 million of purchase obligations. Most listed purchase obligations are cancelable on 30 days’ notice. Management said known legal matters are not expected to have a material adverse effect, while noting outcomes are difficult to predict. The filing reports no material changes to previously disclosed risk factors.
- The company has a related-party parking lot lease with an entity associated with major stockholders; the lease has minimum annual rent of $0.695 million and a $1.6 million payment obligation if the renewal option is not exercised. The filing also describes a related-party driveway lease. The company reported effective disclosure controls and procedures.
Most important facts for investors to verify
- How much of reported revenue, departmental margins and operating cash flow reflects underlying business performance versus ASC 606 presentation and the players’ club liability change.
- Whether the Black Hawk expansion remains on schedule for Q2 2019 and within the revised $264–$269 million completion estimate; the filing provides no assurance.
- Actual expansion funding needs, facility availability and covenant headroom as spending progresses, including the scheduled post-completion reduction in revolving capacity.
- Whether lower tax expense and the resulting earnings growth are sustainable, and the final accounting for Tax Act provisional amounts.
- How labor costs, competition and gaming-market changes affect Atlantis and Black Hawk operating results.
- The terms, governance and ongoing costs of related-party leases, and any material developments in legal or regulatory matters.