Monarch Casino & Resort, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $64.4 | $63.0 | $180.5 | $174.7 |
| Income from operations | $13.9 | $13.3 | $33.8 | $32.5 |
| Net income | $10.9 | $9.0 | $26.8 | $21.1 |
| Diluted EPS | $0.58 | $0.49 | $1.44 | $1.16 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $45.0 | $34.7 |
Q3 net revenue rose 2.1%; nine-month net revenue rose 3.4%. Net income increased 20.3% for Q3 and 27.0% for the nine-month period. Income from operations increased 3.8% over the first nine months.
- For the nine months, reported revenue was $94.6 million casino, $53.0 million food and beverage, $23.6 million hotel and $9.4 million other.
- Q3 casino revenue as reported fell 31.0%, and nine-month casino revenue fell 30.0%, primarily because ASC 606 shifted amounts among revenue categories and eliminated promotional allowances. On a prior-accounting basis, casino revenue increased 1.4% for Q3 and 2.8% for the nine months. Management also cited low table-games hold in Q3.
- Food and beverage revenue increased 13.0% in Q3 and 11.7% for the nine months; hotel revenue increased 25.3% and 23.0%, respectively. The reported increases partly reflect ASC 606’s retail-price valuation of complimentary goods and services, not solely changes in underlying demand.
- The nine-month effective tax rate was 20.1%, compared with 33.7% in 2017, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act. The lower rate contributed to earnings growth.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $34.7 million, compared with $29.2 million at December 31, 2017. Current assets were $49.6 million and current liabilities $63.9 million.
- Nine-month operating cash flow was $45.0 million, up 29.5%. Net investing cash outflow was $82.5 million; financing provided $43.1 million from credit-facility borrowings. Cash increased $5.5 million during the period.
- Property and equipment acquisitions were $101.7 million in the cash flow statement; the period also included a $19.2 million increase in construction accounts payable. Management described cash paid for capital expenditures as approximately $82.5 million.
- Long-term debt was $69.3 million, up from $26.2 million at year-end. The $250 million credit facility had $180.1 million of available borrowings and a $0.6 million standby letter of credit at quarter-end; maturity is July 2021. Borrowings bear a variable rate; the rate at quarter-end was 3.25% (one-month LIBOR of 2.25% plus 1.00%). A 1-percentage-point rate increase would add approximately $0.7 million to annual interest cost at the quarter-end balance.
- The company reported compliance with credit covenants: total leverage ratio of 1.2:1 versus a maximum of 4.75:1, and fixed-charge coverage of 37.0:1 versus a minimum of 1.15:1. Management believes cash, operating cash flow and available facility borrowings will fund operations, debt obligations and planned capital expenditures for the next 12 months, while noting that adverse conditions could require capital-spending reductions or other financing actions.
Expansion, accounting changes and outlook
- The Monarch Black Hawk expansion budget was increased to approximately $264–$269 million, including scope additions and higher construction and equipment costs. Estimated remaining cost at September 30 was $169–$176 million. The contractor expected expanded casino, restaurants, retail and about six hotel floors to open in Q2 2019, with remaining hotel floors and amenities in Q3 2019. Completion timing, budget and returns are not assured.
- Construction in progress rose to $146.3 million from $48.8 million at year-end. The expansion is expected to be funded through operating cash flow and the credit facility. After completion, the facility’s revolving commitment is scheduled to reduce to $50 million, with eligible outstanding revolving borrowings converted to a term loan.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It produced a $4.86 million cumulative adjustment to opening retained earnings for the players’ club liability. Prior-year results were not restated; ASC 606 increased 2018 net revenue by $35,000 for Q3 and $351,000 for the nine months, with no net-income impact. Category-level year-over-year comparisons are therefore not directly comparable.
- After the October 24 earnings release, the company identified an unaccrued contractor billing for September. This filing adds $10.2 million to construction in progress and construction accounts payable; management said the adjustment did not affect the income statement.
- The filing gives no earnings or revenue guidance. Management noted rising labor costs and competitor marketing pressure at Atlantis, as well as construction, cost, financing, interest-rate, competitive, regulatory and economic risks. It reported no material change to the risk factors in its 2017 Form 10-K.
- Related-party leases with entities associated with major stockholders include parking and driveway arrangements adjacent to Atlantis. The filing also reports ordinary-course legal claims and says known matters are not expected to have a material adverse effect, while outcomes remain uncertain.
Key facts for investors to verify
- Whether Black Hawk expansion milestones, total cost and remaining-cost estimates remain on schedule and within budget.
- How much of reported revenue and hotel/food-and-beverage growth reflects ASC 606 presentation changes versus underlying business trends; 2017 figures were not restated.
- Cash generation and borrowing needs as expansion spending continues, including credit availability, variable-rate exposure and post-completion facility changes.
- The effect of table-games hold, labor-cost pressure and competitive promotions on operating performance.
- The $10.2 million construction accrual and the terms and ongoing costs of related-party leases.