Monarch Casino & Resort, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Gross revenue | $264.1 million | $247.2 million | +6.9% |
| Net revenue | $217.0 million | $202.2 million | +7.3% |
| Operating income | $38.5 million | $32.6 million | +18.4% |
| Net income | $24.6 million | $20.7 million | +19.0% |
| Diluted EPS | $1.39 | $1.19 | +16.8% |
| Cash from operations | $43.7 million | $38.2 million | +14.3% |
| Capital expenditures | $24.9 million | $38.1 million | −34.5% |
Operating margin was approximately 17.8% of net revenue, compared with 16.1% in 2015. Casino revenue rose 7.7% at both properties combined. Food and beverage revenue increased 6.7%; hotel revenue increased 3.3%. Atlantis occupancy eased to 88.2% from 89.7%, while ADR rose to $79.52 from $76.92 and RevPAR to $77.50 from $75.24.
Fourth-quarter 2016 net revenue was $55.6 million, operating income $10.2 million, net income $6.5 million, and diluted EPS $0.36. The comparable 2015 quarter recorded net revenue of $51.5 million, operating income of $8.0 million, net income of $5.1 million, and diluted EPS of $0.29.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $26.4 million; current assets were $39.4 million and current liabilities $35.1 million.
- Total assets were $295.2 million, total liabilities $61.3 million, and stockholders’ equity $233.8 million.
- Credit-facility borrowings declined to $26.2 million from $40.9 million. The amended facility provides up to $250 million through July 20, 2021, with $223.8 million available at year-end; borrowings are secured by substantially all real and personal property.
- Management reported a 0.5:1 leverage ratio against a maximum covenant of 3.5:1, and fixed-charge coverage of 47.1:1 against a minimum of 1.15:1. Management said cash, operating cash flow and facility availability should fund operations, obligations and planned capital spending for the next 12 months, subject to business and financing risks.
Changes, outlook and notable items
- Management attributed improved results to stronger regional markets and increased local visitation at Atlantis, as well as higher Black Hawk casino revenue despite expansion-related disruption. Higher revenues and more efficient use of complimentary offers helped reduce casino operating expenses as a share of casino revenue.
- Expenses included $1.6 million for the Toucan Charlie’s Buffet redesign and a $677,000 loss on asset disposals, primarily replacement of Atlantis hotel-tower doors. Higher labor costs and competitive marketing pressure were noted; food and beverage and hotel expense ratios increased.
- The Black Hawk expansion’s new nine-story, approximately 1,350-space parking structure opened in November 2016; the old garage was demolished in December. The hotel tower and casino expansion broke ground in February 2017. The project is estimated at $229–$234 million, with completion expected in the second quarter of 2019. Planned additions include about 500 rooms, nearly double the casino space, a spa and pool, restaurants and bars. The filing gives no earnings or revenue guidance for the project.
- Monarch plans to fund the expansion through operating cash flow and the amended credit facility. The facility’s revolving commitment is scheduled to reduce to $50 million after expansion completion, with outstanding revolving loans converted to a term loan; excess-cash-flow prepayments may also be required under specified conditions.
- The company paid no dividends and said it does not anticipate cash dividends in the foreseeable future. A 2014 authorization to repurchase up to 3 million shares had resulted in no purchases as of the filing.
- Material risks include dependence on Reno and Denver-area economies and discretionary spending; intense casino and potential online-gaming competition; gaming-license and tax changes; construction cost, schedule, approval and financing risks; variable-rate debt; weather, insurance and environmental exposure; and cybersecurity and privacy risks. The filing says ordinary-course legal claims are not expected to materially affect results.
- Related-party arrangements include leases with Biggest Little Investments, in which Farahi family members hold interests: a 20-year Atlantis parking-lot lease with annual minimum rent of $695,000, and a driveway lease. Investors should review the terms, renewal provisions and related-party oversight.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls at year-end.
Important facts for investors to verify
- Whether the Black Hawk expansion remains within its $229–$234 million estimate and expected 2019 completion schedule, and how much additional facility borrowing it requires.
- Whether operating cash flow and available credit remain sufficient as construction spending accelerates and the facility’s post-completion terms take effect.
- Whether revenue growth and improved operating leverage can persist amid higher labor costs, competition and market sensitivity to consumer spending.
- The terms and governance of the related-party leases, including the parking lease’s $1.6 million payment obligation if Monarch does not renew.
- The effect of the forthcoming revenue-recognition standard on loyalty programs, promotional allowances, revenue presentation and reported margins; the company had not yet quantified the impact.