Monarch Casino & Resort, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative figures are for Q1 2011. Before the April 26, 2012 acquisition, the company’s sole operating property was the Atlantis Casino Resort Spa in Reno, Nevada. The acquisition is a subsequent event and is not included in Q1 operating results.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Gross revenue | $42.3 million | $40.2 million | Up 5.1% |
| Promotional allowances | $7.6 million | $6.9 million | Up 10.3% |
| Net revenue | $34.6 million | $33.3 million | Up 3.9% |
| Operating income | $2.85 million | $2.66 million | Up 7.4% |
| Operating margin | 8.2% | 8.0% | Up 0.2 percentage points |
| Net income | $1.64 million | $1.54 million | Up 6.7% |
| Diluted EPS | $0.10 | $0.09 | Up 11.1% |
| Operating cash flow | $4.73 million | $4.43 million | Up 6.8% |
Casino revenue rose 8.6% to $25.2 million and food and beverage revenue rose 5.0% to $10.6 million. Hotel revenue fell 12.0% to $4.4 million. SG&A increased 8.3% to $11.8 million, including higher marketing, payroll and benefits, and bad-debt expense. Interest expense increased to $329,000 from $289,000, primarily due to fees on unused credit commitments. The effective tax rate was 35.0% in both periods.
Q1 cash flow included $1.44 million of capital spending and $5.70 million of debt repayments. Cash declined $2.41 million during the quarter to $11.17 million. At March 31, total assets were $175.6 million, current assets $22.9 million, current liabilities $23.1 million, and long-term debt $19.0 million. The current ratio was approximately 0.99.
Material changes and business trends
- Promotional allowances increased to 18.1% of gross revenue from 17.2%, reflecting marketing efforts and competitive pressure.
- Hotel occupancy declined to 81.4% from 83.7%; average daily room rate fell to $66.09 from $74.59, and RevPAR fell to $53.78 from $62.44. Management attributed weaker hotel revenue partly to a major convention that was not held in Reno in 2012.
- Food and beverage revenue growth reflected a 7.9% increase in average revenue per cover, partly offset by 3.2% fewer covers. Department expense ratios improved for casino and food and beverage operations.
- Debt fell from $24.68 million at year-end 2011 to $18.98 million at quarter-end following repayments.
Acquisition, outlook, risks and contingencies
On April 26, 2012, Monarch acquired Riviera Black Hawk, Inc., which operates a casino in Black Hawk, Colorado, for $76 million, subject to working-capital adjustments. The seller left $2.1 million of cash working capital. Monarch borrowed $72.3 million under its $100 million credit agreement to fund the purchase and transaction costs; $2.28 million of the price was escrowed for seller indemnification. Management said it was evaluating operations and planning possible renovations, casino improvements, parking, and a hotel, subject to further evaluation. These plans are forward-looking and not a quantified financial forecast.
At March 31, Monarch reported a 0.65:1 leverage ratio against a maximum of 3.25:1 and a 23.6:1 fixed-charge coverage ratio against a minimum of 1.15:1. Management expected both ratios to remain covenant-compliant after the acquisition-related borrowing, while noting leverage would rise and coverage would fall. The credit facility matures November 15, 2016; pricing at quarter-end was LIBOR plus 1.25%. A 1-percentage-point rate increase on quarter-end debt would raise annual interest cost by approximately $190,000.
Management warned that weak Reno and national economic conditions, reduced discretionary spending, aggressive competitor marketing, California tribal casino competition, and higher fuel costs could pressure results. It anticipated continued downward pressure on Atlantis revenue but provided no numerical guidance. Other matters include a Nevada tax dispute over sales tax on complimentary meals; the company said it would accrue tax prospectively, while a roughly $1.2 million historical refund claim remained unrecorded. An appeal in Kerzner’s Atlantis trademark litigation was ongoing; management intended to oppose it. Related-party payments included approximately $85,200 for leased access space and $53,800 for billboard advertising in Q1 2012.
Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It stated that other ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Post-acquisition debt, interest expense, covenant headroom, and integration costs after the $72.3 million draw.
- Riviera Black Hawk’s subsequent operating contribution and the cost, timing, and funding of contemplated property improvements.
- Whether Reno and Denver market conditions, competitive promotions, and hotel demand continue to affect revenue and margins.
- Developments and potential financial effects of the complimentary-meal tax matter and the trademark appeal.
- Cash generation and liquidity after acquisition financing, capital commitments, and ongoing debt service.