Monarch Casino & Resort, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The quarter includes Riviera Black Hawk results only from its April 26, 2012 acquisition date. Financial statements are unaudited.
Business context
Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and acquired Riviera Black Hawk Casino in Colorado on April 26, 2012. Riviera Black Hawk has no hotel. Monarch also formed Monarch Interactive, which had applied for a Nevada interactive gaming license but had no operating activity at the reporting date.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $45.8 million | $37.2 million | $80.5 million | $70.4 million |
| Income from operations | $3.4 million | $5.7 million | $6.2 million | $8.3 million |
| Net income | $1.8 million | $3.6 million | $3.4 million | $5.1 million |
| Diluted EPS | $0.11 | $0.22 | $0.21 | $0.31 |
| Adjusted EBITDA | $9.6 million | $9.5 million | $16.2 million | $16.0 million |
| Operating cash flow | Not separately presented | Not separately presented | $11.3 million | $10.3 million |
Reported Q2 net revenue rose 23.4%, reflecting the acquisition; operating income fell 40.3% and net income fell 49.6%. For the six-month period, net revenue rose 14.2%, while operating income fell 25.1% and net income fell 32.6%. Q2 operating and net margins were approximately 7.4% and 3.9%, respectively, versus 15.3% and 9.6% a year earlier. Six-month operating and net margins were approximately 7.8% and 4.3%, versus 11.8% and 7.2%.
Riviera Black Hawk contributed $9.5 million of revenue, $1.6 million of operating income and $1.0 million of net income from acquisition through June 30. Pro forma results assuming ownership from January 1 show Q2 net revenue of $49.1 million versus $49.7 million, and net income of $2.1 million versus $5.1 million; six-month net revenue was $95.9 million versus $95.3 million, and net income was $5.1 million versus $8.3 million.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $16.4 million at June 30, 2012, compared with $13.6 million at year-end 2011. Current assets were $24.7 million and current liabilities $26.5 million.
- Long-term debt was $88.0 million, up from $24.7 million at December 31, 2011; cash less debt was approximately negative $71.6 million. Debt is under a revolving facility with a $100 million maximum and maturity on November 15, 2016.
- Six-month operating cash flow was $11.3 million. Investing cash outflow was $71.8 million, including $66.7 million net cash paid for the acquisition and $5.1 million of capital expenditures. Financing provided $63.3 million, primarily from facility borrowings.
- Interest expense was $0.6 million in Q2 and $0.9 million for six months. Borrowings were priced at LIBOR plus 2.25% at June 30; the filing estimates a 1 percentage-point rate increase would add about $880,000 to annual interest cost.
- The company reported covenant leverage of 2.3:1 against a maximum of 3.25:1, and fixed-charge coverage of 25.9:1 against a minimum of 1.15:1.
Material changes and management commentary
- Atlantis Q2 net revenue declined 2.4% to $36.3 million. Lower slot and hotel revenue and increased promotional allowances weighed on results. Management cited persistent weakness in Reno and aggressive competitor promotions.
- Atlantis hotel occupancy was 90.0% in Q2 versus 93.8%; six-month occupancy was 85.7% versus 88.8%. Six-month average daily room rate fell to $69.63 from $73.23, and RevPAR to $59.66 from $65.03.
- Promotional allowances increased to 17.8% of gross revenue in Q2 from 16.4%, and to 17.9% for six months from 16.8%. Casino costs were pressured by complimentary offers; food and beverage cost ratios improved, aided by menu price increases.
- Acquisition-related expense was $1.6 million in Q2 and $1.7 million for six months. Higher debt, depreciation and amortization, and SG&A also affected comparisons.
- Management is evaluating Riviera Black Hawk operations and developing a possible master plan that may include property-wide renovations, improved gaming, a parking facility and a hotel. No specific timetable, budget or earnings guidance is provided.
Risks, contingencies and unusual items
- The Riviera Black Hawk purchase-price allocation, including $26.6 million goodwill and $11.6 million net intangible assets, was preliminary; valuation work was expected to be completed by December 31, 2012. The acquired customer list is amortized over nine years and the Riviera trade name over one year.
- Monarch is pursuing Nevada use-tax refunds estimated at approximately $1.5 million plus interest for taxes on complimentary and employee meals; no refund asset was recognized. The company accrued $178,000 for tax on complimentary and employee meals under a 2012 state directive and regulations. The company disputes the policy and notes that challenges are underway.
- The company disclosed ongoing trademark litigation involving Kerzner and the Atlantis name. The district court entered judgment for Monarch; Kerzner appealed, Monarch cross-appealed, and appellate briefing was stayed while settlement discussions proceeded. Management said other ordinary-course claims were not expected to have a material adverse effect.
- Risks include weak Reno and Denver-area economies, gaming competition, acquisition integration, construction cost and schedule overruns, licensing and permitting, financing availability, weather, and possible environmental liabilities associated with the Black Hawk area’s historic mining activity.
- The credit facility is secured by substantially all of specified company and subsidiary assets and restricts additional debt, certain investments, cash transfers, dividends and stock repurchases. Purchase obligations totaled $9.1 million, including capital-project commitments; approximately $4.6 million were cancelable on 30 days’ notice.
Important facts for investors to verify
- How much of reported growth and EBITDA is attributable to the acquisition, and how are the properties performing on a comparable basis?
- Whether Atlantis revenue and hotel trends stabilize amid continued promotional competition and weak regional conditions.
- Final Riviera Black Hawk purchase accounting, planned renovation scope, costs, funding, approvals and expected returns.
- Debt capacity, interest-rate exposure, covenant headroom and cash needs for acquisition integration and future capital projects.
- Developments in the meal-tax dispute, unrecognized refund claims, Kerzner appeal and potential environmental exposure.