Monarch Casino & Resort, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company operates Atlantis Casino Resort Spa in Reno, Nevada, and Riviera Black Hawk in Colorado. Results are unaudited interim results. Black Hawk was acquired April 26, 2012, so the prior-year comparisons include only its post-acquisition operations.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $49.7 million | $42.5 million | $95.3 million | $75.4 million |
| Income from operations | $10.2 million | $3.4 million | $17.4 million | $6.2 million |
| Net income | $6.1 million | $1.8 million | $10.4 million | $3.4 million |
| Diluted earnings per share | $0.37 | $0.11 | $0.63 | $0.21 |
| Adjusted EBITDA | $14.8 million | $9.6 million | $26.9 million | $16.2 million |
| Cash from operating activities | — | $19.0 million | $11.3 million |
Q2 net revenue increased 16.9% and net income rose approximately 241%; six-month net revenue increased 26.4% and net income rose approximately 202%. Operating margin was approximately 20.5% for Q2 versus 8.0% a year earlier, and 18.2% for the first half versus 8.3%. Growth reflects improved Atlantis results and Black Hawk’s inclusion for a full six months in 2013; the acquisition makes year-over-year comparisons less like-for-like.
Q2 Atlantis hotel occupancy was 93.7% versus 90.0%; average daily room rate was $83.91 versus $73.69. For the first half, occupancy was 88.9% versus 84.6%, and average daily room rate was $81.14 versus $70.54. Atlantis casino revenue benefited mainly from slot growth, while table-games net win declined. Management cited targeted promotions and lower casino complimentary costs; higher food commodity costs pressured food-and-beverage expenses.
- Liquidity: Cash was $17.8 million at June 30, down from $19.0 million at year-end 2012. Current assets were $30.2 million and current liabilities $24.7 million, a current ratio of approximately 1.22.
- Debt: Long-term debt was $64.8 million, down $16.3 million from December 31, 2012. The $100 million credit facility had $35.2 million available; it matures November 15, 2016. Borrowings were priced at LIBOR plus 2.0% at quarter-end. A 1-percentage-point rate increase would add about $0.6 million to annual interest expense, according to the filing.
- Cash flow and investment: Operating cash flow was $19.0 million; capital spending was $5.3 million. Financing cash use was $15.0 million, primarily debt repayment. Cash declined by $1.3 million over the six-month period.
- Covenants: The reported leverage ratio was 1.4:1 against a maximum 3.0:1; fixed-charge coverage was 13.3:1 against a minimum 1.15:1. The facility’s maximum availability begins declining by $1.5 million per quarter from July 1, 2013.
Material changes, outlook, and risks
- Black Hawk revenue was $12.4 million in Q2 and $24.0 million for the first half; 2012 comparisons include only the period since the April 2012 acquisition. Management attributed improved operations to operating changes and a focus on casino and food-and-beverage revenue.
- Monarch received conditional zoning approval in April 2013 for a major Black Hawk expansion: nearly twice the casino space, a 507-room hotel tower, restaurants, spa and pool facilities, and parking. Detailed design, cost estimates, construction timing, and financing remained pending. Management expected to announce cost and timing in late 2013; no firm project cost or financing plan is provided here.
- No specific financial guidance was provided. Management said continued weak economic conditions and aggressive competition could pressure Atlantis revenue, despite recent growth across its revenue categories. Risks also include competition from California tribal casinos, possible new gaming near key feeder markets, fuel costs, and declines in the Reno or Denver-area economies.
- A Nevada Tax Commission ruling that complimentary and employee meals were no longer subject to sales tax led to reversal of a $0.6 million accrued expense in Q2. The company withdrew claims for approximately $1.6 million of historical use-tax refunds and did not recognize those refunds.
- The company corrected an immaterial prior-period classification of promotional items from selling, general and administrative expense to a reduction of revenue. The correction changed neither operating income, net income, nor cash flows.
- Black Hawk acquisition costs were $1.6 million in Q2 2012 and $1.7 million for the first half of 2012; none were reported in 2013. The Kerzner trademark litigation was settled and the appeals dismissed in February 2013. Monarch retained rights supporting an Atlantis-branded casino resort in Nevada; Kerzner received certain rights east of the Mississippi.
- Interactive gaming operations had not commenced. Nevada approval was subject to conditions and a provider contract, neither of which had been completed by the filing.
Important facts for investors to verify
- How much of earnings growth reflects sustainable Atlantis operating improvement versus Black Hawk’s additional months in the comparison?
- What are the final Black Hawk expansion cost, schedule, financing sources, and expected returns, and have the zoning conditions been satisfied?
- How will quarterly reductions in credit-facility availability affect liquidity and planned capital spending?
- Whether economic softness, gaming competition, commodity costs, or variable interest rates materially affect future results.
- Whether interactive gaming licensing conditions are met and operations begin; the filing provides no launch date or projected financial contribution.