Monarch Casino & Resort, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 8, 2012. Unaudited interim financial statements. Monarch operated Atlantis Casino Resort Spa in Reno and, following its April 26, 2012 acquisition, Riviera Black Hawk Casino in Colorado. Prior-year comparisons exclude Black Hawk.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenue | $47.9 million | $36.2 million | $126.7 million | $106.6 million |
| Income from operations | $6.9 million | $0.2 million | $13.1 million | $8.5 million |
| Net income | $4.1 million | $11,000 | $7.6 million | $5.1 million |
| Diluted EPS | $0.25 | $0.00 | $0.47 | $0.31 |
Q3 net revenue rose 32.3%, largely reflecting the newly acquired Black Hawk operation; Atlantis revenue increased 1.8%. Nine-month net revenue increased 18.8%. Operating margin was approximately 14.4% for Q3 2012 versus 0.4% in Q3 2011, which included $3.5 million of Adventure Inn demolition expense; nine-month operating margin was 10.3% versus 8.0%. Net margin was approximately 8.6% for Q3 2012 and 6.0% for the first nine months.
Black Hawk contributed $11.0 million of Q3 revenue and $2.7 million of operating income. Since acquisition, it contributed $19.0 million of revenue, $4.3 million of operating income and $2.7 million of net income. Q3 total Adjusted EBITDA was $12.3 million versus $7.8 million; nine-month Adjusted EBITDA was $28.5 million versus $23.8 million. Adjusted EBITDA is a non-GAAP measure.
Atlantis trends were mixed. Q3 casino and food-and-beverage revenue improved, while hotel revenue fell as lower room rates outweighed higher occupancy. For the first nine months, Atlantis net revenue increased 1.1%; hotel occupancy declined to 89.6% from 90.8%, and average daily room rate fell to $72.69 from $76.38. Promotional allowances increased as a share of gross revenue, to 18.5% in Q3 from 16.9% and to 18.1% for nine months from 16.8%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $20.7 million, up from $17.6 million. Investing cash outflow was $74.7 million, including $66.7 million net cash paid for the Black Hawk acquisition and $8.0 million of property and equipment spending. Financing cash inflow was $57.4 million. Cash increased to $17.0 million from $13.6 million at year-end 2011.
- At September 30, 2012, long-term debt was $82.1 million, up from $24.7 million at December 31, 2011; the balance sheet showed no current debt maturities. Cash less debt was approximately negative $65.1 million. Interest expense was $0.5 million in Q3 and $1.4 million for nine months.
- The revolving credit facility provides up to $100 million and matures November 15, 2016. Borrowings carried pricing of LIBOR plus 2.25% at quarter-end; one-month LIBOR was 0.21%. The company reported covenant leverage of 2.03:1 against a maximum of 3.25:1 and fixed-charge coverage of 19.1:1 against a minimum of 1.15:1.
- Current assets were $25.2 million and current liabilities $26.5 million at September 30, 2012. Management said cash, operating cash flow and available facility borrowings should fund operations, debt obligations and planned capital spending for the next 12 months, subject to business and market risks.
Material changes, outlook and risks
- The April acquisition was funded principally with credit-facility borrowings. Preliminary purchase accounting included $26.6 million of goodwill and $10.9 million of net intangible assets; the final allocation was expected by December 31, 2012. Acquisition expenses were $0.5 million in Q3 and $2.2 million for nine months.
- Management described continued economic weakness and competition as pressures on Atlantis, and expected these conditions to continue weighing on revenue. Black Hawk operational changes and a master plan for potential casino, restaurant and public-area renovations were under evaluation; a parking facility and hotel were among possible projects, subject to evaluation. No quantified earnings or revenue guidance was provided.
- Risks include acquisition integration and leverage, renovation costs and delays, financing availability, competition, economic conditions, gaming regulation and taxes, severe weather, and possible environmental liabilities near the Black Hawk property. A 1% increase in borrowing rates would raise annual interest cost by approximately $821,000.
- Monarch received Nevada approval for an interactive-gaming operator license, but conditions remained outstanding, including regulatory approvals and a contract with a licensed service provider. No operations had begun; Nevada interactive gaming was limited to intrastate poker. The company said it would need an extension if it did not commence operations within six months of approval.
- The company estimated a roughly $1.5 million Nevada use-tax refund claim, excluding interest, but had recognized none. It accrued $296,000 of tax related to complimentary meals under the state’s 2012 directive. The IRS examination of 2006–2008 returns was settled during Q3, with $1.1 million paid.
- In the Atlantis trademark dispute, the district court entered judgment for Monarch; Kerzner’s appeal and Monarch’s cross-appeal remained pending, with appellate briefing stayed while the parties explored settlement. Management said other ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth and improved profitability reflects Black Hawk’s contribution versus changes at Atlantis, and how the acquisition performs on a comparable full-period basis.
- The final Black Hawk purchase-price allocation and any resulting changes to goodwill, intangible assets, depreciation or amortization.
- Remaining credit-facility availability, covenant headroom, floating-rate exposure and funding needs for planned renovations and capital commitments.
- Progress, cost, timing and approvals for Black Hawk improvements and the interactive-gaming launch; neither project had a firm completion or financial forecast in this filing.
- Developments in the Nevada use-tax refund claims and complimentary-meal tax treatment, environmental diligence at Black Hawk, and the pending trademark appeals.