Monarch Casino & Resort, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2023; comparisons are with the three months ended March 31, 2022. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Resort Spa Black Hawk in Colorado. The two properties are reported as one segment.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net revenue | $116.6 million | $108.3 million; up 7.7% |
| Income from operations | $23.2 million | $21.3 million |
| Net income | $17.7 million | $18.1 million; down 2.5% |
| Diluted EPS | $0.90 | $0.92 |
| Operating cash flow | $61.5 million | $35.4 million |
| Cash and cash equivalents | $34.4 million | $38.8 million at Dec. 31, 2022 |
| Long-term debt | $51.0 million | No balance at Dec. 31, 2022 |
- Casino revenue rose 6.5%, led primarily by higher gaming volume in Black Hawk. Food and beverage revenue grew 12.6%; hotel revenue grew 1.8%; other revenue rose 16.5%.
- Operating margin was approximately 19.9% versus 19.7% a year earlier. Net margin was approximately 15.2% versus 16.7%. The higher effective tax rate—21.7% versus 12.5%—contributed to lower net income despite revenue and operating-income growth.
- Food and beverage operating expense fell to 74.8% of its revenue from 79.6%. Casino expense rose to 37.7% of casino revenue from 35.6%, and hotel expense rose to 41.3% of hotel revenue from 38.0%, primarily reflecting labor costs and, for hotels, lower average daily rates.
- Operating cash flow included a $28.6 million benefit from the change in income taxes receivable/payable, primarily related to receipt of an income tax refund. Investing activities used $15.2 million, mainly for property upgrades and equipment. Financing activities used $50.7 million, including the $95.6 million dividend payment.
- At March 31, current assets were $57.0 million and current liabilities were $113.3 million. Total assets were $663.8 million and total liabilities were $200.4 million.
Material changes versus the prior comparable period
- Revenue increased across all reported categories; income from operations improved, but net income and diluted EPS declined, principally because of the higher effective tax rate.
- Operating cash flow increased, largely due to the tax refund-related working-capital movement. Capital spending was lower than the prior-year period.
- The company replaced its prior credit agreement on February 1, 2023 with a revolving facility of up to $100 million, with an option to increase capacity by another $100 million within six months. It had drawn $51 million at quarter-end; $48.4 million was available.
- Stockholders’ equity fell to $463.4 million from $539.0 million at year-end, primarily reflecting the $95.6 million one-time dividend, partly offset by quarterly net income and other equity movements.
Outlook, commentary, risks and unusual items
- Management said operating cash flow and available credit were expected to be sufficient for operations and planned capital expenditures for the twelve months following filing. The company did not provide numerical revenue or earnings guidance.
- Management cited labor availability and wage inflation, broader price inflation, competitive marketing pressure, and expense management as operating considerations. It described Reno as competitive and Black Hawk as benefiting from its completed expansion, while noting staffing challenges at both properties.
- The credit facility matures January 1, 2025, is secured by substantially all company assets, and carried a 5.91% interest rate at quarter-end. Leverage and fixed-charge coverage ratios were 0.3:1 and 6.7:1, respectively, against covenants of no more than 2.5:1 and at least 1.1:1. A 1% rate increase on the outstanding balance would raise annual interest cost by approximately $0.5 million.
- The board declared and paid a one-time $5.00-per-share dividend in March. It also approved a planned annual dividend of $1.20 per share beginning in Q2 2023; future payments remain subject to board review and may be suspended.
- Construction disputes with PCL Construction Services and related mechanics’ lien claims remain unresolved. The company reported that it could not determine the probability of outcomes or reasonably estimate any loss or gain. Construction-litigation professional fees were $0.5 million in Q1 2023, compared with $1.3 million in Q1 2022. A newly filed company lawsuit against PCL was stayed by joint request through July 17, 2023.
- Other disclosed risks include economic and gaming-market conditions, interest rates, competition, labor and supply costs, regulation and licensing, cybersecurity, weather and natural disasters, and dependence on two resort properties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and operating performance persist, particularly at Black Hawk, and how labor and competitive pressures affect margins.
- The sustainability of operating cash generation after accounting for the tax refund benefit, capital spending, and the substantial dividend outflow.
- Borrowings, interest expense, facility availability, covenant headroom, and refinancing plans ahead of the January 2025 maturity.
- Developments, potential costs, and any financial impact from the PCL litigation and related lien claims, which the filing says cannot currently be estimated.
- Whether the board continues the quarterly dividend and how distributions balance with capital needs and other uses of cash.