Monarch Casino & Resort, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Resort Spa Black Hawk in Colorado.
Financial performance and liquidity
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 period |
|---|---|---|---|
| Net revenue | $15.2 million | $66.2 million | $62.8 million Q2; $121.5 million six months |
| Operating income (loss) | $(5.5) million | $(3.4) million | $11.6 million Q2; $20.4 million six months |
| Net income (loss) | $(4.3) million | $(2.3) million | $9.3 million Q2; $16.3 million six months |
| Diluted earnings (loss) per share | $(0.24) | $(0.13) | $0.50 Q2; $0.88 six months |
| Operating cash flow | Not separately provided | $(10.0) million | $31.7 million six months |
| Capital expenditures paid | Not separately provided | $22.6 million | $73.6 million six months |
- Q2 revenue declined 75.9% year over year; six-month revenue declined 45.5%. Operations at both properties were suspended for roughly three months, with reopening in June under capacity and service restrictions.
- Q2 casino revenue fell 69.8%, food and beverage revenue 83.9%, hotel revenue 83.3%, and other revenue 71.8%. For the six months, the respective declines were 40.2%, 50.5%, 54.4%, and 45.5%.
- Cost actions reduced Q2 SG&A to $8.9 million from $16.5 million, but SG&A rose to 58.5% of revenue from 26.3%. Food and beverage operating expense was 96.6% of that segment’s revenue, versus 79.6%; hotel operating expense was 61.8%, versus 39.1%.
- At June 30, cash and cash equivalents were $38.3 million, current assets $56.6 million, and current liabilities $61.0 million. Debt principal outstanding under the credit facility was $207.3 million: $191.3 million term debt and $16.0 million revolver borrowings, with $34.0 million of revolver capacity remaining. Mandatory principal payments due over the next 12 months were estimated at $25.0 million.
- Six-month operating cash flow turned negative, versus positive cash flow a year earlier, primarily reflecting the net loss and decreases in accounts payable and accrued expenses. Cash declined by $22.2 million from year-end 2019.
Material changes and unusual items
- COVID-19 closures and restricted reopening drove the sharp revenue decline and net losses. Atlantis reopened June 4 and Black Hawk June 17; certain facilities and services remained closed or limited at quarter-end. Management reported lower visitation and bookings and expected near-term weakness.
- The company reduced expenses through furloughs of approximately 90% of employees during the closure, a 50% executive salary reduction, and the CEO and board members foregoing cash compensation.
- Q2 other operating items included $0.2 million of expansion pre-opening costs, $0.2 million of construction-litigation fees, $0.5 million of Colorado lobbying expenses, and $0.3 million of pandemic-related reopening costs. Six-month amounts included $1.0 million, $0.3 million, $0.9 million, and $0.3 million, respectively.
- The company recorded no goodwill impairment after testing its Black Hawk reporting unit at June 30. Management cautioned that assumptions are uncertain and future impairment could result if projected performance or other factors deteriorate.
Outlook, financing, and risks
- Management expected the Black Hawk expansion podium and some hotel floors to open in Q3 2020, with the balance of the hotel tower in Q4 2020. The project’s overall budget was approximately $264–$269 million; estimated remaining costs were $9–$16 million. Timing, cost, approvals, and eventual returns were not assured.
- The credit facility required a maximum total leverage ratio of 3.5:1 and a minimum fixed-charge coverage ratio of 1.15:1. Reported ratios were 5.2:1 and 1.7:1, respectively. Lenders waived specified defaults and financial covenant defaults through September 29, 2020, and certain closure-related defaults through September 30, 2020. These waivers were temporary.
- The company had a term sheet and firm commitment letters from participating lenders for a refinancing intended to increase the facility and extend its term, but completion depended on signing definitive documents. Management warned that failure to complete refinancing could materially adversely affect financial condition.
- Management believed available liquidity and anticipated operating cash flow would fund operations, debt service, and planned capital expenditures for the next 12 months. It also warned that renewed closures, weak demand, additional restrictions, or cash needs exceeding borrowing capacity could require reduced or delayed capital spending, asset sales, debt restructuring, or equity issuance.
- The $207.3 million facility balance carried variable rates; a 1 percentage-point rate increase would add approximately $2.1 million to annual interest cost. The company disclosed no derivatives for trading or speculative purposes.
- PCL Construction Services’ lawsuit concerning the Black Hawk expansion and the company’s counterclaims remained in preliminary discovery; trial was set for May 17, 2021. The company could not estimate the probability or amount of any loss or gain. The filing also identifies construction execution, pandemic-related demand and operations, covenant compliance, refinancing, and regulatory approvals as material risks.
Important facts for investors to verify
- Whether the proposed refinancing was completed, on what terms, and whether additional covenant waivers were obtained after September 2020.
- Post-reopening visitation, revenue, margins, cash generation, and the effect of any renewed operating restrictions.
- Actual Black Hawk expansion opening dates, remaining costs, funding needs, and any construction-litigation outcomes or related payments.
- Compliance with debt service and liquidity requirements, including the $25.0 million expected principal payments and remaining revolver availability.
- Whether changing pandemic and operating forecasts affected goodwill valuations or led to impairment charges in later periods.