Monarch Casino & Resort, Inc. — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2016, compared with the same 2015 periods. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. The company reports the two properties as one segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net revenue | $54.6 million | $50.0 million | $104.3 million | $97.2 million |
| Income from operations | $8.9 million | $8.0 million | $16.1 million | $14.5 million |
| Net income | $5.7 million | $5.1 million | $10.3 million | $9.1 million |
| Diluted EPS | $0.32 | $0.29 | $0.58 | $0.53 |
| Operating cash flow | Not separately presented | Not separately presented | $17.1 million | $14.9 million |
Margins: Operating margin was approximately 16.4% in Q2 2016, versus 16.1% in Q2 2015; first-half operating margin was approximately 15.4%, versus 14.9%. Net margin was approximately 10.4% and 10.2% for the respective second quarters, and 9.8% and 9.4% for the respective first halves. These percentages are calculated from reported net revenue and income.
Revenue mix and operating trends: Q2 casino revenue rose 8.9%, food and beverage 11.2%, hotel 3.5%, and other revenue 6.0% year over year. First-half net revenue increased 7.3%. Q2 hotel ADR rose to $82.93 from $79.45, while occupancy eased to 89.2% from 90.3%. First-half food and beverage revenue grew despite the Atlantis buffet’s 70-day closure for renovation; related repair, maintenance, and labor costs pressured margins.
Cash, debt, and liquidity: Cash was $19.3 million at June 30, 2016, versus $21.2 million at December 31, 2015. Debt was $35.0 million, leaving net debt of approximately $15.7 million. Under the facility then in place, $10.5 million remained available. Current assets were $31.6 million and current liabilities $30.0 million; the $35.0 million debt balance was classified as long-term following the July refinancing. First-half investing cash outflow was $14.8 million, primarily for construction and property upgrades; financing cash outflow was $4.2 million, including $5.9 million of debt repayments.
Material changes versus prior comparable periods
- Q2 net revenue increased 9.1%, operating income 11.1%, net income 11.7%, and diluted EPS 10.3% year over year. For the first half, net income increased 12.3% and diluted EPS 9.4%.
- Operating cash flow increased $2.2 million, or 15.0%, in the first half. Capital expenditures were approximately $14.8 million, broadly in line with the prior-year period.
- SG&A increased to $14.5 million in Q2 and $27.7 million in the first half, largely reflecting higher wages and benefits, marketing, and Atlantis parking lease expense. Depreciation and amortization declined in both periods.
- Interest expense fell to $60,000 in Q2 and $145,000 in the first half, primarily due to lower average borrowings.
Outlook, risks, and unusual items
- Black Hawk expansion: The new nine-story parking structure was expected to be completed in Q3 2016. Management expected to begin the hotel tower and casino expansion in Q1 2017, with full completion in Q1 2019. The planned 23-story tower includes approximately 500 rooms and nearly doubles casino space. Estimated total cost was $229–$234 million; funding was expected from operating cash flow and the amended credit facility.
- Refinancing after quarter-end: On July 20, 2016, Monarch amended its credit facility, increasing capacity from $100 million to $250 million and extending maturity from November 2016 to July 2021. The facility is intended in part to fund Black Hawk expansion costs. Borrowing margins vary with leverage; the company may have to use excess cash flow to repay borrowings depending on leverage.
- Management stated that cash, operating cash flow, and available borrowing capacity should fund operations, debt obligations, and planned capital spending over the next 12 months, but noted that adverse operating conditions or cash needs above available capacity could require cuts or delays to capital spending, asset sales, debt restructuring, or additional equity.
- Q2 results included a $607,000 loss on disposal of the Atlantis hotel tower’s replaced doors. Depreciation associated with the existing Black Hawk parking structure reflected revised estimates; the structure was fully depreciated by June 30 and was to be demolished after the new garage opened.
- Risks cited include competition, economic weakness in feeder markets, gaming expansion near Denver or in Northern California, construction execution and cost risks, regulatory and licensing matters, cybersecurity threats, and litigation. Management said normal-course claims were not expected to have a material adverse effect. No material change to previously reported risk factors was identified.
- The company disclosed related-party leases with BLI, in which company executives and major stockholders have beneficial interests. It reported $348,000 of first-half parking lot rent and $188,000 of driveway rent in 2016. Management reported effective disclosure controls and no material change in internal control over financial reporting.
No specific earnings or revenue guidance was provided. The expansion schedule and cost estimates are management expectations, not guarantees.
Important facts for investors to verify
- Progress, remaining costs, financing, and timing of the Black Hawk parking garage and resort expansion.
- Terms and conditions of the July 20, 2016 amended credit facility, including leverage-linked pricing, potential excess-cash-flow repayments, and conversion of expansion borrowings to term debt.
- Whether revenue growth continues to outpace labor, marketing, and food-and-beverage cost increases.
- Cash generation and liquidity relative to expansion spending and contractual commitments; the filing lists $5.1 million of construction-contract obligations and $11.5 million of purchase obligations at June 30.
- Potential effects of competition, market conditions, construction delays or cost overruns, regulatory developments, and cybersecurity events.