Monarch Casino & Resort, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Monarch operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $59.9 | $58.2 | $116.2 | $111.6 |
| Operating income | $11.3 | $11.6 | $19.9 | $19.3 |
| Net income | $9.2 | $7.2 | $16.0 | $12.1 |
| Diluted EPS | $0.50 | $0.40 | $0.86 | $0.67 |
| Operating cash flow | — | $28.5 | $18.3 |
- Net revenue rose 2.9% in Q2 and 4.1% for the half year. Operating income was down 1.8% in Q2 but up 3.2% year to date. Net income increased 27.6% and 31.9%, respectively.
- Net margin was approximately 15.4% in Q2 versus 12.4% a year earlier, and 13.8% for the half year versus 10.8%. Profit growth benefited substantially from lower tax expense; the six-month effective tax rate was 19.2%, compared with 35.6% in 2017, primarily reflecting the federal corporate tax-rate reduction.
- Q2 casino revenue reported fell 31.3%, and six-month casino revenue fell 29.5%, largely because ASC 606 reclassified player rewards and complimentary offerings. On the prior accounting basis, casino revenue increased 1.4% in Q2 and 3.5% for the half year. Low table-games hold constrained Q2 casino growth.
- Reported food-and-beverage and hotel revenues increased, but the new accounting standard also changed their presentation and associated expense ratios. Hotel occupancy was 91.5% in Q2 versus 88.2%; reported ADR was $108.73 versus $83.08, with much of the ADR increase reflecting complimentary rooms valued at retail rather than discounted rates.
- Q2 SG&A increased to $16.2 million from $15.1 million; as a share of net revenue it rose to 27.0% from 25.9%. Interest expense was $42,000 in Q2 and $122,000 for the half year, lower year over year largely because more interest was capitalized during construction.
Cash, debt and capital spending
- At June 30, cash and equivalents were $27.1 million, down from $29.2 million at year-end 2017. Current assets were $40.1 million and current liabilities $55.7 million.
- Long-term debt was $37.0 million. The $250 million revolving facility had $212.4 million available, alongside a $0.6 million standby letter of credit; no draws had been made on that letter. Debt pricing was one-month LIBOR plus 1.00% (LIBOR was 2.10%). A 1 percentage-point rate increase on outstanding borrowings would add about $0.4 million to annual interest cost.
- Operating cash flow was $28.5 million, up 55.6%; management attributed the increase partly to higher earnings, working-capital changes and the ASC 606 accounting change. Investing cash outflow was $41.3 million. Cash paid for capital expenditures was approximately $28.5 million, principally for the Black Hawk expansion and equipment. The company borrowed $10.8 million during the half year to help fund expansion spending.
- Reported leverage and fixed-charge coverage ratios were 0.6:1 and 45.8:1, respectively, against limits of no more than 3.5:1 and at least 1.15:1.
Outlook, risks and unusual items
- The Black Hawk project is planned to add a 23-story hotel tower with approximately 500 rooms, expanded casino space, spa and pool facilities, restaurants and bars. The budget was increased to approximately $264–$269 million after scope changes and higher construction and furnishing costs; remaining cost was estimated at $206–$213 million at June 30.
- Management expected to open the substantial majority of the expansion in Q2 2019, with remaining elements in the following quarter. Funding is expected from operating cash flow and the credit facility. The filing cautions that timing, budget and expected returns are not assured; construction, labor, materials, financing and operating cash flow are key risks. No specific earnings or revenue guidance was provided.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased opening retained earnings by $4.86 million due to the change in accounting for player-club points and changed revenue and expense classifications. The company said it did not affect net income for the reported 2018 periods; 2017 results were not restated, limiting direct line-item comparability.
- Management said cash balances, operating cash flow and available borrowing capacity should fund operations, debt obligations and planned capital expenditures for the next 12 months, while noting dependence on economic, competitive and regulatory conditions. The facility’s revolving commitment is scheduled to reduce to $50 million after the expansion is completed, and excess cash-flow prepayments may be required depending on leverage.
- Related-party arrangements include property leases with an entity in which major stockholders have interests. Management reported no material changes to previously disclosed risk factors and no known legal matters expected to have a material adverse effect. Disclosure controls were concluded effective.
Investor facts to verify
- Separate operating trends from ASC 606 presentation effects when comparing casino, hotel, food-and-beverage revenue and departmental expense ratios.
- Track Black Hawk construction progress, remaining costs, project funding, and the targeted 2019 opening schedule.
- Monitor expansion-related borrowing, facility availability, variable-rate exposure, covenant compliance and the post-completion reduction in revolving capacity.
- Assess the sustainability of earnings growth apart from the lower tax rate and stock-based compensation tax benefits.
- Review assumptions for player-club point redemptions and breakage, and the terms and costs of related-party leases.