Business context and reporting period
Monarch Casino & Resort, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. It operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; the properties are reported as one segment.
Financial performance
Amounts below are in millions, except per-share data and operating statistics.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $53.414 | $49.749 | +7.4% |
| Income from operations | $7.726 | $7.159 | +7.9% |
| Net income | $4.872 | $4.575 | +6.5% |
| Diluted EPS | $0.27 | $0.26 | +3.8% |
| Operating margin | 14.5% | 14.4% | +0.1 percentage point |
| Net margin | 9.1% | 9.2% | -0.1 percentage point |
| Cash from operations | $10.310 | $10.761 | -4.2% |
| Capital expenditures | $12.246 | $8.928 | +$3.318 |
Gross revenue was $65.218 million, less $11.804 million in promotional allowances. Interest expense was $0.272 million, versus $0.085 million. The effective tax rate was 34.6%, compared with 35.3%.
Balance sheet and liquidity
At March 31, 2017, cash and cash equivalents were $24.538 million, down from $26.383 million at year-end 2016. Current assets were $35.962 million and current liabilities were $34.024 million. Long-term debt was $26.2 million; cash exceeded debt by approximately $1.7 million. The company had $223.8 million of remaining availability under its $250 million credit facility, maturing July 20, 2021. The facility is secured by substantially all company real and personal property. Reported leverage and fixed-charge coverage ratios were 0.5:1 and 49.0:1, respectively, against covenant limits of no more than 3.5:1 and at least 1.15:1.
Investing cash outflow was $12.155 million, primarily for the Black Hawk expansion and property upgrades. There were no financing cash flows in Q1 2017. Cash decreased by $1.845 million during the quarter. Management said cash, operating cash flow, and available facility borrowings should fund operations, debt obligations, and planned capital expenditures over the next 12 months.
Material changes and management commentary
- Casino revenue increased 4.0%; casino expense as a share of casino revenue improved to 42.8% from 43.6%.
- Food and beverage revenue increased 15.5%, reflecting 10.4% more covers and 4.6% higher average revenue per cover. The prior-year comparison was affected by a 70-day closure of Toucan Charlie’s buffet for renovation.
- Hotel revenue increased 10.5%; occupancy rose to 87.1% from 82.1%, ADR to $78.22 from $74.44, and RevPAR to $76.05 from $68.05. Hotel expense as a share of revenue rose to 39.1% from 31.6%, primarily due to labor and shuttle-service costs.
- SG&A increased to $14.639 million from $13.151 million, mainly due to higher wages and benefits, marketing, and property maintenance. SG&A rose to 27.4% of net revenue from 26.4%.
- Management attributed the modest net-income increase to higher revenue and operating income, partly offset by higher expenses and interest costs. It cited increased labor costs and aggressive competitor marketing as pressures at Atlantis.
Outlook, risks and unusual items
The Black Hawk expansion includes a 23-story tower, nearly double the existing casino space, approximately 500 rooms, a spa and pool, and additional restaurants and bars. Construction began in February 2017; completion of the entire project was expected in Q2 2019. The company estimated total project cost at approximately $229–$234 million and separately estimated remaining cost at $234–$242 million as of March 31, 2017. Funding is expected from operating cash flow and the credit facility; management cautioned that schedule, budget, and returns are not assured.
Risks highlighted include competition (including California tribal casinos and potential new gaming near Denver or in feeder markets), regional economic weakness, fuel costs, labor and construction pressures, regulatory and licensing matters, and cybersecurity threats. The company disclosed related-party leases with entities affiliated with major stockholders, including a 20-year parking-lot lease; failure to renew that lease would trigger a $1.6 million payment. Management said known legal matters were not expected to materially affect results, while noting outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
Effective January 1, 2017, the company adopted ASU 2016-09 for share-based compensation; it reduced Q1 tax expense by $64,000 and increased net income by $42,000. The company plans to adopt the new revenue standard on January 1, 2018; quantitative effects were still under analysis. No earnings guidance was provided.
Important facts for investors to verify
- Reconcile the stated $229–$234 million total expansion cost with the $234–$242 million remaining-cost estimate.
- Track Black Hawk construction progress, financing needs, and any changes to the Q2 2019 completion target or projected costs.
- Assess whether revenue growth can continue to offset higher labor, marketing, and other operating costs.
- Monitor credit-facility utilization, variable-rate exposure, and covenant compliance as expansion spending proceeds.
- Review the revenue-standard transition effects, particularly loyalty-program accounting and promotional-allowance presentation.
- Consider related-party lease terms and the company’s disclosed competitive, regulatory, economic, and cybersecurity risks.