Monarch Casino & Resort, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Monarch operates the Atlantis Casino Resort Spa in Reno and, since its April 26, 2012 acquisition, the Riviera Black Hawk Casino in Colorado. Black Hawk’s results are included in Q1 2013 but not Q1 2012, limiting year-over-year comparability.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Gross revenue | $58.6 million | $42.5 million | Up 37.8% |
| Net revenue | $47.6 million | $34.9 million | Up 36.6%; includes $11.6 million from Black Hawk |
| Income from operations | $7.2 million | $2.9 million | Operating margin 15.1%, versus 8.2% |
| Net income | $4.3 million | $1.6 million | Up 160%; diluted EPS $0.26 versus $0.10 |
| Adjusted EBITDA | $12.1 million | $6.6 million | Non-GAAP measure; includes Black Hawk in 2013 |
| Cash from operations | $11.9 million | $4.7 million | Increase attributed primarily to higher income, including Black Hawk |
| Capital expenditures | $2.4 million | $1.4 million | Primarily Black Hawk upgrades and gaming equipment |
| Cash and cash equivalents | $19.2 million | $19.0 million at Dec. 31, 2012 | Quarter-end balance |
| Debt outstanding | $71.8 million | $81.1 million at Dec. 31, 2012 | $9.3 million of principal repaid during quarter |
Net margin was approximately 8.9%, compared with 4.7% in Q1 2012. The effective income tax rate was 35.6%, versus 35.0%; the increase reflected Colorado taxable income following the Black Hawk acquisition. Cash interest paid was $0.5 million. The filing reports current assets of $32.6 million and current liabilities of $29.3 million at quarter-end.
Operating performance and material changes
- Atlantis: Casino revenue declined 1.2% year over year. Food and beverage revenue rose 3.0%, hotel revenue rose 21.6%, and other revenue rose 9.0%. Hotel occupancy improved to 84.9% from 81.4%; average daily room rate increased to $77.27 from $66.09, and RevPAR to $71.60 from $58.24.
- Black Hawk: Q1 net revenue was $11.6 million, operating income $2.8 million, net income $1.4 million, and Adjusted EBITDA $4.0 million. There was no comparable 2012 contribution because Monarch acquired the property in April 2012.
- SG&A increased to $14.0 million from $11.7 million, primarily reflecting $2.5 million of Black Hawk expense; SG&A declined as a share of net revenue to 29.3% from 33.5%. Depreciation and amortization rose to $4.6 million from $3.4 million, including $1.2 million related to Black Hawk assets.
Liquidity, debt, outlook and risks
- The $100 million credit facility had $71.8 million drawn and $28.2 million available at March 31, 2013. It matures November 15, 2016, is secured by substantially all Monarch property, and bears interest at LIBOR or a base rate plus a leverage-based margin; pricing was LIBOR plus 2.25% at quarter-end. A 1 percentage-point rate increase on the outstanding balance would raise annual interest cost by approximately $0.7 million.
- Monarch reported a 1.7:1 leverage ratio against a maximum covenant of 3.0:1, and 10.1:1 fixed-charge coverage against a minimum of 1.15:1. Maximum facility availability is scheduled to decline by 1.5% per quarter beginning July 1, 2013.
- Management gave no numerical earnings or revenue guidance. It expects continued downward pressure on Atlantis revenue from weak Reno-area and national economic conditions and competitor marketing. Management says it is redesigning and upgrading Black Hawk and has implemented operating changes intended to improve guest experience and reduce costs.
- After quarter-end, on April 10, 2013, Black Hawk received conditional zoning approval for a major resort expansion: a 507-room hotel tower, casino expansion, restaurants, spa and pool, and parking structure. The filing describes plans and approval, not a completed project or committed construction budget.
- Risks include discretionary-spending weakness, competition from California Native American casinos and potential nearby gaming, fuel costs, construction and regulatory risks, and exposure to variable interest rates. The filing states disclosure controls were effective and no material change in internal control occurred during the quarter.
Contingencies and unusual items
- Monarch accrued $0.5 million for sales tax on complimentary and employee meals under a Nevada tax directive and regulations it believes conflict with a 2008 Nevada Supreme Court decision. It is challenging the requirement with other affected parties. Monarch has also requested approximately $1.6 million in historical use-tax refunds, excluding interest, but has not recognized the potential refunds.
- Contractual cash obligations totaled $80.9 million, including $71.8 million of credit-facility borrowings, $6.6 million of purchase obligations, and $2.5 million of operating leases. Approximately $4.7 million of purchase commitments were cancelable on 30 days’ notice.
- Related-party arrangements include the Atlantis driveway lease from a shopping center whose owners include Monarch’s controlling stockholders; quarterly lease payments were approximately $85,200. The Kerzner Atlantis trademark litigation was settled and dismissed in February 2013; the filing states the dispute is concluded and describes the parties’ respective use rights.
Important facts for investors to verify
- How much of the revenue and earnings improvement reflects Black Hawk’s inclusion rather than organic growth, particularly at Atlantis.
- Black Hawk expansion conditions, total expected investment, financing plan, construction timetable, and any required gaming or other regulatory approvals.
- Credit-facility covenant headroom, scheduled reductions in borrowing availability, refinancing needs, and sensitivity to floating interest rates.
- Potential outcome and timing of the complimentary-meal sales-tax dispute and the unrecognized $1.6 million refund claims.
- Whether Reno and Denver market conditions, competitive pressure, and management’s operating initiatives affect future revenue and cash generation.