Business context and reporting period
Monarch Casino & Resort, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The company operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado. The filing also presents unaudited quarterly results, including fourth-quarter 2015.
Key financial results
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net revenue | $202.2 million | $187.8 million | +7.7% |
| Income from operations | $32.6 million | $22.2 million | +46.5% |
| Net income | $20.7 million | $14.2 million | +45.6% |
| Diluted EPS | $1.19 | $0.83 | +43.4% |
| Operating margin | 16.1% | 11.8% | +4.3 percentage points |
| Operating cash flow | $38.2 million | $31.2 million | +$7.0 million |
| Capital expenditures | $38.1 million | $21.7 million | +$16.3 million |
Revenue growth reflected higher casino revenue at both properties, improved Black Hawk results after casino-floor upgrades, increased local visitation at Atlantis, and higher food, beverage and hotel revenue. Atlantis occupancy was 89.7% versus 89.1%; average daily room rate was $76.92 versus $73.66. Casino revenue rose 8.1%, and food and beverage revenue rose 8.1%.
At December 31, 2015, cash and cash equivalents were $21.2 million, total assets $274.8 million and stockholders’ equity $203.9 million. Credit Facility borrowings were $40.9 million, down from $46.3 million; the full balance was classified as current because the facility matures November 15, 2016. The facility had $48.5 million of stated availability. Management reported a 0.8:1 leverage ratio and 42.0:1 fixed-charge coverage ratio against covenant limits of no more than 2.0:1 and at least 1.15:1, respectively.
Interest expense, net of capitalized amounts, fell to $0.7 million from $1.1 million. The effective income-tax rate increased to 35.19% from 32.82%. Net income margin was approximately 10.2%, compared with 7.6% in 2014. Cash flow from operations was roughly comparable to capital spending, leaving little internally generated cash after investment before financing and other cash movements.
Material changes versus prior period
- Net revenue increased 7.7% and operating income increased 46.5%; operating expenses rose more slowly than revenue overall.
- Black Hawk completed the final phase of its existing casino renovation in August 2015. Casino revenue benefited from the upgrades, while the expansion and parking-structure project drove higher capital spending.
- Casino operating expenses declined to 42.1% of casino revenue from 42.4%; food and beverage expenses declined to 39.4% of revenue from 40.9%. Hotel expenses increased to 30.0% of hotel revenue from 27.6%, partly due to higher payroll, supplies and maintenance.
- Depreciation and amortization decreased to $15.9 million from $17.8 million. Separately, the revised expected demolition timing for Black Hawk’s existing parking structure increased 2015 depreciation expense by $1.4 million and reduced net income by approximately $0.9 million, or $0.05 per share.
- 2014 included $1.9 million of costs opposing a Colorado gaming ballot initiative; no comparable expense was recorded in 2015.
Outlook, risks and unusual items
- Black Hawk expansion: The new nine-story parking structure, planned to increase parking from about 500 to 1,500 spaces, was expected to be completed in the second quarter of 2016. Management expected to begin the hotel tower and casino expansion in the fourth quarter of 2016, with overall completion in the third quarter of 2018. The planned 23-story tower includes about 500 rooms, expanded casino space, a spa and pool, restaurants and bars. Estimated total cost was $229–$234 million; management expected to fund it with operating cash flow and an expanded or replacement credit facility.
- Refinancing and liquidity: Management expected to negotiate a new or amended facility before the existing facility’s November 2016 maturity, but gave no assurance financing would be available timely or on favorable terms. The company cited operating cash flow, cash balances and credit availability as expected sources for near-term needs, subject to refinancing and business conditions.
- Operating and regulatory risks: Results depend on discretionary consumer spending and economic conditions in Reno, Denver, California and the Pacific Northwest. Competition, gaming taxes and regulation, licensing, construction delays or cost overruns, labor costs, weather, insurance adequacy, cybersecurity, and potential environmental liabilities could adversely affect operations.
- Related-party leases: The company entered a 20-year parking-lot lease with Biggest Little Investments, an entity in which members of the Farahi family have interests. Minimum annual rent is $695,000; the company also disclosed a $1.6 million payment obligation if it does not exercise the renewal option. Related-party relationships and lease terms merit review.
- Other: Monarch allowed its Nevada interactive-gaming approval to lapse and is not operating that business. The company reported no material subsequent events, and management believed ordinary-course legal claims would not materially affect results. The company does not anticipate cash dividends in the foreseeable future.
Most important facts for investors to verify
- Progress, final cost and schedule of the Black Hawk parking structure and resort expansion, including permits and construction commitments.
- Whether Monarch secures sufficient refinancing or replacement borrowing capacity before the November 2016 maturity, and the resulting interest rate, covenants and available funds.
- Cash generation relative to expansion spending, debt reduction and liquidity needs; confirm the facility’s current availability and covenant headroom.
- Whether 2015 revenue and margin improvement is sustained, particularly at Black Hawk after renovation and at Atlantis amid labor-cost and competitive pressures.
- Terms, governance and economics of the Biggest Little Investments related-party leases, including rent escalations and the non-renewal payment.
- The audited statements report 2015 net income of $20.659 million; reconcile this with the Selected Financial Data table, which lists $20.540 million.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2015.