Business context and reporting period
Monarch Casino & Resort, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It operates Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Casino Black Hawk in Colorado; the two properties are reported as one segment.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $57.1 | $53.6 | $161.4 | $150.8 |
| Income from operations | $12.3 | $10.0 | $28.4 | $24.6 |
| Net income | $7.8 | $6.4 | $18.1 | $15.5 |
| Diluted EPS | $0.45 | $0.37 | $1.03 | $0.90 |
| Operating cash flow | Not separately provided | Not separately provided | $29.2 | $28.4 |
| Cash and equivalents at period end | $19.5 at September 30, 2016 | $21.2 at December 31, 2015 |
For the nine-month period, gross revenue was $196.6 million, less $35.2 million in promotional allowances. Cash used in investing was $19.8 million and cash used in financing was $11.1 million; cash declined by $1.7 million from year-end 2015. Property and equipment stood at $211.9 million, including $50.2 million of construction in progress.
At September 30, 2016, debt was $29.9 million, with $220.1 million available under the $250 million credit facility. The reported leverage ratio was 0.6:1 against a maximum of 3.5:1; fixed-charge coverage was 46.4:1 against a minimum of 1.15:1. The current ratio is not stated in the filing.
Material changes versus prior comparable periods
- Q3 net revenue rose $3.5 million year over year; net income increased 22.5% and diluted EPS increased 21.6%, according to management.
- For the first nine months, net revenue increased 7.1%, operating income 15.4%, and net income 16.5% year over year.
- Casino revenue rose 6.0% in Q3 and 7.0% year to date. Food and beverage revenue rose 6.1% and 6.6%, respectively; hotel revenue rose 3.8% and 4.8%.
- SG&A increased to $14.4 million in Q3 and $42.1 million year to date, primarily reflecting payroll, benefits, parking-lot lease expense and, in Q3, higher legal fees. As a percentage of net revenue, SG&A declined to 25.3% in Q3 and 26.1% year to date.
- Year-to-date operating cash flow increased 2.6%, while investing cash outflow decreased from $24.6 million to $19.8 million. Debt declined from $40.9 million at December 31, 2015, and the amended facility moved the remaining debt to long-term classification.
Outlook, commentary, risks and unusual items
- Black Hawk expansion: The company expected temporary occupancy approval and opening of a new parking structure in November 2016, with up to $3 million of remaining garage work funded from operating cash flow. It expected hotel-tower and casino-expansion construction to begin in Q1 2017 and the overall project to finish in Q2 2019. The stated project cost was approximately $229–$234 million, expected to be funded by operating cash flow and the credit facility. Plans include a 23-story tower with about 500 rooms, expanded casino space, spa and pool, restaurants and bars.
- Financing: The July 2016 amended facility increased maximum capacity from $100 million to $250 million and extended maturity to July 20, 2021. After expansion completion, the revolving commitment is scheduled to reduce to $50 million, with qualifying outstanding revolver debt converted to a term loan. Excess-cash-flow prepayments may be required depending on leverage, no later than December 31, 2019. A 1 percentage-point rate increase on period-end debt would add about $0.3 million to annual interest cost.
- Liquidity assessment: Management said cash, operating cash flow and available borrowings should fund operations, debt service and planned capital expenditures over the next 12 months, while noting that adverse conditions or cash needs beyond borrowing capacity could require cuts or delays to capital spending, asset sales, debt restructuring or equity financing.
- Operating risks: Management cited competition, including California tribal casinos and potential new gaming near key markets; labor-cost pressure; economic conditions and customer discretionary spending; fuel costs; construction risks; regulatory and licensing matters; and cybersecurity and information-technology risks. It also warned that gaming legalization near Denver could adversely affect Black Hawk and alter or delay expansion plans.
- Commitments and related parties: Contractual cash obligations totaled $63.9 million, including $21.9 million of operating leases, $9.7 million of purchase obligations, $2.4 million of construction commitments and $29.9 million of borrowings. Interest was excluded because it could not be reliably determined; much of the larger expansion work had not yet been contracted. The Atlantis parking-lot and driveway leases involve an entity in which major Farahi family stockholders have interests. The 20-year parking-lot lease has minimum annual rent of $695,000 and a $1.6 million payment obligation if the renewal option is not exercised.
- Unusual items: A $0.6 million loss on disposal of assets was recorded in Q2 2016 after replacement of Atlantis hotel-tower doors. A change in the estimated depreciable life of the existing Black Hawk parking structure affected nine-month 2016 depreciation by $266,000 and net income by $173,000; the structure was fully depreciated by June 30, 2016. The new garage was then expected to be completed in Q4 2016.
- The company said there were no material changes to previously disclosed risk factors. It reported no material expected impact from known legal matters and stated that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the parking structure opened on the expected schedule and whether the hotel and casino expansion remains on schedule and within the stated cost range.
- Actual expansion funding, future borrowing, interest expense and compliance with credit-facility covenants and mandatory repayment provisions.
- Whether operating growth can continue amid higher labor costs, competitive marketing and potential gaming competition in key feeder markets.
- The financial and governance implications of the related-party Atlantis leases, including the renewal and termination-payment terms.
- Future capital commitments, since substantial portions of the expansion were not yet under contract at September 30, 2016.