Monarch Casino & Resort, Inc. — Q2 2014 Form 10-Q
Business and reporting period: The filing covers the quarter and six months ended June 30, 2014. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada, and Monarch Black Hawk Casino in Colorado. Financial amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $47.8 | $49.7 | $93.3 | $95.3 |
| Operating income | $5.5 | $10.2 | $10.8 | $17.4 |
| Net income | $3.0 | $6.1 | $6.3 | $10.4 |
| Diluted EPS | $0.18 | $0.37 | $0.37 | $0.63 |
| Operating margin | 11.4% | 20.5% | 11.6% | 18.2% |
Cash flow and investment: First-half operating cash flow was $14.1, down 25.9% from $19.0. Investing activities used $9.3, including $9.5 of property and equipment purchases; financing activities used $7.0, including $4.9 of debt principal payments. Cash declined $2.2 to $17.2.
Liquidity and debt: At June 30, cash was $17.2 and current assets and liabilities were $32.1 and $25.2, respectively (current ratio about 1.28). Long-term debt was $48.9, down from $53.8 at year-end 2013. The company reported $43.6 available under its credit facility, which matures in November 2016 and bears variable interest. A 1 percentage-point rate increase would raise annual interest cost by about $0.5. The company reported covenant ratios of 1.12:1 leverage versus a 2.5:1 maximum, and 27.05:1 fixed-charge coverage versus a 1.15:1 minimum.
Changes and operating drivers
- Q2 net revenue fell 3.7%; operating income fell 46.2% and net income fell 50.6%. For the first half, net revenue declined 2.0%, operating income 37.8%, and net income 39.3%.
- Casino revenue declined at both properties. Black Hawk results were affected by renovation disruption and about 13% fewer slot machines on the floor. The move from cash-voucher promotions to free play also shifts the accounting presentation between promotional allowances and casino revenue. Atlantis faced lower gaming volume.
- Food and beverage revenue increased, but costs as a share of revenue rose. Hotel revenue fell amid lower room rates and slightly lower occupancy, with management citing weaker Reno convention and meeting demand. Other revenue growth was attributed mainly to the Atlantis spa and salon.
- SG&A rose to $13.2 in Q2 and $26.4 for the first half. Interest expense declined as debt and borrowing costs fell.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said cash, operating cash flow, and facility availability should fund operations, debt service, and planned capital expenditures over the next 12 months, while noting dependence on factors outside its control.
- Black Hawk’s renovation continued in phases; the first phase was expected to finish in Q3 2014, with the remaining phases estimated to take six to seven months each. A larger master plan would nearly double casino space and add a 507-room hotel and other amenities, but costs, schedule, and financing were not finalized. Management expects to seek additional debt financing; availability on acceptable terms is not assured.
- First-half capital expenditures were $9.5 versus $5.3 a year earlier. Contractual cash obligations totaled $68.8, including $10.6 of construction contracts and $48.9 of facility borrowings. The expansion’s full estimated cost is not included because it had not been finalized.
- Q2 included a $1.0 expense for campaigning against proposed Colorado gaming ballot initiatives and a $0.3 loss on disposal of slot machines. The shortened estimated life of Black Hawk’s existing parking structure increased depreciation by $0.9 in Q2 and $1.9 in the first half; management said this reduced first-half net income by $1.2 and EPS by $0.07.
- Competitive pressure, economic conditions, gaming regulation and taxes, construction disruption, and potential financing constraints are identified risks. Management did not expect ordinary-course legal claims to materially affect results. The company will allow its interactive-gaming approval to lapse pending improved market conditions.
Important facts for investors to verify
- Whether Black Hawk construction disruption and the promotional-method change continue to affect reported casino revenue and property performance.
- The final scope, cost, schedule, and financing plan for the Black Hawk expansion, and whether financing will be available on acceptable terms.
- Progress in Atlantis and Black Hawk revenue trends, especially gaming volume, hotel rates and occupancy, and operating expense ratios.
- Debt-facility terms, variable-rate exposure, covenant compliance, and remaining liquidity as capital spending proceeds.
- The effects of the accelerated parking-structure depreciation and the Colorado ballot-initiative expense on comparisons with future periods.
- Related-party arrangements, including the Atlantis driveway lease from an entity connected to controlling stockholders.