Monarch Casino & Resort, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Monarch operates the Atlantis Casino Resort Spa in Reno, Nevada; its other subsidiaries own adjacent parcels of land.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenue | $37.2 million | $36.2 million | $70.4 million | $70.5 million |
| Operating income | $5.7 million | $4.5 million | $8.3 million | $8.7 million |
| Net income | $3.6 million | $2.7 million | $5.1 million | $5.1 million |
| Diluted EPS | $0.22 | $0.16 | $0.31 | $0.32 |
| Operating margin | 15.3% | 12.4% | 11.8% | 12.3% |
Q2 net revenue rose 2.8%, operating income 26.7%, and net income 33.3%. Casino revenue increased 4.4% and food and beverage revenue 4.8%, while hotel revenue declined 6.8%. For the first half, net revenue was essentially flat; operating income fell 4.6% and diluted EPS decreased from $0.32 to $0.31.
First-half cash from operations was $10.3 million, up from $8.8 million a year earlier. Investing activities used $2.5 million, primarily for property and equipment, and financing activities used $11.6 million for debt principal payments. Cash declined $3.8 million to $10.0 million.
At June 30, cash was $10.0 million and current assets were $19.1 million. The company reported $17.0 million outstanding under its credit facility, all classified as current debt; the facility’s stated maturity was January 20, 2012. The balance sheet showed total assets of $171.4 million, total liabilities of $42.2 million, and stockholders’ equity of $129.2 million. The company had $22.0 million of facility capacity and reported leverage and fixed-charge coverage ratios of 0.6:1 and 19.2:1, respectively, versus covenant limits of no more than 2.00:1 and at least 1.25:1.
Changes and management commentary
- Q2 SG&A declined 5.0%, principally due to lower bad-debt and utility expenses, partly offset by higher marketing costs. Lower average borrowings reduced Q2 interest expense to $195,000 from $366,000.
- Hotel room inventory fell from 973 to 824 after demolition of a 149-room motor lodge in late 2010. Q2 occupancy rose to 93.8% from 86.4%; average daily rate increased to $72.11 from $71.34. Despite higher occupancy and rates, hotel revenue declined year over year.
- Management attributed improved Q2 casino and food and beverage performance partly to prior Atlantis upgrades and guest service. It cited the prolonged Reno-area downturn and aggressive competitor promotions as continuing pressures, and said these factors could weigh on future revenue.
- Management believed cash, operating cash flow, and available facility borrowings would fund operations and planned capital spending through the facility’s maturity. It intended to amend or refinance the facility, but cautioned that acceptable terms were not assured; alternative financing, including equity, could be needed if refinancing failed.
Risks, contingencies, and unusual items
- Economic weakness, reduced discretionary and convention spending, competition from Reno-area casinos and California Native American casinos, higher fuel costs, and potential new land-based gaming near feeder markets could adversely affect results.
- The company adopted jackpot-liability guidance and reversed approximately $639,000 of previously accrued base jackpots to opening retained earnings. This accounting change increased beginning equity; it did not represent operating cash generation.
- Contractual cash obligations totaled approximately $25.8 million, including $17.0 million of facility borrowings due within one year, $5.7 million of purchase obligations, and $3.1 million of operating leases. Approximately $4.6 million of purchase commitments were cancelable on 30 days’ notice.
- In the Atlantis trademark litigation, the district court entered judgment in Monarch’s favor in February 2011, including favorable rulings on its Nevada rights and use of the mark in Las Vegas. Kerzner appealed; Monarch cross-appealed on trademark-registration cancellation and attorneys’ fees. The TTAB cancellation proceeding remained pending. Management said ordinary-course claims were not expected to have a material adverse effect.
- Related-party arrangements include a lease of adjacent shopping-center space controlled by entities whose owners include controlling stockholders. The company paid $170,400 in lease payments in the first half of 2011, plus common-area charges.
Key facts for investors to verify
- Progress and terms of the credit-facility amendment or refinancing before its January 2012 maturity, including interest rate, covenants, and repayment requirements.
- Whether first-half operating cash generation can be sustained while funding capital needs and scheduled debt reduction.
- Trends in casino and food and beverage demand, promotional costs, hotel revenue after the room-inventory reduction, and Reno-market competition.
- Developments in Kerzner’s appeal, Monarch’s cross-appeal, and the pending TTAB proceeding.
- The filing states that management’s interim results are not necessarily indicative of full-year 2011 results; it provides no numerical full-year earnings or revenue guidance.