Monarch Casino & Resort, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Monarch operated the Atlantis Casino Resort Spa in Reno, Nevada; its proposed acquisition of Riviera Black Hawk had not closed by quarter-end.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $36.2 million | $37.7 million | $106.6 million | $108.2 million |
| Operating income | $0.15 million | $4.41 million | $8.48 million | $13.08 million |
| Net income | $11,279 | $2.67 million | $5.11 million | $7.77 million |
| Diluted EPS | $0.00 | $0.17 | $0.31 | $0.48 |
| Operating margin | 0.4% | 11.7% | 8.0% | 12.1% |
- Q3 net revenue fell 4.0%; nine-month revenue fell 1.5%. Casino revenue declined 6.9% in Q3 and 2.4% year to date. Food and beverage revenue rose, while hotel and other revenue were lower.
- Q3 operating income included a $3.5 million, primarily noncash charge for demolition of the Adventure Inn. Before income taxes, Q3 results were a loss of $8,792; a $20,071 tax benefit produced reported net income of $11,279.
- At September 30, cash was $10.9 million, current assets $23.7 million, and current liabilities $21.1 million. Long-term debt was $16.0 million, down from $28.6 million at December 31, 2010. Stockholders’ equity was $129.6 million.
- For the first nine months, operating cash flow was $17.6 million, investing cash outflow $7.6 million, and financing cash outflow $12.8 million. Cash decreased $2.9 million to $10.9 million. Investing outflows included a $3.8 million acquisition deposit and $3.8 million of property and equipment purchases.
Material changes and management commentary
- Management attributed revenue pressure to the weak Reno economy, reduced regional gaming-market revenue, and aggressive competitor marketing. It expected these conditions to continue weighing on Atlantis revenue.
- Casino revenue weakness was primarily associated with lower slot revenue; complimentary expenses increased as a share of casino revenue. Food and beverage revenue grew mainly through higher average revenue per cover, while commodity costs raised departmental expense ratios.
- Hotel room inventory fell from 973 to 824 after the 149-room motor lodge demolition in late 2010. For Q3, occupancy rose to 94.9% from 93.3%, ADR to $82.10 from $73.17, and RevPAR to $77.92 from $68.26. Nine-month occupancy and RevPAR also improved, despite lower hotel revenue.
- SG&A declined year over year, partly from lower marketing and bad-debt expense, but included approximately $440,000 of acquisition-related legal and other costs. Interest expense also fell with lower average borrowings.
- The company adopted jackpot-liability guidance and reversed approximately $639,000 of previously accrued base jackpots to opening retained earnings. The cash-flow statement reports a corresponding noncash reduction in jackpot liability.
Outlook, financing, and risks
- On September 29, 2011, Monarch agreed to buy all shares of Riviera Black Hawk for $76 million, subject to working-capital adjustments. The seller was to pay substantially all target debt and leave at least $2.1 million of cash. Monarch paid a $3.8 million deposit, creditable at closing, and would owe a $1.5 million advisor success fee at closing.
- Closing was subject to gaming approvals and licenses, antitrust waiting-period expiration, and other conditions; the deal had no financing or due-diligence condition. The filing said Monarch expected a second operating asset before the end of Q2 2012, but completion was not assured. The acquisition could require additional financing and entails integration, regulatory, and unknown-liability risks.
- The existing secured credit facility had $16.0 million outstanding, a stated January 20, 2012 maturity, and a maximum availability of $19.5 million at quarter-end. The bank had irrevocably committed, subject to customary conditions, to a new facility of up to $100 million for the acquisition, refinancing, and general purposes; definitive documents were not finalized. The existing debt was classified as noncurrent because of this commitment. Management expected broadly similar pricing and covenants.
- At quarter-end, leverage was 0.6:1 against a maximum 2.00:1 covenant, and fixed-charge coverage was 27.1:1 against a 1.25:1 minimum. A 1 percentage-point interest-rate increase on then-outstanding debt would raise annual interest cost by approximately $160,000.
- Risks include continued recessionary pressure, competition from Reno-area casinos and California Native American casinos, higher fuel costs, and potential nearby metropolitan casino gaming. The Atlantis trademark dispute remained on appeal, with briefing stayed while the parties explored settlement; the related TTAB cancellation proceeding also remained pending.
- No specific financial guidance was provided. Management stated it would monitor economic conditions and consider strategies to mitigate their effects, while cautioning that such strategies might not be effective.
Important facts for investors to verify
- Progress on regulatory approvals, licenses, closing conditions, final purchase-price adjustments, and timing of the Riviera Black Hawk acquisition.
- Execution and final terms of the proposed $100 million credit facility, including availability, pricing, covenants, and its capacity to fund the acquisition.
- Whether Atlantis revenue and operating margins stabilize amid regional economic weakness and competitive pressure.
- Cash requirements and operating results following the Adventure Inn demolition and any acquisition-related costs or integration expenses.
- Status and potential outcomes of the trademark appeal and TTAB proceeding.