What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-07 · 67 added, 69 removed, 92 unchanged (60% of the section changed)

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“believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “will,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions, as well as statements containing phrases such as “in our view,” or “we cannot assure you,” “although no assurance can be given.” Examples of forward-looking statements include, among others, statements we make regarding:

(i) our beliefs regarding the sufficiency of our cash and other financial resources;

(ii) our belief regarding the exposure of our cash and accounts receivable to credit risk;

(iii) our beliefs regarding the quality of our work product and guest service and our ability to capture additional market share in the high-end segment of the market;

(iv) our beliefs regarding the quality of our properties as key factors in Monarch's long-term success;

(v) our expectations regarding the employment growth in the Reno market and its effect on our business at Atlantis;

(vi) our expectations and intentions regarding the expenses, defenses and outcomes of the lawsuits filed by the construction project general contractor against us and our counterclaims and separate lawsuit against the contractor;

(vii) our expectations regarding our business prospects, strategies, estimates and outlook;

(viii) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth;

(ix) our expectations regarding future capital requirements;

(x) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements;

and (xi) our expectations regarding legal and other matters.

(i) our belief regarding the exposure of our cash and accounts receivable to credit risk;

(ii) our beliefs regarding the quality of our work product and guest service and our ability to capture additional market share in the high-end segment of the market;

(iii) our beliefs regarding the quality of our properties as key factors in each of their long-term success;

(iv) our expectations regarding the employment growth in the Reno market, the tight labor market (including wage inflation) and its effect on our business at Atlantis;

(v) our expectations and intentions regarding the expenses, defenses and outcomes of the lawsuits filed by the construction project general contractor against us and our counterclaims and separate lawsuit against the contractor;

(vi) our expectations regarding our business prospects, strategies, estimates and outlook;

(vii) our expectations regarding the positioning of our properties to benefit from future macro and local economic growth;

(viii) our expectations regarding future capital requirements;

(ix) our anticipated sources of funds and adequacy of such funds to meet our debt obligations and capital requirements;

and (x) our expectations regarding legal and other matters.

Forward-looking statements are neither historical facts nor assurances of future performance.

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Therefore, you should not rely on any of these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, those risks discussed in Part I, Item 1A-Risk Factors and throughout Part II, Item 7-Management’s Discussion and Analysis of Financial Condition and Results of our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A-Risk Factors and elsewhere of this Form 10-Q.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the impact of the events occurring in the Middle East and the conflict taking place in Israel, as well as those risks discussed in Part I, Item 1A-Risk Factors and throughout Part II, Item 7-Management’s Discussion and Analysis of Financial Condition and Results of our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A-Risk Factors and elsewhere of this Form 10-Q.

In addition, you should consult other disclosures made by us (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in Company press releases) for other factors that may cause actual results to differ materially from those projected by us.

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RESULTS OF OPERATIONS

Comparison of Operating Results for the Three-Month Periods Ended June 30, 2023 and 2022

For the three months ended June 30, 2023, our net income totaled $22.4 million, or $1.14 per diluted share, compared to net income of $19.4 million, or $0.99 per diluted share for the same period in 2022, reflecting a 15.3% and 15.2% increase in net income and diluted earnings per share, respectively.

Net revenues in the three months ended June 30, 2023, totaled $123.7 million, an increase of $8.4 million, or 7.3%, compared to the three months ended June 30, 2022.

Income from operations for the three months ended June 30, 2023, totaled $29.7 million compared to income from operations of $25.7 million for the same period in 2022.

Casino revenue increased 7.8% in the second quarter of 2023 compared to the second quarter of 2022.

The increase in casino revenue was driven primarily by the increase in gaming volume in Black Hawk.

Guest visits and spend per visit for the second quarter increased year-over-year at both properties.

Casino operating expense as a percentage of casino revenue increased to 37.4% for the three months ended June 30, 2023, compared to 36.5% for the three months ended June 30, 2022, primarily due to the increase in labor expense.

Food and beverage revenue for the second quarter of 2023 increased 10.8% compared to the second quarter of 2022 due to a 3.7% increase in food and beverage covers, combined with an increase in food and beverage revenue per cover of 6.8%.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the second quarter of 2023 to 72.3% compared to 77.0% for the same quarter in 2022 primarily due to an increase in average check and improved cost management.

Hotel revenue decreased 1.1% in the second quarter of 2023 compared to the same quarter of 2022 primarily as a result of a decrease in ADR by $8.94 ($176.34 in the second quarter of 2023 and $185.28 in the second quarter of 2022), partially offset by an increase in hotel occupancy to 83.4% during the current year period compared to 81.0% during the second quarter of 2022.

RevPAR was $162.33 and $162.47 for the three months ended June 30, 2023 and 2022, respectively.

Hotel operating expense as a percentage of hotel revenue increased to 36.2% in the second quarter of 2023 compared to 34.4% for the comparable prior year period primarily as a result of the decrease in ADR and an increase in labor expense.

Other revenue increased 11.6% in the second quarter of 2023 compared to the same prior year period primarily due to an increase in retail revenue at both properties and an increase in spa revenue at Atlantis.

SG&A expense increased to $25.0 million in the second quarter of 2023 from $23.1 million in the second quarter of 2022 driven primarily by increases in utility, insurance and marketing and advertising expenses.

As a percentage of net revenue, SG&A expense increased to 20.2% in the second quarter of 2023 compared to 20.0% in the same period in 2022.

Depreciation and amortization expense increased to $11.6 million for the three months ended June 30, 2023, compared to $10.5 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the second quarter of 2023, we recognized $0.6 million and $2.4 million, respectively, in professional service fees relating to our construction litigation.

During the second quarter of 2023 we also recognized $1.2 million proceeds from a sale of COVID closure related insurance claim.

These items are included in Other operating items, net in the Consolidated Statements of Income.

In the second quarter of 2023 we recognized $0.8 million of interest expense, net of interest income.

In the second quarter of 2022 we expensed $0.3 million of interest and amortized $0.4 million in deferred loan costs.

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2023 and 2022

For the three months ended September 30, 2023, our net income totaled $24.2 million, or $1.23 per diluted share, compared to net income of $27.5 million, or $1.41 per diluted share for the same period in 2022, reflecting a 12.1% and 12.8% decrease in net income and diluted earnings per share, respectively.

Net revenues in the three months ended September 30, 2023, totaled $133.0 million, a decrease of $0.8 million, or 0.6%, compared to the three months ended September 30, 2022.

Income from operations for the three months ended September 30, 2023, totaled $31.9 million compared to income from operations of $36.4 million for the same period in 2022.

Casino revenue decreased 4.0% in the third quarter of 2023 compared to the third quarter of 2022.

The decrease in casino revenue was driven primarily by the increase in promotional allowances and decrease in spend per visit year-over-year at Atlantis.

Casino operating expense as a percentage of casino revenue increased to 34.5% for the three months ended September 30, 2023, compared to 33.1% for the three months ended September 30, 2022, primarily due to the increase in labor expense.

Food and beverage revenue for the third quarter of 2023 increased 5.3% compared to the third quarter of 2022 due to a 1.2% increase in food and beverage covers, combined with an increase in food and beverage revenue per cover of 4.1%.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the third quarter of 2023 to 70.8% compared to 72.4% for the same quarter in 2022 primarily due to an increase in average check and improved cost management.

Hotel revenue decreased 0.9% in the third quarter of 2023 compared to the same quarter of 2022 primarily as a result of lower number of available rooms in the current quarter compared to the prior year same quarter.

ADR increased by $1.04 ($178.78 in the third quarter of 2023 and $177.74 in the third quarter of 2022).

Hotel occupancy increased to 88.1% during the current year period compared to 86.8% during the third quarter of 2022.

RevPAR was $169.63 and $170.14 for the three months ended September 30, 2023 and 2022, respectively and was impacted by a decrease in resort fee revenue.

Hotel operating expense as a percentage of hotel revenue increased to 34.8% in the third quarter of 2023 compared to 34.2% for the comparable prior year period primarily as a result of the decrease in RevPAR and an increase in labor expense.

Other revenue increased 18.0% in the third quarter of 2023 compared to the same prior year period primarily due to an increase in retail and spa revenues at both properties.

SG&A expense increased to $27.1 million in the third quarter of 2023 from $25.7 million in the third quarter of 2022 driven primarily by increases in labor, utilities, insurance and marketing expenses.

As a percentage of net revenue, SG&A expense increased to 20.4% in the third quarter of 2023 compared to 19.2% in the same period in 2022.

Depreciation and amortization expense increased to $12.2 million for the three months ended September 30, 2023, compared to $11.2 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the third quarter of 2023 and 2022, we recognized $2.9 million and $2.8 million, respectively, in professional service fees relating to our construction litigation, which are included in Other operating items, net in the Consolidated Statements of Income.

In the third quarter of 2023, we recognized $0.4 million of interest expense, net of interest income.

In the third quarter of 2022, we expensed $0.5 million of interest and amortized $0.4 million in deferred loan costs.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Six-Month Periods Ended June 30, 2023 and 2022

For the six months ended June 30, 2023, we had a net income of $40.1 million, or $2.04 per diluted share, compared to net income of $37.6 million, or $1.92 per diluted share for the same period in 2022, reflecting a 6.7% and 6.3% increase in net income and diluted earnings per share, respectively.

Net revenues in the six months ended June 30, 2023, totaled $240.3 million, an increase of 7.5%, compared to the six months ended June 30, 2022.

Income from operations for the six months ended June 30, 2023 totaled $52.9 million compared to $47.0 million income from operations for the same period in 2022.

Casino revenue increased 7.2% in the first six months of 2023 compared to the first six months of 2022 and was driven by an increase in guest spend per visit at both properties.

Casino operating expense as a percentage of casino revenue increased to 37.6% for the six months ended June 30, 2023 compared to 36.1% for the six months ended June 30, 2022 primarily as a result of increase in labor expense and increase in promotional allowances.

Food and beverage revenue for the first six months of 2023 increased 11.6% compared to the 2022 same period due to a 2.6% increase in food and beverage covers combined with an 8.8% increase in food and beverage revenue per cover.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the first six months of 2023 to 73.5% from 78.2% for the same period in 2022 primarily as a result of our effort to align menu prices with increased commodity prices and labor cost.

Hotel revenue increased 0.2% in the first six months of 2023 compared to the first six months of 2022 primarily due to an increase in occupancy from 78.8% during the first six months of 2022 to 82.8% during the same period of 2023, partially offset by a decrease in ADR by $9.44, from $178.40 in the first six months of 2022 to $168.96 in the first six months of 2023.

REVPAR was $154.67 for the first six months of 2023 and $152.90 for the first six months of 2022.

Hotel operating expense as a percentage of hotel revenue increased to 38.5% in the first six months of 2023 compared to 36.0% for the comparable prior year period primarily as a result of the lower ADR.

Other revenue increased 14.0% in the first six months of 2023 compared to the same prior year period.

SG&A expense increased to $50.1 million in the first six months of 2023 from $47.3 million in the first six months of 2022 primarily due to the increase in labor expense, as well as utility, insurance and repair and maintenance expenses.

As a percentage of net revenue, SG&A expense decreased to 20.8% in the first six months of 2023 compared to 21.1% in the same period in 2022.

Depreciation and amortization expense increased to $23.0 million for the six months ended June 30, 2023 compared to $21.1 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the first six months of 2023, we recognized $1.2 million in professional service fees relating to our construction litigation and $1.2 million in proceeds from a sale of COVID closure related insurance claim.

During the first six months of 2022, we recognized $3.7 million in professional services fees relating to our construction litigation and $0.2 million in gain on disposal of assets and litigation proceeds.

During the first six months of 2023, we expensed $1.4 million of interest, net of interest income.

During the first six months of 2022, we expensed $0.7 million of interest and amortized $0.7 million in deferred loan costs.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2023 and 2022

For the nine months ended September 30, 2023, we had a net income of $64.2 million, or $3.27 per diluted share, compared to net income of $65.0 million, or $3.33 per diluted share for the same period in 2022, reflecting a 1.2% and 1.8% decrease in net income and diluted earnings per share, respectively.

Net revenues in the nine months ended September 30, 2023, totaled $373.3 million, an increase of 4.5%, compared to the nine months ended September 30, 2022.

Income from operations for the nine months ended September 30, 2023 totaled $84.8 million compared to $83.4 million income from operations for the same period in 2022.

Casino revenue increased 2.9% in the first nine months of 2023 compared to the first nine months of 2022 and was driven by an increase in market share at Monarch Black Hawk.

Casino operating expense as a percentage of casino revenue increased to 36.5% for the nine months ended September 30, 2023 compared to 34.9% for the nine months ended September 30, 2022 primarily as a result of increase in labor expense and increase in promotional allowances.

Food and beverage revenue for the first nine months of 2023 increased 9.3% compared to the 2022 same period due to a 1.9% increase in food and beverage covers combined with an 7.3% increase in food and beverage revenue per cover.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the first nine months of 2023 to 72.6% from 76.1% for the same period in 2022 primarily as a result of an increase in average check and improved cost management.

Hotel revenue decreased 0.2% in the first nine months of 2023 compared to the first nine months of 2022 primarily due to a decrease in ADR by $5.53, from $178.15 in the first nine months of 2022 to $172.62 in the first nine months of 2023.

The occupancy increased from 81.7% during the first nine months of 2022 to 84.7% during the same period of 2023.

Hotel operating expense as a percentage of hotel revenue increased to 37.1% in the first nine months of 2023 compared to 35.3% for the comparable prior year period primarily as a result of the lower ADR and an increase in labor expense.

Other revenue increased 15.3% in the first nine months of 2023 compared to the same prior year period.

SG&A expense increased to $77.2 million in the first nine months of 2023 from $72.9 million in the first nine months of 2022 primarily due to the increase in labor expense, as well as utilities, insurance and repair and maintenance expenses.

As a percentage of net revenue, SG&A expense increased to 20.7% in the first nine months of 2023 compared to 20.4% in the same period in 2022.

Depreciation and amortization expense increased to $35.2 million for the nine months ended September 30, 2023 compared to $32.2 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the first nine months of 2023, we recognized $4.1 million in professional service fees relating to our construction litigation and $1.2 million in proceeds from a sale of COVID closure related insurance claim.

During the first nine months of 2022, we recognized $6.5 million in professional services fees relating to our construction litigation.

During the first nine months of 2023, we expensed $1.7 million of interest, net of interest income.

During the first nine months of 2022, we expensed $1.1 million of interest and amortized $1.1 million in deferred loan costs.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

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We seek to continually upgrade and maintain our facilities in order to present a fresh, high quality product to our guests.

Cash paid for capital expenditures for the six-month periods ended June 30, 2023 and 2022 totaled $25.6 million and $35.2 million, respectively.

During the six-month period ended June 30, 2023, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the six-month period ended June 30, 2022, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the first tower at Atlantis, the completion of the transformation of part of the Monarch Black Hawk legacy facility, and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

Capital expenditures during each of the first six months of 2023 and 2022 were funded from operating cash flows.

Cash paid for capital expenditures for the nine-month periods ended September 30, 2023 and 2022 totaled $34.6 million and $40.5 million, respectively.

During the nine-month period ended September 30, 2023, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the nine-month period ended September 30, 2022 our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the original tower at Atlantis, the new upscale retail shop at Atlantis and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

Capital expenditures during each of the first nine months of 2023 and 2022 were funded primarily from operating cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facility.

For the six months ended June 30, 2023, net cash provided by operating activities totaled $87.9 million, compared to net cash provided by operating activities of $60.6 million in the same prior year period.

This increase was primarily a result of the decrease in income tax receivable as a result of receipt of an income tax refund.

Net cash used in investing activities totaled $25.6 million and $35.2 million during the six months ended June 30, 2023 and 2022, respectively.

Net cash used in investing activities during the first six months of 2023 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis, and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first six months of 2022 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the first tower at Atlantis, the completion of the transformation of part of the Monarch Black Hawk legacy facility, and for acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first six months of 2023 totaled $66.0 million and consisted of $101.3 million used for payment of dividends, offset by $34.0 million of borrowings under the Amended Credit Facility, net of the payments to the lender under the Amended Credit Facility and $1.3 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first six months of 2022 totaled $28.3 million and consisted of $25.0 million in principal payments on the credit facility and $6.5 million cash used for purchase of Company stock under the Repurchase Plan partially offset by $3.2 million of net proceeds from stock options exercise.

For the nine months ended September 30, 2023, net cash provided by operating activities totaled $134.4 million, compared to net cash provided by operating activities of $106.2 million in the same prior year period.

This increase was primarily a result of the decrease in income tax receivable as a result of receipt of an income tax refund, increase in depreciation expense and change in working capital.

Net cash used in investing activities totaled $34.6 million and $40.5 million during the nine months ended September 30, 2023 and 2022, respectively.

Net cash used in investing activities during the first nine months of 2023 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis, and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first nine months of 2022 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the first tower at Atlantis, the completion of the transformation of part of the Monarch Black Hawk legacy facility, and for acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first nine months of 2023 totaled $104.6 million consisting of $107.0 million used for payment of dividends, offset by $1.0 million of borrowings under the Amended Credit Facility, net of the payments to the lender under the Amended Credit Facility and $1.4 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first nine months of 2022 totaled $66.0 million and consisted of $63.0 million in principal payments on the credit facility and $6.5 million cash used for purchase of Company stock under the Repurchase Plan partially offset by $3.5 million of net proceeds from stock options exercise.

Amended Credit Facility

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The maturity date of the Amended Credit Facility is January 1, 2025.

As of June 30, 2023, we had an outstanding principal balance of $41 million under the Amended Credit Facility.

In addition to other customary covenants for a facility of this nature, as of June 30, 2023, we were required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 2.5:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.

As of June 30, 2023, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.2:1 and 9.3:1, respectively.

As of September 30, 2023, we had an outstanding principal balance of $8 million under the Amended Credit Facility.

In addition to other customary covenants for a facility of this nature, as of September 30, 2023, we were required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 2.5:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.

As of September 30, 2023, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.05:1 and 14.73:1, respectively.

The interest rate under the Amended Credit Facility is SOFR (the Secured Overnight Financing Rate) plus a margin ranging from 1.00% to 1.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 0.50%.

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In addition, SOFR-based loans will incur a 0.10% credit adjustment spread due to the conversion from LIBOR to SOFR as the new benchmark rate.

As of June 30, 2023, the interest rate was 6.2%, or SOFR plus a 1.00% margin.

As of September 30, 2023, the interest rate was 6.42%, or SOFR plus a 1.00% margin.

The Company’s obligations under the Amended Credit Facility are secured by substantially all of the Company’s assets.

We believe that our anticipated operating cash flow and the $58.4 million available under our Amended Credit Facility as of June 30, 2023 will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended June 30, 2023 and fulfill our capital expenditure plans.

We believe that our anticipated operating cash flow and the $91.4 million available under our Amended Credit Facility as of September 30, 2023 will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended September 30, 2023 and fulfill our capital expenditure plans and authorized dividend distributions.

However financial, economic, competitive, regulatory, and other factors, many of which are beyond our control, could negatively impact our operations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis