Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, “Monarch,” “Company,” “we,” “our,” and “us” refer to Monarch Casino & Resort, Inc. and its subsidiaries.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “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 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. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. 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, 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. You should read this Form 10-Q, and the documents that we reference in this Form 10-Q and have filed with the SEC, and our Annual Report on Form 10-K for the year ended December 31, 2022, with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions, except as required by law. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements.
OVERVIEW
Monarch was incorporated in the state of Nevada in 1993. We own and operate the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the “Atlantis”) and Monarch Casino Resort Spa Black Hawk (the “Monarch Black Hawk”), a casino in Black Hawk, Colorado. In addition, we own separate parcels of land located next to the Atlantis and a parcel of land with an industrial warehouse located between Denver, Colorado and Monarch Black Hawk.
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We earn revenues, operating income and cash flow from Atlantis and Monarch Black Hawk, primarily through our casino, food and beverage, and hotel operations. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer services and cost efficiencies.
Atlantis: We continuously upgrade our property. With quality gaming, hotel and dining products, we believe the Atlantis is well positioned to benefit from future macro and local economic growth. Reno remains a healthy local-oriented market, but at the same time a very competitive market. The market’s employment growth is broad based and we expect this positive indicator will support the continued strength of our business at Atlantis. At the same time, the tight employment environment, with the local unemployment rate below the national average, has created labor challenges, including wage inflation, which we continue to actively manage. We expect this to be a recurring trend for the market and Atlantis in the years ahead. The increase in the labor costs and the increase in price inflation, combined with continued aggressive marketing programs by our competitors, has applied upward pressure on Atlantis’ operating costs and is lowering our profit margins.
Monarch Black Hawk: Monarch Black Hawk is the first property encountered by visitors arriving from Denver and other major population centers via Colorado State Highway 119. The Denver metro economy remains strong with higher than the national average per capita personal income. At the beginning of 2022, we completed the master planned renovation and expansion, transforming the property into a world-class resort. Monarch Black Hawk is positioned to leverage the expanded operation, the elimination of betting limits and new game types in Black Hawk, Colorado, as well as to benefit from the growing state-wide online and retail sports betting. Monarch Black Hawk also is experiencing labor challenges, resulting from the distance to the staffing filter markets of Golden, Colorado and the Denver Metro area and low unemployment in those markets. We continue to attract high value players from across Colorado’s Front Range, who had previously traveled to other markets, such as Las Vegas, for a high-end casino entertainment experience. We believe that the quality of our expanded product and exceptional guest service will meet the demand of the high-end segment of the market and will grow revenue and accelerate market share.
KEY PERFORMANCE INDICATORS
We use the following Key Performance Indicators (“KPI”) to manage our operation and measure our performance:
Gaming revenue KPI: Our management reviews on a consistent basis the volume metrics and hold percentage metrics for each gaming area. The main volume measurements are slot coin-in, table games drop, sportsbook write and keno write. Slot coin-in represents the dollar amount wagered in slot machines, including free promotional wagers. Table games drop represents the total amount of cash and net markers deposited in the table drop box. Keno write and sportsbook write represents the dollar amount wagered at our counters, along with sportsbook write made through our mobile wagering system. Volume metrics are important in managing the business, as our gaming win is affected by actual hold percentage, which in general varies from the expected hold percentage and historical hold percentage. Gaming win represents the amount of wagers retained by us. Hold percentage represents win as a percentage of slot coin-in, table game drop, sportsbook write, or keno write. Our win and hold percentages are calculated before discounts, commissions, deferring revenue associated with our loyalty programs and allocating casino revenues related to goods and services provided to patrons on a complimentary basis.
Food and Beverage revenue KPI: The main KPIs in managing our food and beverage (“F&B”) operations are covers and average revenue per cover. A cover represents the number of guests served and is an indicator of volume. Average revenue per cover represents the average amount spent per food and beverage outlets’ served guests. Changes in the average revenue per cover might be an indicator for changes in menu offerings, changes in menu prices or may indicate changes in our guests’ preferences and purchasing habits.
Hotel revenue KPI: The main KPIs used in managing our hotel operation are the occupancy rate (a volume indicator), which is the average percentage of available hotel rooms occupied during a period, and the average daily rate (“ADR”, a price indicator), which is the average price per sold room. Available rooms exclude those rooms unavailable for occupancy during the period due to renovation, development, or other requirements. Sold rooms include rooms where the guests do not show up for their stay and lose their deposit. The calculations of the occupancy rate and ADR include the impact of rooms provided on a complimentary basis. Revenue per available room ("RevPAR") represents total hotel revenue per available room and is a representation of the occupancy rate, ADR and miscellaneous hotel sales.
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Operating margins: Our management is consistently focused on controlling expenses and finding cost savings, without affecting the quality of the product we offer and our guests’ services and experience. We measure our performance using expense margin, which is a percentage of direct expenses, including labor, cost of product and any other operating expenses related to the gaming, food and beverage, or hotel operation to the net gaming, food and beverage, or hotel revenues. Selling, general and administrative (“SG&A”) margin represents SG&A expenses for a period as a percentage of total net revenue for a period. In managing the food and beverage operation, we use Cost Of Goods Sold (“COGS”) percentage, which represents a percentage of product cost to the food and beverage revenue and is a measurement of commodity prices and menu sales prices.
Our management evaluates the KPI as compared to prior periods, the peer group, or market, as well as for any trends.
RESULTS OF OPERATIONS
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.
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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 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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CAPITAL SPENDING AND DEVELOPMENT
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 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 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
On February 1, 2023, we entered into the Fifth Amended and Restated Credit Agreement (the “Amended Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent. The Amended Credit Facility amends and restates the Company’s Fourth Amended and Restated Credit Agreement, which consisted of a $200 million term loan and a $70 million revolving line of credit.
On February 1, 2023, there was no outstanding balance under the term loan of the Fourth Amended and Restated Credit Agreement.
The Amended Credit Facility does not contain a term loan but instead increases the aggregate principal amount of the revolving line of credit from $70 million to $100 million. The maturity date of the Amended Credit Facility is January 1, 2025.
As of September 30, 2023, we had an outstanding principal balance of $8 million under the Amended Credit Facility.
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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%. The applicable margins will vary depending on the Company’s leverage ratio. 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 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 $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. If we are unable to generate sufficient cash flow in the upcoming months or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or issuing additional equity.
For a discussion regarding our material commitments for capital expenditures, see the CAPITAL SPENDING AND DEVELOPMENT section above.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies and estimates can be found in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K. For a more extensive discussion of our accounting policies, see Note 1. “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in our 2022 Form 10-K filed with the SEC on February 28, 2023.
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