What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-06 · 43 added, 67 removed, 92 unchanged (54% of the section changed)

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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.

At the same time, the tight employment environment has created labor challenges, including wage inflation, which we continue to actively manage.

In addition, we are facing increased competition from the continued growth of California tribal gaming and an extremely competitive promotional environment in Northern Nevada.

The increase in the labor costs and the other inflationary pressures, combined with continued aggressive marketing programs by our competitors, has applied pressure on Atlantis’ revenue growth, operating costs and profit margins.

Monarch Black Hawk:

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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.

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.

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.

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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.

Operating margins:

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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.

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.

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2024 and 2023

For the three months ended March 31, 2024, our net income totaled $18.3 million, or $0.93 per diluted share, compared to net income of $17.7 million, or $0.90 per diluted share for the same period in 2023, reflecting a 3.4% and 3.3% increase in net income and diluted earnings per share, respectively.

Net revenues in the three months ended March 31, 2024, totaled $121.7 million, an increase of $5.0 million, or 4.3%, compared to the three months ended March 31, 2023.

Income from operations for the three months ended March 31, 2024, totaled $23.8 million compared to income from operations of $23.2 million for the same period in 2023.

Casino revenue increased 3.8% in the first quarter of 2024 compared to the first quarter of 2023.

The increase in casino revenue was driven primarily by the continued increase in market share at our property in Black Hawk, partially offset by an increase in promotional allowances.

Casino operating expense as a percentage of casino revenue increased to 38.0% for the three months ended March 31, 2024, compared to 37.7% for the three months ended March 31, 2023, primarily due to the increase in labor and slots participation expenses.

Food and beverage revenue for the first quarter of 2024 increased 2.9% compared to the first quarter of 2023 due to a 2.3% increase in food and beverage covers, combined with an increase in food and beverage revenue per cover of 0.6%.

Food and beverage operating expense as a percentage of food and beverage revenue in the first quarters of 2024 and 2023 are flat, at 74.8%, as a result of the increase in average check and our efforts to manage costs.

Hotel revenue increased 8.4% in the first quarter of 2024 compared to the same quarter of 2023 primarily as a result of ADR increased by $20.41 ($181.49 in the first quarter of 2024 and $161.08 in the first quarter of 2023).

Hotel occupancy decreased to 78.7% during the current year period compared to 82.2% during the first quarter of 2023.

RevPAR was $153.42 and $146.58 for the three months ended March 31, 2024 and 2023, respectively, and was impacted by the lower occupancy and a decrease in resort fee revenue.

Hotel operating expense as a percentage of hotel revenue decreased to 35.6% in the first quarter of 2024 compared to 41.3% for the comparable prior year period primarily as a result of increase in ADR and improved cost management.

Other revenue increased 6.7% in the first quarter of 2024 compared to the same prior year period primarily due to an increase in spa revenues at both properties.

SG&A expense increased to $27.1 million in the first quarter of 2024 from $25.1 million in the first quarter of 2023 driven primarily by increases in labor expenses, combined with an increase in advertising and promotional expenses.

As a percentage of net revenue, SG&A expense increased to 22.3% in the first quarter of 2024 compared to 21.5% in the same period in 2023.

Depreciation and amortization expense increased to $12.5 million for the three months ended March 31, 2024, compared to $11.3 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During each of the first quarters of 2024 and 2023, we recognized $0.5 million 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 first quarter of 2024, our interest expense was offset by the interest income.

In the first quarter of 2023, we recognized $0.5 million of interest expense.

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 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.

Cash paid for capital expenditures for the three-month periods ended March 31, 2024 and 2023 totaled $17.9 million and $15.2 million, respectively.

During the three-month period ended March 31, 2024, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the third tower at Atlantis, and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the three-month period ended March 31, 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.

Capital expenditures during each of the first three months of 2024 and 2023 were funded from cash on hand and 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.

For the three months ended March 31, 2024, net cash provided by operating activities totaled $38.3 million, compared to net cash provided by operating activities of $61.5 million in the same prior year period.

This decrease was primarily a result of the decrease in income tax receivable as a result of receipt of an income tax refund in the first quarter of 2023 and change in working capital, offset by an increase in depreciation expense and increase in net income.

Net cash used in investing activities totaled $17.9 million and $15.2 million during the three months ended March 31, 2024 and 2023, respectively.

Net cash used in investing activities during the first three months of 2024 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the third tower at Atlantis and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first three 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 financing activities in the first three months of 2024 totaled $24.3 million and consisted of $19.6 million cash used for purchase of Company stock under the Repurchase Plan and $5.7 million used for payment of dividends, partially offset by $1.0 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first three months of 2023 totaled $50.7 million and consisted of $95.6 million used for payment of dividends, partially offset by $44.0 million of borrowings under the credit facility, net of the payments to the credit facility and $0.9 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.

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.

On February 1, 2023, the Company 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 provides for a $100 million line of credit which matures on January 1, 2025.

As of March 31, 2024, we had an outstanding principal balance of $5.5 million under the Amended Credit Facility.

In addition to other customary covenants for a facility of this nature, as of March 31, 2024, 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 March 31, 2024, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.04:1 and 55.46:1, 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 September 30, 2023, the interest rate was 6.42%, or SOFR plus a 1.00% margin.

As of March 31, 2024, the interest rate was 8.5%, 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.

We believe that our anticipated operating cash flows will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended March 31, 2024 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