MONARCH CASINO & RESORT INC (MCRI) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of our results of operations and our present financial condition. The consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material.
Cautionary Note on Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our expectations and beliefs concerning the cost, financing and impact of our Monarch Black Hawk Expansion; additional revenue opportunities as a result of project and budget modifications for our Monarch Black Hawk Expansion; additional capital projects; future expansion and acquisition opportunities; positioning of our properties to benefit from future macro and local economic growth; business prospects; business strategies and outlook; competitive advantages and sources of competition; marketing strategy; approvals and licensing requirements; employee relations; capital requirements; anticipated source of funds and adequacy of such funds to meet our debt obligations and capital requirements; financial condition, legal matters and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements. When words and expressions such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions are used in this Form 10-K, as well as statements containing phrases such as “in our view,” “we cannot assure you,” “although no assurance can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made. Example of forward-looking statements include, among others, statements we make regarding: (i) our belief that we have sufficient liquidity to fund any remaining construction and litigation costs and ongoing capital expenditures; (ii) our belief that our business is well-positioned to benefit from any post-pandemic recovery; (iii) our expectation regarding the availability of future acquisition opportunities; (iv) our beliefs regarding the quality of our products and guest services in Reno and Black Hawk; (v) our expectations regarding our guests' acceptance of the expanded casino, new hotel and enhanced amenities at Monarch Casino Resort Spa Black Hawk; (vi) our expectations regarding our future position in, and share of, the high-end segment of the market and the quality of service we provide to our guests; (vii) our expectations regarding the litigation relating to the construction of the Monarch Black Hawk expansion and related liens recorded by the general contractor and certain subcontractors against the Monarch Black Hawk; and (viii) our belief regarding the proximity that the Reno-Sparks Convention Center will have for the Atlantis. Actual results and future events and conditions may differ materially from those described in any forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.
Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including the following factors:
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| ● | our ability to successfully implement our business and growth strategies; |
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| ● | our ability to successfully defend against and remove the liens recorded against the Monarch Black Hawk by the general contractor and certain subcontractors with respect to the expansion and renovation of the property; |
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| ● | adverse impacts of the COVID-19 pandemic on our business, construction projects, financial condition and operating results; |
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| ● | actions by government officials at the federal, state and/or local level with respect to steps to be taken, including, without limitation, temporary or extended shutdowns, travel restrictions, social distancing and shelter-in-place orders, in connection with the COVID-19 pandemic; |
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| ● | our ability to manage guest safety concerns caused by COVID-19; |
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| ● | our ability to effectively manage and control expenses during any future shutdown periods; |
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| ● | impact of any future shutdowns on our ability to maintain compliance with the terms and conditions of our credit facilities and other material contracts; |
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| ● | our ability to negotiate relief options and necessary amendments to our Amended Credit Facility, if required; |
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| ● | access to available and reasonable financing on a timely basis; |
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| ● | our ability to maintain strong working relationships with our regulators, employees, lenders, suppliers, insurance carriers, customers, and other stakeholders; |
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| ● | impact of any uninsured losses; |
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| ● | changes in guest visitation or spending patterns due to health or other concerns; |
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| ● | construction factors, including delays, disruptions, availability of labor and materials, increased costs of labor and materials, contractor disagreements, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters, building permit issues and other regulatory approvals or issues; |
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| ● | ongoing disagreements over costs of and responsibility for delays and other construction related matters with our Monarch Black Hawk general contractor, PCL Construction Services, Inc., including, as previously reported, the litigation against us by such contractor; |
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| ● | affirmative and extensive counterclaims for construction defects, breach of contract, breach of warranty, fraud, fraudulent inducement, negligence and other construction related claims that we have filed against the Monarch Black Hawk contractor, PCL Construction Services, Inc., in the above-mentioned litigation in which litigation the parties are currently conducting discovery, and investigation of the claims by and against us is therefore ongoing; |
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| ● | our potential need to post bonds or other forms of surety to support our legal remedies; |
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| ● | risks related to development and construction activities (including disputes with and defaults by contractors and subcontractors; construction, equipment or staffing problems and delays; shortages of materials or skilled labor; environmental, health and safety issues; weather and other hazards, site access matters, and unanticipated cost increases); |
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| ● | changes in laws mandating increases in minimum wages and employee benefits; |
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| ● | changes in laws and regulations permitting expanded and other forms of gaming in our key markets; |
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| ● | the effects of labor shortages on our market position, growth and financial results; |
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| ● | current broad-based inflation on the economy, including wage inflation; |
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| ● | the potential of increases in state and federal taxation to address budgetary and other impacts of the COVID-19 pandemic; |
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| ● | the potential of increased regulatory and other burdens to address the direct and indirect impacts of COVID-19 pandemic; |
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| ● | guest acceptance of our expanded facilities once completed and the resulting impact on our market position, growth and financial results; |
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| ● | competition in our target market areas; |
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| ● | our dependence on two resorts; |
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| ● | our ability to realize the anticipated benefits of our expansion and renovation projects, including the Monarch Black Hawk Expansion; |
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| ● | our ability to effectively manage expenses to optimize our margins and operating results; |
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| ● | risks related to our present indebtedness and future borrowings and our ability to meet our debt obligations and comply with our loan covenants; |
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| ● | adverse trends in the gaming industries; |
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| ● | changes in patron demographics; |
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| ● | general market and economic conditions, including but not limited to, the effects of local and national economic, credit and capital market conditions, housing and energy conditions on the economy in general and on the gaming and lodging industries in particular; |
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| ● | access to capital and credit, including our ability to finance future business requirements; |
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| ● | our ability to generate sufficient operating cash flow to finance our expansion plans and fund working capital; |
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| ● | the impact of rising interest rates and our ability to refinance debt as it matures at commercially reasonable rates or at all; |
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| ● | disruptions and shortages in the supply chain; |
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| ● | the impact that any discontinuance, modification or other reform of LIBOR, or the establishment of alternative reference rates, may have on our LIBOR-based debt instruments such as our Amended Credit Facility; |
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| ● | ability of large stockholders to influence our affairs; |
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| ● | our dependence on key personnel; |
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| ● | the availability of adequate levels of insurance; |
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| ● | changes in federal, state, and local laws and regulations, including environmental and gaming licenses or legislation and regulations; |
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| ● | our ability to comply with existing laws and regulations to which we are subject; |
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| ● | our ability to obtain and maintain gaming and other governmental licenses and regulatory approvals; |
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| ● | any violations by us of the anti-money laundering laws; |
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| ● | cybersecurity risks, including misappropriation of customer information or other breaches of information security; |
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| ● | impact of natural disasters, severe weather, terrorist activity and similar events; |
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| ● | competitive environment, including increased competition in our target market areas; |
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| ● | increases in the effective rate of taxation at any of our properties or at the corporate level; |
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| ● | our ability to successfully estimate the impact of accounting, tax and legal matters; |
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| ● | risks, uncertainties and other factors described from time to time in this and our other Securities and Exchange Commission (“SEC” or “Commission”) filings and reports; |
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| ● | the effects of macro and micro economic conditions on employment growth in the economy in general; |
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| ● | the effects of labor shortages on our ability to grow our business and to expand our market share in each of our key markets; |
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| ● | our ability to generate sufficient cash flow and manage our expenses to deleverage the Company; |
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| ● | guest acceptance of our expanded facilities at Monarch Black Hawk once completed and the resulting impact on our market position, growth and future financial results; and |
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| ● | the impact of the events occurring in Eastern Europe and a possible Russian invasion of Ukraine. |
For a more detailed description of certain Risk Factors affecting our business, see Item 1A, “Risk Factors.”
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 owns and operates the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the “Atlantis”) and Monarch Casino Resort Spa Black Hawk, a hotel and casino in Black Hawk, Colorado (the “Monarch Black Hawk”). 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 Casino Resort Spa Black Hawk. We also own Chicago Dogs Eatery, Inc. and Monarch Promotional Association, both of which were formed in relation to licensure requirements for extended hours of liquor operation in Black Hawk, Colorado.
Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage, and hotel operations at the Atlantis and Monarch Black Hawk. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost efficiencies.
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FACTORS IMPACTING OUR RESULTS OF OPERATIONS
Our operating results may be affected by, among other things, competitive factors, gaming tax increases, mandated minimum wages, the commencement of new gaming operations, construction at our facilities, general public sentiment regarding travel, overall economic conditions and governmental policies affecting the disposable income of our patrons, widespread public health emergencies including pandemics such as the global coronavirus (COVID-19) pandemic, terrorism and weather conditions affecting our properties, as well as those matters discussed in Item 1A. “RISK FACTORS” above.
The following significant factors and trends should be considered in analyzing our operating performance:
Atlantis: Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage operations and hotel operations. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost efficiencies 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. 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 profit margins.
Monarch Casino Resort Spa Black Hawk: Since the acquisition of the Monarch Black Hawk property in April 2012, our focus has been to maximize casino and food and beverage revenues while upgrading the existing facility and working on the major expansion. In the fourth quarter of 2020 we began the phased opening of our hotel tower and expanded casino floor. In 2021 we significantly completed the phased opening of our hotel tower, casino expansion and the redesign and upgrade of the legacy building, which transformed our Monarch Black Hawk property into a full-scale casino resort spa. The property now features approximately 60,000 square feet of casino space, approximately 1,200 slot machines, approximately 40 table games, a sports lounge and poker room, 10 bars and lounges, and four new dining options, including a twenty-four-hour full-service restaurant, 250-seat buffet-style restaurant, the Monarch Chophouse (a fine-dining steakhouse), and Bistro Mariposa (a specialty restaurant). The resort offers 516 guest rooms and suites, banquet and meeting room space, a retail store, a concierge lounge and an upscale spa and pool facility located on the top floor of the tower. 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 certain 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.
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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.
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
Impact of the COVID-19 Pandemic
Monarch’s operating results for the year ended December 31, 2021 and 2020 were impacted by the COVID-19 pandemic.
In March 2020, the World Health Organization declared the rapidly growing COVID-19 outbreak a global pandemic. On March 16, 2020, in an effort to contain the virus, the state of Colorado mandated a temporary shutdown of all casinos including Monarch Black Hawk and, on March 17, 2020, the state of Nevada mandated the temporary closure of all casinos including the Atlantis in Reno. Our Nevada and Colorado properties partially reopened with limited operations on June 4, 2020 and June 17, 2020, respectively. Therefore, the annual financial results comparison set forth below should be read with the 2020 partial period closures in mind.
Following the reopening of our operations in 2020 and through 2021, we continued to operate under government-imposed capacity restrictions on our operations and various COVID-19 safety protocols. We were continually adjusting our operations to the restrictions in occupancy and social distancing requirements, which included reduced seating at table games and in all restaurants, and a decreased number of active slot machines on the casino floors. The convention business at Atlantis was adversely affected by the state-mandated gathering limits. We have experienced hotel stay and convention booking cancellations, and since the reopening, guest visitation and hotel and convention bookings have been inconsistent.
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Our financial results, particularly for 2020, were significantly impacted by the unprecedented government-mandated closure of our Nevada and Colorado properties in response to the COVID-19 pandemic, which lasted approximately three months, and the related operational changes we were required to make to comply with government mandated restrictions as well as changes in customer demand and overall travel and leisure industry.
In July 2021, due to reports of increased COVID-19 cases apparently driven by the Delta variant, Nevada state government officials reintroduced mask mandates for all persons in certain public indoor locations, including casino resorts such as the Atlantis, which lasted until the beginning of 2022.
We are operating in an environment of high uncertainty and there may be additional government restrictions placed on all of our services, such as gaming, restaurants, spas and salons, entertainment venues and convention and meeting space, which could lead to lower demand and revenue. Such restrictions could also increase our costs, decrease our operating margins and have a material adverse effect on our operations, cash flows and financial results.
While we have incurred significant disruptions from the COVID-19 pandemic, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties and the dynamic nature of the circumstances, including the duration and severity of the disease, the possibility of the outbreak levels seen to return, the long-term impact on demand following the reopening of our casinos, and other actions or restrictions that may be taken by governmental authorities, the impact thereof to the general U.S economy and to our customers. We will continue to evaluate the nature and extent of the impact to our business, results of operations, and financial condition.
Monarch Casino Resort Spa Black Hawk expansion
Our financial results for the year ended December 31, 2021 benefited from the phased opening of operations at our newly transformed Monarch Black Hawk, which opening began in the fourth quarter of 2020. The new hotel, including a spa and pool on the top floor, were fully opened in the first quarter of 2021. In May, 2021, we opened our new poker room and in mid-December we opened our new sportsbook, lounge and bar and additional casino space at the legacy part of the building. With the opening of our expanded casino floor at the beginning of 2021, we increased the number of slot machines by approximately 190 and table games by 10, compared to the pre-COVID active gaming devices at Monarch Black Hawk. Monarch Black Hawk operations continue to ramp up.
Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
For 2021, our net income totaled $68.5 million, or $3.53 per diluted share, compared to net income of $23.7 million, or $1.25 per diluted share for the same period of 2020, reflecting a 189.2% increase in net income and 182.4% increase in diluted earnings per share. Net income and diluted earnings per share comparisons were impacted by the $8.7 million tax benefit recognized in 2020. Net revenue for the years ended December 31, 2021 and 2020 were $395.4 million and $184.4 million, respectively, reflecting an increase of $211.0 million, or 114.4%. Income from operations for the year ended December 31, 2021 totaled $89.9 million compared to $15.3 million for the same period in 2020, representing an increase of $74.6 million, or 488.5%.
Casino revenue increased 109.2% in the year ended December 31, 2021, compared to the same period of 2020 and was driven primarily by the increase in gaming devices in 2021 with the opening of expanded casino at Monarch Black Hawk. In addition, 2020 gaming revenue was impacted by the pandemic-related properties closure and capacity and other regulatory limitations, which remained in effect following the properties’ reopening in June 2020. Casino operating expense as a percentage of casino revenue increased to 32.2% for the year ended December 31, 2021, compared to 30.5% in 2020 primarily due to an increase in promotional expenses at Monarch Black Hawk and an increase in gaming taxes with the increase in gaming revenue at Monarch Black Hawk.
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Food and beverage revenue increased 111.0% in the year ended December 31, 2021 over the same period in 2020, due to a 97.4% increase in covers, combined with a 6.9% increase in average revenue per cover. In 2021 we increased the F&B seating capacity with the opening of our new F&B outlets in Monarch Black Hawk. In 2020, in addition to the pandemic-related shutdown of our properties for approximately three months, we also had one of our restaurants and one of our bars at Atlantis closed for redesign and upgrade for approximately six months. Food and beverage operating expense as a percentage of food and beverage revenue in the year ended December 31, 2021 was 79.8% compared to 83.7% over the same period in 2020. Food and beverage operating expense as a percentage of food and beverage revenue decreased as a result of an effort to align menu prices with increased commodity prices and labor costs.
Hotel revenue increased 170.1% in the year ended December 31, 2021 over the same period in 2020 due to increase in available rooms by 15.8 thousand, higher hotel occupancy of 76.7% in 2021 compared to 69.8% for the period the hotel was open in 2020 and higher ADR of $141.17 for the year ended December 31, 2021, compared to $109.46 for the year ended December 31, 2020. REVPAR was $119.03 in 2021 and $82.06 for the period hotel was open in 2020. Hotel operating expense as a percent of the hotel revenue for the year ended December 31, 2021 was 40.7% compared to 50.2% for the same period in 2020. The decrease in the hotel expense margin was primarily due to the increase in ADR and REVPAR.
Other revenue increased 72.6% in 2021 compared to 2020 driven by increase in commission revenues, spa revenue, arcade revenue and retail revenue, driven by the expanded operation in Monarch Black Hawk in 2021 and by the properties closures for approximately three months and limited operations due to COVID-19 related state restrictions after opening in 2020.
SG&A Expense increased to $84.4 million in the year ended December 31, 2021 from $60.4 million in the same period of 2020 due to: i) a $10.2 million increase in salaries, wages and related employee benefits expense; ii) a $6.5 million increase in advertising and promotional expenses; iii) a $1.8 million increase in utility expense; iv) a $1.6 million increase in taxes and licenses; v) a $0.4 million increase in employee relations; and v) a $3.5 million in other expenses. The increase in expense in all categories above is primarily a result of the expanded operation at Monarch Black Hawk. As a percentage of net revenue, SG&A expense decreased to 21.4% in 2021 from 32.7% in 2020.
Depreciation and amortization expense increased to $38.4 million for the year ended December 31, 2021, as compared to $17.3 million for the same period in 2020 primarily due to the addition of the hotel building and furniture, fixtures and equipment assets with the completion of the expansion project in Monarch Black Hawk.
During the year ended December 31, 2021, we recognized $5.1 million in construction litigation expense related to the lawsuit filed by the Monarch Black Hawk Expansion construction project general contractor against the Company and our countersuit against the general contractor, $0.1 million in equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations; and $0.1 million loss on disposal of assets, offset by $0.3 million of litigation proceeds and $0.1 million of insurance claims proceeds. During the year ended December 31, 2020, we recognized $2.8 million in pre-opening expense related to the opening of the new hotel and expanded casino in Black Hawk, $1.6 million in construction litigation expense related to the lawsuit filed by the Monarch Black Hawk Expansion construction project general contractor against the Company and our countersuit against the general contractor, $1.4 million in Colorado legislation lobbying expenses, $0.7 million in equipment, supplies and employee testing expenses directly attributable to the COVID-19 pandemic for reopening of the properties and incremental to normal operations and $0.2 million in unamortized debt issuance cost write off and loss on disposition of assets. These expenses are included in Other operating items, net in the Consolidated Statement of Operations.
During the year ended December 31, 2021, we decreased the outstanding balance under our credit facility by $92.5 million to $90.0 million as of December 31, 2021. During 2021, we expensed $4.5 million interest. During 2020, we capitalized a majority of the interest paid and accrued, as most of the draws were used to finance the Monarch Black Hawk expansion plan. Interest expense, net of amounts capitalized, in 2020 was $0.3 million. See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.
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Comparison of Operating Results for the Years Ended December 31, 2020 and 2019
Refer to ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in the Company’s annual report on Form 10-K for the year ended December 31, 2020.
CAPITAL SPENDING AND DEVELOPMENT
We seek to continuously upgrade and maintain our facilities in order to present a fresh, high quality product to our guests. In addition, we have invested, in our Monarch Black Hawk Expansion Plan. Capital expenditures during the years ended December 31, 2021 and 2020 were as follows (in thousands):
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| | 2021 | 2020 | |||||
| | | | | | | | |
| Atlantis | | $ | 16,075 | | $ | 7,548 | |
| Monarch Black Hawk | | 21,733 | | 38,255 | | ||
| Corporate | | | — | | | 621 | |
| | | $ | 37,808 | | $ | 46,424 | |
During the years ended December 31, 2021 and 2020, capital expenditures related primarily to the work on the Monarch Black Hawk Expansion Plan, the introduction of Red Bloom Asian Kitchen restaurant and Atrium bar and lounge at Atlantis and the redesign and upgrade of the suites on the top floors of the concierge hotel tower at Atlantis, as well as the acquisition of gaming equipment to upgrade and replace existing equipment at both properties.
Monarch Black Hawk Expansion Plan
In 2013, we began work to convert the Monarch Black Hawk into a full-scale casino resort spa. The multi-phased expansion of the Monarch Casino Resort Spa Black Hawk involved construction of a new parking structure, demolition of the existing parking structure, construction of a new hotel tower and casino expansion and redesign and upgrade of a part of the legacy facility.
In November 2016, the new nine-story parking structure, offering approximately 1,350 parking spaces, was completed and became available for use by Monarch Black Hawk guests. The demolition and removal of the old parking structure, which included a controlled implosion of the old garage, was completed in the first quarter of 2017.
On February 8, 2017, we broke ground on the hotel tower and casino expansion.
In the fourth quarter of 2020, we began the phased opening of our new hotel tower and casino expansion, which increased the casino space and added a 23-story hotel tower with 516 guest rooms and suites, banquet and meeting room space, a retail store, a concierge lounge, an upscale spa and pool facility located on the top floor of the tower, three new restaurants, and additional bars and lounges. In 2021, we added a poker room, a keno counter, a sportsbook, sports lounge and bar, as well as additional slot machines in the legacy facility. In February 2022, we completed the Monarch Black Hawk expansion with the opening of a new specialty restaurant.
We are confident 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 derive accelerated market share and revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facility.
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Operating Activities
For the year ended December 31, 2021, net cash provided by operating activities totaled $128.1 million, an increase of $96.7 million, or 307.4%, compared to the same period of the prior year. This increase was primarily due to: i) a $44.8 million increase in Net income; ii) $22.7 million related to decrease in income tax receivable, offset by a $9.2 million decrease in deferred tax, both as a result of an accelerated depreciation for tax purposes on the assets put in service in 2020 with the opening of a hotel tower and expanded casino in Monarch Black Hawk; iii) a $21.3 million increase in depreciation and amortization, including amortization of deferred loan costs; iv) a $16.9 million change in working capital; and v) a $0.2 million increase in stock-based compensation expense.
Investing Activities
Net cash used in investing activities totaled $37.8 million and $46.4 million in the years ended December 31, 2021 and 2020, respectively. Net cash used in investing activities during the years ended December 31, 2021 and 2020 consisted primarily of cash used for the new hotel tower and casino expansion at Monarch Casino Resort Spa Black Hawk, for renovation projects at Atlantis, and for the acquisition of gaming and other equipment at both properties.
Financing Activities
Net cash used in financing activities of $85.1 million in 2021 represented $92.5 million principal payments under the credit facility, offset by $7.4 million of proceeds from stock options exercise, net of payroll taxes from net exercises. Net cash provided by financial activities in 2020 represented $13.7 million principal payments, net of the borrowings under the credit facility, $2.9 million long-term debt refinancing cost and $0.7 million of net proceeds from stock options exercise.
We expect that the Company’s cash position in the next several quarters will be negatively impacted by the outstanding construction retention and other payments related to the Monarch Black Hawk Expansion project of $58.9 million, which are reflected in “Construction Accounts Payable” on the balance sheet as of December 31, 2021.
We expect that the Company’s cash position in the next few quarters will be positively impacted by the expected tax refund for 2020 fiscal year of $26.9 million, which is reflected in “Income taxes receivable” on the balance sheet as of December 31, 2021.
Purchase obligations of materials and supplies used in the normal operation of our business represent approximately $10.8 million as of December 31, 2021 and all are cancelable by us upon providing a 30-day notice.
Amended Credit Facility
On September 3, 2020, we entered into the Fourth Amended and Restated Credit Agreement with Wells Fargo Bank, N.A., as administrative agent and certain banks (the “Fourth Amended Credit Facility”). On April 30, 2021, the Company entered into an amendment to the Fourth Amended Credit Facility (collectively, with all prior amendments, the “Amended Credit Facility”).
The maturity date of the Amended Credit Facility is September 3, 2023. The Amended Credit Facility increases the aggregate principal amount to $270 million. The $270 million Amended Credit Facility consists of: a $200 million Term Loan Facility and a $70 million Revolving Credit Facility, together with an option to increase the facility by up to an additional $75 million Revolving Credit Facility.
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We are required to make quarterly principal payments under the Term Loan Facility on each Term Loan Installment Date, commencing on December 31, 2020, in an amount equal to (x) the percentage set forth opposite the applicable period during which such Term Loan Installment Date occurs (i.e., 1.25% for the period from December 31, 2020 to September 30, 2021, and 2.50% for the period from December 31, 2021 and thereafter) multiplied by (y) $200 million. The estimated amount of the mandatory principal payments due in the next twelve months is $20 million.
As of December 31, 2021, we had an outstanding principal balance of $90 million under the Term Loan Facility, a $0.6 million letter of credit and no borrowings under the Revolving Credit Facility; $69.4 million remained available for borrowing.
Borrowings are secured by liens on substantially all of the Company’s real and personal property.
In addition to other customary covenants for a facility of this nature, as of December 31, 2021, we are required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 4.50:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.15:1. As of December 31, 2021, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.7:1 and 5.7:1.
The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.00%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.00%, or the Prime Rate. The applicable margins vary depending on Company’s leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.325%, based on our leverage ratio.
At December 31, 2021, our interest rate was based on LIBOR and our leverage ratio was such that pricing for borrowings under the Amended Credit Facility was LIBOR plus 1.0%. On December 31, 2021, the Term Loan Facility interest rate was 1.11%, computed as LIBOR of 0.11% plus interest margin of 1.0%. The carrying value of the debt outstanding under the Amended Credit Facility approximates fair value because the interest fluctuates with the lender’s prime rate or other market rates of interest.
On the terms and subject to some conditions, the Company may, at any time before the Maturity Date, request an increase of the Revolving Credit Facility, provided that each such increase is equal to $15.0 million or an integral multiple of $1.0 million in excess and, after giving effect to the requested increase, the aggregate amount of the increases in the total revolving loan commitment shall not exceed $75.0 million.
We may prepay borrowings under the Amended Credit Facility revolving loan without penalty (subject to certain conditions and certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Once reduced or cancelled, the Revolving Credit Facility may not be increased or reinstated without the prior written consent of all lenders.
As of December 31, 2021, $68.2 million “Long-term debt, net” in the Company’s consolidated balance sheets represents the $90.0 million outstanding loan amount under the Amended Credit facility, net of $1.8 million unamortized debt issuance costs and $20.0 million mandatory principal payment that are due in next twelve months and are presented as “Current portion of long-term debt” in the Current liabilities section of the Company’s consolidated balance sheets.
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We believe that the expected cash flows from operating activities and the $69.4 million available under our Amended Credit Facility as of December 31, 2021 will be sufficient to support our current operations, meet our debt obligations and fulfill our capital expenditure plans for the twelve months from the filing of Form 10-K for the year ended December 31, 2021; however, we are surrounded by uncertainty about COVID-19, as well as financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow in the upcoming months or if our cash needs exceed the Company’s 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of our policies, including the estimated useful lives assigned to our assets and the calculation of the capitalized interest, the determination of the allowance for doubtful accounts and allowance for unredeemed gift certificates, self-insurance reserves, deferred revenue, the calculation of income tax liabilities and the calculation of stock-based compensation, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on historical experience, terms of existing contracts, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodologies applied, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.
The consolidated financial statements include the accounts of Monarch and its subsidiaries. Intercompany balances and transactions are eliminated.
Allowance for Doubtful Accounts
We extend short-term credit to our gaming customers. Such credit is non-interest bearing and is due on demand. In addition, we also have receivables due from hotel guests and convention groups and events, which are primarily secured with a credit card at the time a customer makes a reservation or checks in. An allowance for doubtful accounts is established for all of our receivables based upon our historical collection and write-off experience, and taking into consideration the current economic and business conditions and management’s expectations of future economic and business conditions. The allowance is applied even when the risk of credit loss is remote. When a situation warrants, the Company may create a specific identification reserve for a high collection risk receivable. We write off our uncollectible receivables once all efforts have been made to collect such receivables. The book value of receivables approximates fair value due to the short-term nature of the receivables.
Casino Revenues
Casino revenues represent the net win from gaming activity, which is the difference between the amounts won and lost, which represents the transaction price. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. Funds deposited by customers in advance and outstanding chips and slot tickets in the customers’ possession are recognized as a liability until such amounts are redeemed or used in gaming play by the customer. Additionally, net win is reduced by the performance obligations for the players’ club program, progressive jackpots and any pre-arranged marker discounts. The players club performance obligations result in recognition of deferred revenue at the standalone selling prices (“SSP”) of the goods and services that the points are expected to be redeemed for. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of players’ wagers that are contributed to the progressive jackpot award, and 2) as jackpots are won for the portion of the progressive jackpot award contributed by us. Cash discounts and other cash incentives to guests related to gaming play are recorded as a reduction to gaming revenue.
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Income Taxes
Income taxes are recorded in accordance with the liability method pursuant to authoritative guidance. Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements: (a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.
Our income tax returns are subject to examination by tax authorities. We assess potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes. Under the accounting guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50.0% likelihood of being realized upon ultimate settlement. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure.
Stock-based Compensation
We account for stock-based compensation in accordance with authoritative guidance which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. It requires an entity to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. We calculate the grant-date fair value using the Black-Scholes valuation model.
The Black-Scholes valuation model requires the input of highly subjective assumptions which include the expected term of options granted, risk-free interest rates, expected volatility, and expected rates of dividends. We estimate an expected term for each stock option grant based on the weighted-average time between grant date and exercise date and the risk-free interest rate assumption was based on U.S. Treasury rates appropriate for the expected term. We use historical data and projections to estimate expected volatility and expected employee behaviors related to option exercises and forfeitures.
RECENTLY ISSUED ACCOUNTING STANDARDS
A variety of proposed or otherwise potential accounting standards are currently under review and study by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, the implementation of any such proposed or revised standards would have on the Company’s Consolidated Financial Statements.
Reference Rate Reform: In March 2020, the FASB issued temporary accounting guidance to ease the accounting effects of reform to the London Interbank Offered Rate (“LIBOR”) and other reference rates. The guidance contains optional expedients and exceptions that apply to accounting for contract modifications, hedging relationships, and other transactions affected by reference rate reform. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022, and may be applied from the beginning of an interim period or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. The Company does not expect the adoption to have a material impact on its Consolidated Financial Statements.
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Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued amended accounting guidance to simplify the accounting for income taxes. The amendment eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also simplifies other aspects of the accounting for income taxes. We adopted this amended accounting guidance in 2021. The amendment has no impact on our financial position and results of operations.