Monarch Casino & Resort(MCRI) - 2022 Q4 - Annual Report

Part I Business Monarch Casino & Resort operates two casino resorts, Atlantis in Reno and Monarch Black Hawk, focusing on maximizing revenue through service and upgrades in competitive, regulated markets - The company owns and operates two hotel and casino properties: the Atlantis in Reno, NV, and the Monarch Black Hawk in Black Hawk, CO[8] - The core business strategy is to maximize revenues and cash flow from casino, food and beverage, and hotel operations by focusing on exceptional guest service and cost efficiency[9] - The company utilizes a cross-property players' club, "Monarch Rewards," to track guest activity, build loyalty, and guide direct marketing efforts[43] Properties Overview Atlantis in Reno and Monarch Black Hawk, the company's two main properties, feature extensive gaming and lodging, showing strong hotel performance growth Atlantis Hotel Performance (2020-2022) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Occupancy rate (%) | 83.30% | 82.10% | 71.30% | | ADR ($) | $158.54 | $123.18 | $108.44 | | REVPAR ($) | $149.11 | $114.85 | $86.85 | Monarch Black Hawk Hotel Performance (2020-2022) | | 2022 | 2021 | 2020 (1) | | :--- | :--- | :--- | :--- | | Occupancy rate (%) | 75.10% | 67.90% | 29.60% | | ADR ($) | $201.92 | $182.78 | $177.63 | | REVPAR ($) | $164.91 | $132.75 | $52.97 | Capital Investments and Expansion Monarch continuously invests in facility upgrades, with $48.4 million in 2022 capital expenditures for Monarch Black Hawk transformation and Atlantis upgrades, holding a 16-acre parcel for future expansion - Capital expenditures totaled $48.4 million in 2022, $37.8 million in 2021, and $46.4 million in 2020, primarily for the Monarch Black Hawk transformation and Atlantis upgrades[25] - The company owns a 16-acre parcel of land across from the Atlantis, zoned for a resort casino and available for future development[26] Competition and Market The company faces intense competition in Reno and Black Hawk markets from other casinos and potential new gaming options, including Native American facilities in California - The Reno-Sparks gaming market is intense, with approximately 15 casinos generating over $12.0 million in annual gaming revenues[44] - Major Native American owned facilities in California have adversely impacted many hotel casinos in Reno[48] - The Black Hawk/Central City gaming market is geographically isolated, but additional gaming authorization in the Denver metropolitan area would adversely affect the market[52] Regulation and Licensing Operations are subject to strict gaming regulations in Nevada and Colorado, requiring revocable licenses, with Colorado's Amendment 77 removing betting limits and the company holding a Master License for sports betting - Gaming licenses are revocable privileges, not transferable, and can be suspended or limited for reasonable cause by regulatory authorities[55] - In Nevada, any person acquiring more than 10% of voting securities must apply for a finding of suitability from the Nevada Gaming Commission[62] - Colorado's Amendment 77, effective May 1, 2021, removed betting limits (previously $100) and allowed new games like baccarat and keno in Black Hawk[81] - Monarch Black Hawk was issued a Master License for sports betting on February 20, 2020, with sports betting going live in Colorado on May 1, 2020[95][97] Risk Factors The company faces significant risks including sensitivity to consumer spending, pandemic disruptions, intense market competition, high dependence on two properties, ongoing litigation, cybersecurity threats, and regulatory changes - The business is highly sensitive to economic downturns impacting discretionary consumer spending on leisure and entertainment[106] - The company is entirely dependent on its two resorts, Atlantis and Monarch Black Hawk, for all operating cash flow, posing greater risks than diversified competitors[111] - The company has numerous disagreements with its Monarch Black Hawk general contractor over costs, delays, and other matters, resulting in litigation[126] - The Farahi family beneficially owns approximately 32% of the company's outstanding common stock, enabling significant influence over company affairs[113] Properties As of December 31, 2022, the company's properties include Atlantis in Reno and Monarch Black Hawk in Colorado, with adjacent expansion land and a warehouse parcel, substantially all pledged as credit facility collateral - The Atlantis property in Reno includes an adjacent 16-acre site zoned for casino use and available for future expansion[187] - The Monarch Black Hawk property includes the resort and a separate 9.0-acre parcel with an industrial warehouse[194] - Substantially all of the company's real and personal property is pledged as collateral under its credit facility[192] Legal Proceedings Legal proceedings information is incorporated by reference from Note 11, primarily detailing ongoing litigation with PCL Construction Services, Inc. regarding the Monarch Black Hawk expansion - Information regarding legal proceedings is incorporated by reference from Item 8, Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 11[193] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (MCRI), with the board authorizing a $5.00 special dividend and a recurring $1.20 annual dividend, alongside an active stock repurchase plan - On February 7, 2023, the board authorized a one-time cash dividend of $5.00 per share and a recurring annual cash dividend of $1.20 per share, payable quarterly starting in Q2 2023[200] - As of December 31, 2022, the company has authorization to repurchase up to 2,900,000 shares under its Repurchase Plan[209] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong 2022 financial performance, with net revenue up 20.9% to $477.9 million and net income up 27.7% to $87.5 million, driven by Monarch Black Hawk's ramp-up, strong liquidity, and debt reduction Results of Operations For 2022, net income increased 27.7% to $87.5 million and net revenues grew 20.9% to $477.9 million, driven by Monarch Black Hawk's ramp-up and double-digit growth across all revenue segments Financial Highlights (2022 vs. 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Revenues ($) | $477.9M | $395.4M | +20.9% | | Income from Operations ($) | $111.4M | $89.9M | +24.0% | | Net Income ($) | $87.5M | $68.5M | +27.7% | | Diluted EPS ($) | $4.47 | $3.53 | +26.6% | - Casino revenue increased 16.0%, Food and beverage revenue increased 28.6%, and Hotel revenue increased 30.9% in 2022 compared to 2021[234][235][236] - The company recognized $7.3 million in construction litigation expenses in 2022, up from $5.1 million in 2021[240] Liquidity and Capital Resources The company's liquidity is driven by strong operating cash flow, generating $139.8 million in 2022, enabling $83.0 million in debt principal payments, with a new credit facility established post-year-end - Net cash provided by operating activities totaled $139.8 million in 2022, a 9.1% increase from 2021[251] - The company made $83.0 million in principal payments on its long-term debt during 2022[253] - On February 1, 2023, the company entered into a new Fifth Amended Credit Facility, increasing its revolving line of credit from $70.0 million to $100.0 million and extending the maturity to January 1, 2025[401] Capital Spending and Development Capital expenditures totaled $48.4 million in 2022, decreasing as the major Monarch Black Hawk expansion completed, with spending focused on further Black Hawk transformations and significant Atlantis upgrades Capital Expenditures (in thousands) | | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Atlantis | $32,058 | $16,075 | | Monarch Black Hawk | $16,353 | $21,733 | | Total | $48,411 | $37,808 | - The Monarch Black Hawk expansion was completed in February 2022 with the opening of a new specialty restaurant[247] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020-2022, with an unqualified opinion, detailing key financial data, accounting policies, debt, legal contingencies, and significant subsequent events Consolidated Statement of Income Highlights (Year Ended Dec 31, 2022, in thousands) | | Amount (in thousands) | | :--- | :--- | | Net revenues | $477,870 | | Income from operations | $111,442 | | Net income | $87,479 | | Diluted Earnings Per Share ($) | $4.47 | Consolidated Balance Sheet Highlights (As of Dec 31, 2022, in thousands) | | Amount (in thousands) | | :--- | :--- | | Total current assets | $89,429 | | Total assets | $692,942 | | Total current liabilities | $117,744 | | Total liabilities | $153,988 | | Total stockholders' equity | $538,954 | - The company is in a legal dispute with PCL Construction Services, Inc. over the Monarch Black Hawk expansion, involving ongoing litigation and mechanics' liens, with $7.3 million in related litigation expenses incurred in 2022[389][392][395] - Subsequent to year-end, on February 7, 2023, the company declared a one-time $5.00 per share dividend and initiated a recurring annual dividend of $1.20 per share[404][405] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes in Q4, a conclusion supported by an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[409] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[414] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[418] Part III Directors, Executive Officers and Corporate Governance All information for this item is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders - This information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Stockholders[429] Executive Compensation All information for this item is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders - This information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Stockholders[430] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's equity compensation plans, showing 1,589,370 securities to be issued from outstanding options at a weighted-average exercise price of $51.12, with 776,977 securities remaining available for future issuance Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise of outstanding options (shares) | Weighted average exercise price of outstanding options ($) | Number of securities remaining available for future issuance (shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,589,370 | $51.12 | 776,977 | Certain Relationships and Related Transactions, and Director Independence All information for this item is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders - This information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Stockholders[434] Principal Accounting Fees and Services All information for this item is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders - This information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Stockholders[435] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including the Independent Auditor's Report, consolidated financial statements, Schedule II, and a comprehensive list of various agreements and certifications - Lists all financial statements, notes, and the report of the independent registered public accounting firm as included in Part II, Item 8[438][439][440] - Includes Financial Statement Schedule II – Valuation of Qualifying Accounts, detailing the allowance for doubtful accounts for 2020, 2021, and 2022[441][442] - Provides a detailed list of all exhibits filed with the report, such as credit agreements, lease agreements, and equity incentive plans[445][446][448]