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4-Traders Homepage  >  Equities  >  Nasdaq  >  Monarch Casino & Resort, Inc.    MCRI

MONARCH CASINO & RESORT, INC. (MCRI)
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MONARCH CASINO & RESORT : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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03/14/2018 | 08:04pm CEST

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. Statements in this discussion may be forward-looking. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed. See "Forward-Looking Statements" preceding Item 1. "BUSINESS".



OVERVIEW OF OUR BUSINESS



Monarch Casino & Resort, Inc. was incorporated in Nevada in1993 and, along with its consolidated subsidiaries, is referred to collectively in this Annual Report on Form 10-K as "Monarch", "we", "our" and "us". Monarch owns and operates the Atlantis Casino Resort Spa, a hotel and casino in Reno, Nevada (the "Atlantis") and Monarch Casino Black Hawk, a casino in Black Hawk, Colorado. In addition, we own separate parcels of land located next to the Atlantis, a parcel of land located next to the Monarch Casino Black Hawk and a parcel of land with an industrial warehouse located between Denver, Colorado and Monarch Casino Black Hawk. We also own Chicago Dogs Eatery, Inc. and Monarch Promotional Association, both of which were formed in relation to extended 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 operations and, at the Atlantis, our hotel operations. The Monarch Casino Black Hawk does not have a hotel; however, we are in the process of renovations and construction that will include a hotel. See Item 1, "BUSINESS - THE MONARCH CASINO 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.

FACTORS IMPACTING OUR RESULTS OF OPERATION

Our operating results may be affected by, among other things, competitive factors, gaming tax increases, 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 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 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. Businesses continue to relocate to Northern Nevada and local business volume has steadily increased. While such economic activity could ultimately drive additional revenue and profit at Atlantis, we are experiencing the more immediate effect of increased labor costs, which, combined with continued aggressive marketing programs by our competitors, have applied upward pressure on Atlantis operating costs.



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Monarch Casino Black Hawk: Since the acquisition of Monarch Casino Black Hawk in April 2012, our focus has been to maximize casino and food and beverage revenues while upgrading the existing facility and laying the groundwork for the major expansion. There is currently no hotel on the property. In October 2012, we began a project to redesign and upgrade the existing Monarch Casino Black Hawk facility. In September 2013, we opened a new buffet. In August 2015, we completed the redesign and upgrade of the existing Monarch Casino Black Hawk, bringing to the facility's interior the same quality, ambiance and finishes of the ongoing master planned expansion that will transform Monarch Casino Black Hawk into a full-scale casino resort. In the fourth quarter of 2013, we began work on the Monarch Black Hawk Expansion Plan and have since completed the first phase. In November 2016, we opened for guest use our elegant nine-story parking facility with about 1,350 spaces. Construction of a new hotel tower and casino expansion on the site where the old parking structure was sitting is under way. (see CAPITAL SPENDING AND DEVELOPMENT - Monarch Black Hawk Expansion Plan). Once completed, the Monarch Black Hawk Expansion Plan will nearly double the casino space and will add a 23-story hotel tower with approximately 500 guest rooms and suites, an upscale spa and pool facility, three additional restaurants (increasing the total to four), additional bars and associated support facilities. We currently expect completion of the entire expansion in the second quarter of 2019.



RESULTS OF OPERATIONS



Comparison of Operating Results for the Years Ended December 31, 2017 and 2016

For the year ended December 31, 2017, our net income totaled $25.5 million, or $1.39 per diluted share, compared to net income of $24.6 million, or $1.39 per diluted share for the same period of 2016, reflecting a 3.9% increase in net income and no change in diluted earnings per share. Net revenue for the years ended December 31, 2017 and 2016 was $230.7 million and $217.0 million, respectively, reflecting an increase of $13.7 million, or 6.3%. Income from operations for the year ended December 31, 2017 totaled $40.7 million compared to $38.5 million for the same period in 2016, representing an increase of $2.1 million, or 5.5%.

Casino revenue increased 5.8% in the year ended December 31, 2017 compared to the same period of 2016. Casino revenues increased at both the Monarch Casino Black Hawk and at the Atlantis. The Atlantis benefited from the region's market strength. Our renovated Monarch Black Hawk casino increased market share despite the disruptions related to the property's expansion. Casino operating expense as a percentage of casino revenue decreased to 40.9% for the year ended December 31, 2017, compared to 41.2% in 2016 due to the effect of higher casino revenue combined with operating cost efficiencies.

Food and beverage revenue increased 5.2% in the year ended December 31, 2017 over the same period in 2016, due to a 2.7% increase in average revenue per cover and a 2.4% increase in covers served. Food and beverage operating expense as a percentage of food and beverage revenue in the year ended December 31, 2017

was 40.6% compared to 40.9% over the same period in 2016. The decrease in expense margin is due primarily to the costs, related to the redesign and upgrade of Toucan Charlie's Buffet at Atlantis, which costs were expensed during the first quarter of 2016 and the improved cost of sales percentage in 2017, offset by increase in labor expenses.

Hotel revenue increased 6.0% due to a higher ADR of $81.46 for the year ended December 31, 2017 compared to $79.52 for the same period in 2016, combined with higher hotel occupancy of 89.4% in 2017 compared to 88.2% in 2016. REVPAR was $82.40 and $77.50 for the years ended December 31, 2017 and 2016, respectively. Hotel operating expense as a percent of hotel revenue for the year ended December 31, 2017 was 37.6% compared to 30.9% for the same period in 2016. The increase is due primarily to higher payroll and related benefits expense, expenses related to the implementation of advanced analytical tools, hotel repair and maintenance expense, as well as expenses related to the shuttle service and expanded valet services implemented at Monarch Casino Black Hawk.

Other revenue increased 7.1% in 2017 compared to 2016 driven primarily by increased Atlantis arcade revenue, spa and salon revenue and retail revenue.

Promotional allowances as a percentage of gross revenues declined to 17.4% for the year ended December 31, 2017 compared to 17.8% for the year ended December 31, 2016. This decrease was primarily due to higher revenues and more efficient utilization of complimentaries.



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Selling, general and administrative expense ("SG&A Expense") increased to $62.7 million in the year ended December 31, 2017 from $57.7 million in the same period of 2016 primarily due to: i) a $3.2 million increase in salaries, wages and related employee benefits expense; ii) a $0.5 million increase in professional fees; iii) a $0.4 million increase in repair and maintenance expense; iv) a $0.3 million increase in information technology expense; v) a

$0.3 million increase in marketing expense; vi) a $0.2 million increase in property tax expense resulting from the new parking structure at Monarch Casino Black Hawk; and vii) a $0.1 million increase in contribution expense.

Depreciation and amortization expense increased to $15.1 million for the year ended December 31, 2017 as compared to $14.8 million for the same period in 2016 as a result of: i) a $0.4 million increase in depreciation expense from new assets at Atlantis and ii) a $0.1 million decrease in depreciation expense at Monarch Casino Black Hawk as a result of the accelerated depreciation of the old garage building in 2016, partially offset by the increase in depreciation expense from the new parking garage at Monarch Casino Black Hawk.

In 2016, we incurred a $0.6 million loss from disposal of assets, primarily as a result of the write off of the remaining net book value of the hotel towers doors at the Atlantis, that were replaced with new doors in the second quarter of 2016.

During the year ended December 31, 2017, we did not draw on or make principal payments on the Credit Facility and the outstanding balance of the Credit Facility remained at $26.2 million as of December 31, 2017. Interest expense, net of amounts capitalized were $1.0 million and $0.6 million in 2017 and 2016, respectively. The increase in interest expense is a result of increase in the interest rate and the commitment fees paid. See further discussion of our Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Years Ended December 31, 2016 and 2015

For the year ended December 31, 2016, our net income totaled $24.6 million, or $1.39 per diluted share, compared to net income of $20.7 million, or $1.19 per diluted share for the same period of 2015, reflecting a 19.0% increase in net income and a 16.8% increase in diluted earnings per share. Net revenue for the year ended December 31, 2016 and 2015, was $217.0 million and $202.2 million, respectively, reflecting an increase of $14.8 million, or 7.3%. Income from operations for the year ended December 31, 2016 totaled $38.5 million compared to $32.6 million for the same period in 2015, representing an increase of $6.0 million, or 18.4%.

Casino revenue increased 7.7% in the year ended December 31, 2016 compared to the same period of 2015. Casino revenues increased at both the Monarch Casino Black Hawk and at the Atlantis. The Atlantis benefited from the region's market strength and the increase in local patrons' visits. Monarch Black Hawk casino revenue increased despite the disruptions related to the property's expansion. Casino operating expense as a percentage of casino revenue decreased to 41.2% for the twelve months ended December 31, 2016, compared to 42.1% in 2015 due to the effect of higher casino revenue partially offset by higher complimentary expense.

Food and beverage revenue for the twelve months ended December 31, 2016 increased 6.7% over the same period in 2015, due to a 6.4% increase in average revenue per cover. Covers served were flat. Food and beverage operating expense as a percentage of food and beverage revenue in the twelve months ended December 31, 2016 were 40.9% compared to 39.4% over the same period in 2015. The increase in expense margin is due primarily to costs, related to the redesign and upgrade of Toucan Charlie's Buffet at Atlantis, which costs were expensed during the first quarter of 2016.

Hotel revenue increased 3.3% due to a higher ADR of $79.52 for the year ended December 31, 2016 compared to $76.92 for the same period in 2015, partially offset by slightly lower hotel occupancy of 88.2% in 2016 compared to 89.7% in 2015. REVPAR was $77.50 and $75.24 for the years ended December 31, 2016 and 2015, respectively. Hotel operating expense as a percent of hotel revenue for the twelve months ended December 31, 2016 was 30.9% compared to 30.0% for the same period in 2015. The increase is due primarily to higher payroll and related benefits expense and expense related to the implementation of advanced analytical tools.

Other revenue increased 3.9% in 2016 compared to 2015, driven primarily by increased Atlantis arcade revenue, Atlantis spa and salon revenue and retail revenue.



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Promotional allowances as a percentage of gross revenues declined to 17.8% for the year ended December 31, 2016 compared to 18.2% for the year ended December 31, 2015. This decrease was primarily due to higher revenues and more efficient utilization of complimentaries.

SG&A Expense increased to $57.7 million in the twelve months ended December 31, 2016 from $54.8 million in the same period of 2015 primarily due to: i) a $1.8 million increase in salaries, wages and related benefits expense; ii) a $0.7 million increase in marketing expense; iii) a $0.5 million increase in rental expense from the parking lot lease at Atlantis (see Note 12. Related Party Transactions); iv) a $0.2 million increase in property tax expense, resulting from the new parking structure at Monarch Casino Black Hawk and the addition of the leased parking lot at Atlantis; and v) a $0.2 million increase in legal fees expense, all offset by a decrease in utility expense of $0.5 million.

Depreciation and amortization expense decreased to $14.8 million for the year ended December 31, 2016 as compared to $15.9 million for the same period in 2015 as a result of: i) a $1.1 million decrease in depreciation expense on the parking structure at Monarch Casino Black Hawk; and ii) a $0.3 million decrease in depreciation expense at Atlantis due to assets having become fully depreciated, all partially offset by the increase in depreciation expense from new assets related to the remodel and upgrade project at Monarch Casino Black Hawk.

In 2016, we incurred a $0.6 million loss from disposal of assets, primarily as a result of the write off of the remaining net book value of the hotel towers doors at the Atlantis, that were replaced with new doors in the second quarter of 2016.

During the year ended December 31, 2016, we paid down the principal balance on our Credit Facility by $14.7 million, which decreased the outstanding balance of the Credit Facility to $26.2 million at December 31, 2016 from $40.9 million at December 31, 2015. Interest expense, net of amounts capitalized, decreased to $0.6 million in 2016 from $0.7 million in 2015 primarily as a result of lower borrowings in 2016 compared to 2015, offset by an increase in commitment fees in relation to the Amended Credit Facility we entered into in July 2016. See "LIQUIDITY AND CAPITAL RESOURCES".

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. Capital expenditures during the years ended December 31, 2017 and 2016 were as follows (in thousands):



Capital Expenditures:




                                                 2017        2016

                  Atlantis                     $  6,464    $  7,894
                  Monarch Casino Black Hawk      40,308      17,029
                                               $ 46,772    $ 24,923



During the twelve months ended December 31, 2017 and 2016, capital expenditures related primarily to the work on the Monarch Black Hawk Expansion Plan, as well as acquisition of gaming equipment to upgrade and replace existing equipment at the Monarch Casino Black Hawk and the Atlantis.

Since the acquisition of the Monarch Casino Black Hawk, we have upgraded the property's food and beverage operations (including an all-new buffet) and completed the redesign and upgrade of the existing casino floor. Our plans also call for the exterior of the existing facility to be refinished to match the master planned expansion. The exterior refinishing is expected to cost approximately $11 to $13 million and is anticipated to be funded primarily from operating cash flow or the credit facility.

Monarch Black Hawk Expansion Plan

In the fourth quarter of 2013, we began work to convert the Monarch Casino Black Hawk into a full-scale casino resort.

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The multi-phased expansion of the Monarch Casino Black Hawk involves construction of a new parking structure, demolition of the existing parking structure and construction of a new hotel tower and casino expansion. In November 2016, the new nine-story parking structure, offering approximately 1,350 parking spaces, was completed and became available for use by Monarch Casino 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. The new 23-story tower will nearly double the existing casino space and will include approximately 500 hotel rooms, an upscale spa and pool facility, three additional restaurants and additional bars. We currently expect completion of the entire tower in the second quarter of 2019 at a total cost of approximately $229 to $234 million. We expect to finance the cost through a combination of operating cash flow and the credit facility. We can provide no assurance that any project will be completed on schedule, if at all, or within established budgets, or that any project will result in increased earnings to us.

LIQUIDITY AND CAPITAL RESOURCES

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

For the year ended December 31, 2017, net cash provided by operating activities totaled $49.5 million, an increase of approximately $5.7 million, or 13.1%, compared to the same period of the prior year. This increase was primarily due to: i) a $6.1 million increase in share based compensation as a result of the adoption of the ASU No. 2016-09, which changes the classification and presentation of the stock-based compensation in the Statement of Cash Flows; ii) a $3.0 million decrease in the deferred tax asset as a result of a decrease in temporary tax-to-book differences and a revaluation of the deferred tax asset to a 21% tax rate, established with the Tax Cuts and Jobs Act Bill of 2017; iii) a

$1.0 million increase in net income; and iv) a $0.4 million increase in depreciation and amortization; offset by a combined increase in ordinary working capital of $4.1 million and a decrease in loss on disposal of assets of $0.7 million.

Net cash used in investing activities totaled $46.7 million and $24.9 million in the years ended December 31, 2017 and 2016, respectively. Net cash used in investing activities during the year ended December 31, 2017 consisted primarily of cash used for the new hotel tower and casino expansion at Monarch Casino Black Hawk, the purchase of a parcel of land with an industrial warehouse in proximity to the Monarch Casino Black Hawk, the re-carpeting of the casino floor and hotel rooms and upgrading the fountains at Atlantis, and for acquisition of gaming and other equipment at both properties. Net cash used in investing activities during the year ended December 31, 2016 consisted primarily of cash used for the new parking garage at Monarch Casino Black Hawk, the redesign and upgrade of Toucan Charlie's Buffet at Atlantis, improvements to new additional parking spaces at Atlantis, and for acquisition of gaming and other equipment at both properties.

There were no financing activities during the year ended December 31, 2017. Net cash used in financing activities during the year ended December 31, 2016 was $13.6 million and represented $14.7 million in payments under our credit facility, offset by $1.1 million in proceeds from stock option exercises, including excess tax benefit from options exercised.

On July 20, 2016, we entered into an amended and restated credit facility agreement (the "Amended Credit Facility"), under which our former $100 million credit facility (which, as of June 30, 2016, had borrowing capacity reduced to $45.5 million as a result of $19.5 million in mandatory reductions pursuant to the agreement and $35 million in voluntary reductions, as allowed by the agreement) was increased to $250.0 million, and the maturity date was extended from November 15, 2016 to July 20, 2021.

As of December 31, 2017, we had $26.2 million borrowed and a $0.6 million Standby Letter of Credit and $223.2 million remaining in available borrowings of the $250.0 million maximum principal available under the Amended Credit Facility. As of December 31, 2017, there have been no withdrawals from the Standby Letter of Credit.



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The total revolving loan commitment under the Amended Credit Facility will be automatically and permanently reduced to $50 million in the first full quarter after completion of the expansion project at the Monarch Casino Black Hawk and all then outstanding revolving loans up to $200 million under the Amended Credit Facility will be converted to a term loan at such time. We may be required to prepay borrowings under the Amended Credit Facility using excess cash flows depending on our leverage ratio no later than December 31, 2019. We have an option to permanently reduce the maximum revolving available credit at any time so long as the amount of such reduction is at least $0.5 million and in multiples of $50,000.

Borrowings are secured by liens on substantially all of our real and personal property.

In addition to other customary covenants for a facility of this nature, as of December 31, 2017, we are required to maintain a leverage ratio, defined as consolidated debt divided by Adjusted EBITDA, of no more than 3.5:1 and a fixed charge coverage ratio (Adjusted EBITDA divided by fixed charges, as defined) of at least 1.15:1. As of December 31, 2017, our leverage ratio and fixed charge coverage ratios were 0.5:1 and 40.9:1, respectively.

The interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The applicable margins will vary depending on our leverage ratio. Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.45%, based on our leverage ratio.

At December 31, 2017, 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 1.00%. At December 31, 2017, the one-month LIBOR interest rate was 1.57%. 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.

We may prepay borrowings under the Amended Credit Facility without penalty (subject to certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period). Amounts prepaid may be re-borrowed so long as the total borrowings outstanding do not exceed the maximum principal available.

We believe that our existing cash balances, cash flow from operations and borrowings available under the Amended Credit Facility will provide us with sufficient resources to fund our operations, meet our debt obligations, and fulfill our capital expenditure plans over the next twelve months; however, our operations are subject to financial, economic, competitive, regulatory, and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow 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 obtaining additional equity capital.

OFF-BALANCE SHEET ARRANGEMENTS

The shopping center adjacent to the Atlantis (the "Shopping Center") is owned by Biggest Little Investments, L.P. ("BLI"). John Farahi and Bob Farahi, Co-Chairmen of the Board and our executive officers, and Ben Farahi are the three largest stockholders (the "Farahi Family Stockholders") of Monarch and each also beneficially owns limited partnership interests in BLI. Maxum LLC is the sole general partner of BLI, and Ben Farahi is the sole managing member of Maxum LLC. Neither John Farahi nor Bob Farahi has any management or operational control over BLI or the Shopping Center. Until May 2006, Ben Farahi held the positions of Co-Chairman of the Board, Secretary, Treasurer and Chief Financial Officer of the Company.



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In response to customer demand for more convenient surface parking at the Atlantis, and after detailed analysis, on August 28, 2015, we, through our subsidiary Golden Road, entered into a 20-year lease (the "Parking Lot Lease") with BLI with respect to a portion of the Shopping Center. This lease gives the Atlantis the right to use a parcel, approximately 4.15 acres, comprised of a commercial building and surrounding land adjacent to the Atlantis (the "Leased Property"). The primary purpose of the Parking Lot Lease is to provide additional, convenient, Atlantis surface parking. We demolished the commercial building on the Leased Property and converted the land into approximately 300 additional surface parking spaces for the Atlantis. The minimum annual rent under the Parking Lot Lease is $695 thousand commencing November 17, 2015. The minimum annual rent is subject to a cost of living adjustment increase on each five year anniversary. In addition, we are responsible for payment of property taxes, utilities and maintenance expenses related to the Leased Property. We have an option to renew the Parking Lot Lease for an additional 10-year term. If we elect not to exercise our renewal option, we will be obligated to pay BLI $1.6 million. For each of the years ended December 31, 2017 and 2016, we paid approximately $695 thousand in parking lot rent, respectively.

A driveway (the "Driveway Project") that is being shared between the Atlantis and the Shopping Center was completed and opened on September 30, 2004. The Shopping Center is controlled by BLI. As part of the Driveway Project, in January 2004, we leased (the "Driveway Lease") an approximate 37,400 square-foot corner section of the Shopping Center for a minimum lease term of 15 years at an annual rent of $300 thousand, subject to a cost of living increase on each five year anniversary of the Driveway Lease. As of December 31, 2017, the annual rent is $377 thousand. In August 2015, we exercised our option to extend the lease for three individual five-year terms in addition to the 15 year initial term. At the end of the extension periods, we have the option to purchase the leased section of the Shopping Center at a price to be determined based on an MAI Appraisal. The leased space is being used by us for pedestrian and vehicle access to the Atlantis, and we may use a portion of the parking spaces at the Shopping Center. The total cost of the project was $2.0 million. We were responsible for two thirds of the total cost, or $1.35 million. The cost of the new driveway is being depreciated over the 15-year expected economic useful life of the asset; some components of the new driveway were being depreciated over a shorter period of time. We paid approximately $377 thousand in lease payments for the leased driveway space during each of the years ended December 31, 2017 and 2016.

COMMITMENTS AND CONTINGENCIES

Our contractual cash obligations as of December 31, 2017 and the next five years and thereafter are as follows (in millions):



                                                    Payments due by period (1)
                                                   Less                              Greater
                                                  than 1      1 to 3     3 to 5      than 5
                                       Total       year       years      years        years
Operating Leases (2)                  $  26.4    $    1.1    $    2.2   $    2.2    $    20.9
Purchase Obligations (3)                 15.9        12.9         1.9        0.1          1.0
Borrowings Under Amended Credit
Facility (4)                             26.2           -           -       26.2            -

Total Contractual Cash Obligations $ 68.5 $ 14.0 $ 4.1 $ 28.5 $ 21.9

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 (1)  Because interest payments under our Credit Facility are subject to factors
      that, in our judgment, vary materially, the amount of future interest
      payments is not presently determinable. These factors include: i) future
      short-term interest rates; ii) our future leverage ratio which varies with
      EBITDA and our borrowing levels; and iii) the rate at which we deploy capital
      and other spending which, in turn, impacts the level of future borrowings.
      The interest rate under the Amended Credit Facility is LIBOR plus a margin
      ranging from 1.00% to 2.50%, or a base rate (as defined in the Amended Credit
      Facility) plus a margin ranging from 0.00% to 1.50%, or the Prime Rate. The
      interest rate is adjusted quarterly based on our leverage ratio which is
      calculated using operating results over the previous four quarters and
      borrowings as of the end of the most recent quarter. Based on our leverage
      ratio, at December 31, 2017, pricing was LIBOR plus 1.00% and will be
      adjusted in subsequent quarters in accordance with our leverage ratio. At
      December 31, 2017, the one-month LIBOR rate was 1.57%.




 (2)  Operating leases include the Driveway Lease and the Parking Lot Lease.




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 (3)  Purchase obligations represent approximately $9.1 million of commitments
      related to capital projects and approximately $6.8 million of materials and
      supplies used in the normal operation of our business. Of the total purchase
      order and construction commitments, approximately $15.9 million are
      cancelable by us upon providing a 30-day notice.




 (4)  The amount represents outstanding draws against the Amended Credit Facility
      as of December 31, 2017.



As described in the "CAPITAL SPENDING AND DEVELOPMENT" section above, we have begun commencement of a substantial expansion of our Monarch Casino Black Hawk facility starting in 2014. While we have disclosed the estimated cost of that expansion, we have not entered into contracts for substantial portions of the work. For this reason, we have included in the table above only the amounts for which we have contractual commitments.

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, the determination of the allowance for doubtful accounts and allowance for unredeemed gift certificates, self-insurance reserves, 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 its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, we also have receivables due from hotel guests which are primarily secured with a credit card at the time a customer makes reservation or checks in. An allowance for doubtful accounts is established for all Company receivables based upon our historical collection and write-off experience, unless situations warrant a specific identification of a necessary reserve related to certain receivables. 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.



Self-insurance Reserves



We are currently self-insured up to certain stop loss amounts for Atlantis workers' compensation and certain medical benefit costs provided to all of our employees. As required by the state of Colorado, we are fully insured for Monarch Casino Black Hawk workers' compensation costs. We review self-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reports prepared by the third party plan administrator for any significant unpaid claims. We engage third party actuaries at least once per year for a more precise reserves review and calculation. The reserve is an amount estimated to pay both reported and unreported claims as of the balance sheet date. We believe changes in medical costs, trends in claims of our employee base, accident frequency and severity and other factors could materially affect the estimate for this reserve. Unforeseen developments in existing claims, or the possibility that our estimate of unreported claims differs materially from the actual amount of unreported claims, could result in the over or under estimation of our self-insurance reserve.



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Capitalized Interest


We capitalize interest costs associated with debt incurred in connection with major construction projects. When no debt is specifically identified as being incurred in connection with a construction project, we capitalize interest on amounts expended on the project at our average borrowing cost. Interest capitalization is ceased when the project is substantially complete. We capitalized $544 thousand, $548 thousand and $533 thousand of interest during the years ended December 31, 2017, 2016 and 2015, respectively.


Casino Revenues


Casino revenues represent the net win from gaming activity, which is the difference between the amounts won and lost. Additionally, net win is reduced by a provision for anticipated payouts on slot participation fees, progressive jackpots and any pre-arranged marker discounts. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of player's 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.



Promotional Allowances



Our player program allows members, through the frequency of their play at the casino, to earn and accumulate points which may be redeemed for a variety of goods and services ("Complimentaries"). Points may be applied toward hotel room stays, food and beverage consumption at the food outlets, gift shop items, as well as goods and services at the spa and beauty salon and for cash in our Monarch Casino Black Hawk property. Points earned may also be applied toward off-property events such as concerts, shows and sporting events.

We recognize Complimentaries expense at the time points are earned, which occurs commensurate with casino patron play. The amount of expense recognized is based on the estimated cost of the Complimentaries expected to be redeemed.

The retail value of hotel, food and beverage services provided to customers without charge is included in gross revenue and deducted as promotional allowances. The cost of the products and services earned is reported as casino operating expense.


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.



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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.

Fair Value of Financial Instruments

The estimated fair value of our financial instruments has been determined by us using available market information and valuation methodologies. However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that we could realize in a current market exchange.

The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. Additionally, the carrying value of our long-term debt approximates fair value due to the variable nature of applicable interest rates and short-term maturity.


Goodwill


We account for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC Topic 350"). ASU No. 2011-08, Intangibles- Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08) gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test as appropriate. We test goodwill for impairment annually during the fourth quarter of each year, or whenever events or circumstances make it more likely than not that impairment may have occurred. Impairment testing for goodwill is performed at the reporting unit level, and each of our casino properties is considered to be a reporting unit. We perform qualitative analysis to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount by assessing the relevant events and circumstances. If that is the case, we utilize a two-step testing process. In the first step, the estimated fair value of each reporting unit is compared with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its estimated fair value, then the goodwill of the reporting unit is considered to be impaired, and impairment is measured in the second step of the process. In the second step, we estimate the implied fair value of the reporting unit's goodwill by allocating the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit, as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations. As of December 31, 2017, we had goodwill totaling $25.1 million related to the purchase of Monarch Casino Black Hawk.

Finite-Lived Intangible Assets

Our finite-lived intangible assets include assets related to customer relationships acquired in our acquisition of Monarch Casino Black Hawk. That asset is amortized over its estimated useful life using the straight-line method. We periodically evaluate the remaining useful lives of our finite-lived intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization.



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The customer relationship intangible asset represents the value associated with Monarch Casino Black Hawk rated casino guests. The initial fair value of the customer relationship intangible asset was estimated based on the projected net cash flows associated with these casino guests. The recoverability of our customer relationship intangible asset could be affected by, among other things, increased competition within the gaming industry, a downturn in the economy, declines in customer spending which would impact the expected future cash flows associated with the rated casino guests, declines in the number of visitations which could impact the expected attrition rate of the rated casino guests, and erosion of operating margins associated with rated casino guests. Should events or changes in circumstances cause the carrying value of the customer relationship intangible asset to exceed its estimated fair value, an impairment charge in the amount of the excess would be recognized.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update ("ASU") that amends the FASB ASC and creates a new topic for Revenue from Contracts with Customers. The new guidance is expected to clarify the principles for revenue recognition and to develop a common revenue standard for U.S. GAAP applicable to revenue transactions. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance also provides substantial revision of interim and annual disclosures. The update allows for either full retrospective adoption, meaning the guidance is applied for all periods presented, or modified retrospective adoption, meaning the guidance is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the guidance recognized at the date of initial application. The effective date is for the annual and interim periods beginning after December 15, 2017.

We have completed our evaluation of the impact of adopting this new accounting standard on our financial statements and internal revenue recognition policies. The majority of our revenue recognition policies will not be impacted or will have a minimal impact by the new standard. The accounting treatment for the customer loyalty programs will be impacted the most by the adoption of this ASU. Specifically, the recognition of revenue associated with the customer loyalty programs will be impacted by eliminating the current accrual for the cost of the points awarded at the time of play and instead deferring the portion of the revenue received from the customer at the time of play and attributed to the awarded points until a later period when the points are redeemed or forfeited. The revenue deferral will be calculated from the portion of the transaction price allocated to the points based upon their retail value. Under the former guidance, the cost of the points was recorded as an operating expense through the casino line item of our consolidated statements of income. In addition, upon the adoption of this ASU, the complementary pricing for products and services will be presented at retail pricing within the appropriate revenue line item. Further, promotional allowances representing the retail value of food, beverages and other services furnished to guests without charge will no longer be presented as a separate line item on the consolidated statements of income, rather they will be presented on a net basis within casino, food and beverage, hotel and other revenue. These changes have no impact to net revenues and are for presentation purposes only. We adopted this ASU on January 1, 2018 using the modified retrospective approach and recorded a cumulative adjustment to retained earnings, resulting from recalculating the customer loyalty program liability balance at the time of the adoption from estimated cost to retail value, of approximately $4.9 million.

In February 2016, the FASB issued an ASU which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off- balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently assessing the impact the adoption of this standard will have on our Consolidated Financial Statements.



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In August 2016, the FASB issued an ASU that provides clarifying guidance on the presentation of certain cash receipts and cash payments in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017. We adopted this ASU on January 1, 2018, with no impact to our presentation of cash receipts and payments on our Consolidated Statements of Cash Flows.

In January 2017, the FASB issued an ASU that simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today's goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on today's Step 1). The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today's optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019.

In January 2017, the FASB issued an ASU which provides clarifying guidance on what constitutes a business acquisition versus an asset acquisition. Specifically, the new guidance lays out a screen to more easily determine if a set of integrated assets and activities does in fact represent a business. Under this ASU, when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets do not represent a business. The ASU is effective for annual reporting periods beginning after December 15, 2017. We adopted this ASU on January 1, 2018, with no impact to our accounting policies.

In May 2017, the FASB issued an ASU that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore requires disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures about modifications that are required today, in addition to disclosing that compensation expense hasn't changed, if that's the case. The effective date is for annual and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued or made available for issuance. The guidance will be applied prospectively to awards modified on or after the adoption date. We adopted this ASU on January 1, 2018, with no impact to the Company's accounting policies.

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 our Consolidated Financial Statements.

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Financials ($)
Sales 2018 241 M
EBIT 2018 45,3 M
Net income 2018 34,3 M
Debt 2018 104 M
Yield 2018 -
P/E ratio 2018 23,44
P/E ratio 2019 19,52
EV / Sales 2018 3,63x
EV / Sales 2019 3,04x
Capitalization 770 M
Chart MONARCH CASINO & RESORT, I
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Monarch Casino & Resort, I Technical Analysis Chart | MCRI | US6090271072 | 4-Traders
Technical analysis trends MONARCH CASINO & RESORT, I
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TrendsNeutralNeutralBullish
Income Statement Evolution
Consensus
Sell
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Mean consensus HOLD
Number of Analysts 6
Average target price 47,2 $
Spread / Average Target 9,4%
EPS Revisions
Managers
NameTitle
John Farahi Co-Chairman & Chief Executive Officer
Bob Farahi Chairman, President & Secretary
David-Jacques Farahi Chief Operating Officer
Richard L. Cooley Vice President-Finance
Craig F. Sullivan Independent Director
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