Century Casinos, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars unless otherwise stated. The company operates casinos and related businesses in the United States, Canada and Poland. Results were heavily affected by COVID-19 closures and partial-capacity reopenings; comparisons also reflect the December 2019 acquisition of Mountaineer, Cape Girardeau and Caruthersville.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net operating revenue | $36.1 million | $52.4 million | $123.8 million | $98.1 million |
| Operating income (loss) | $(2.1) million | $2.6 million | $(33.9) million | $6.0 million |
| Net income (loss) attributable to Century shareholders | $(12.6) million | $(0.6) million | $(58.5) million | $0.5 million |
| Diluted EPS | $(0.43) | $(0.02) | $(1.98) | $0.02 |
| Adjusted EBITDA (non-GAAP) | $(1.8) million | $6.7 million | $7.8 million | $13.4 million |
| Operating cash flow | Not separately reported | Not separately reported | $(0.4) million | $7.5 million |
Q2 revenue declined 31.2% year over year, while first-half revenue rose 26.2%, primarily because the acquired U.S. casinos were included in 2020 but not in the comparable 2019 period. First-half gaming revenue increased 31.4%; food and beverage revenue fell 12.5%. The reported results reflect closures from mid-March through May in Poland and into June in North America, as well as restricted gaming capacity and services after reopening.
Q2 operating margin was approximately negative 5.9%, versus positive 5.0% a year earlier. First-half operating margin was approximately negative 27.4%, versus positive 6.2%. Adjusted EBITDA was negative in Q2 and fell 41.7% for the first half. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $51.6 million; cash, cash equivalents and restricted cash totaled $52.5 million. Working capital was $2.6 million, down from $22.8 million at December 31, 2019.
- Total debt principal was $204.0 million, with $194.1 million reported net of deferred financing costs; net debt, a company-defined non-GAAP measure, was $152.4 million. Long-term financing obligations to VICI subsidiaries were a further $277.1 million.
- Six-month interest expense was $22.0 million, compared with $2.7 million in 2019. This includes higher borrowing costs following the acquisition and interest associated with the VICI property financing obligation.
- Cash declined by $3.2 million during the first half. Investing activities used $7.1 million, including $6.0 million for property and equipment and $1.2 million for the acquisition working-capital adjustment; financing activities provided $5.0 million.
- The company borrowed $10.0 million under Macquarie’s revolving facility and $7.4 million under a UniCredit agreement in March. It repaid the revolving facility to zero on July 30, 2020, except for a $50,000 letter of credit being cash-collateralized. At June 30, the company and lender were still reviewing whether the springing leverage covenant had been met; the filing does not provide a definitive determination. A default, if present, could restrict facility actions or permit lender remedies. The company reported compliance with covenants under its other credit agreements.
- Approximately $23.7 million of cash was held by foreign subsidiaries and was not available to fund U.S. operations unless repatriated.
Material changes and unusual items
- COVID-19 closures reduced estimated first-half revenue by approximately $91.3 million and Adjusted EBITDA by approximately $34.3 million. Management estimated operating cash outflows during full suspension averaged $8.0 million per month.
- The company recorded $35.1 million of first-half impairment charges, including goodwill and casino-license impairments and a $1.0 million impairment of its MCE investment. Management warned that further impairment could result if forecasts or market conditions worsen.
- Century Casino Bath entered creditors’ voluntary liquidation and was deconsolidated in May. The company recognized a $7.4 million gain on deconsolidation; it will retain no ownership in the business.
- The first-half loss included $3.1 million of income tax expense, including valuation allowances on certain deferred tax assets. The reported effective tax rate was negative 5.6%.
- Currency translation contributed to a $7.7 million first-half other comprehensive loss.
- On August 5, the company agreed to sell Century Casino Calgary’s casino operations for CAD 10.0 million plus a three-year quarterly earn-out. It received the initial payment at signing, subject to specified adjustments and conditions. It expects to retain the real estate and other Century Sports operations and lease the casino space to the buyer if the transaction closes, subject to regulatory and other conditions.
Outlook, commentary and risks
Management expected COVID-19 to continue adversely affecting results, liquidity and operations for the remainder of 2020, with possible renewed closures, lower customer demand, capacity limits and added health and safety costs. No full-year numerical earnings guidance is provided. The company planned approximately $13.7 million of 2020 non-labor cost savings and to defer or eliminate approximately $2.2 million of discretionary capital projects. It also reported negotiating payment-timing changes with certain vendors and lessors.
Management reported preliminary July 2020 operating estimates: U.S. revenue of $3.6 million in Colorado, $8.1 million in West Virginia and $8.1 million in Missouri; Canada revenue of CAD 4.4 million in Edmonton and CAD 2.7 million in Calgary; and Poland revenue of PLN 20.1 million. These are preliminary figures, not guidance. Management also said a shelf registration statement effective in July permits issuance of up to $100 million of securities, but financing may not be available on acceptable terms and equity financing could dilute shareholders.
Other risks include uncertainty over the Macquarie covenant review, substantial debt and rent obligations, foreign-exchange exposure, and Polish casino-license expirations. Polish licenses are not renewable; proposed legislation could affect the number of casino licenses available in Warsaw. The company also reported a $1.1 million accrued liability related to Polish employee tip-tax audits and noted that additional assessments could be material, though not currently considered probable or estimable.
Important facts for investors to verify
- Whether the Macquarie springing leverage covenant was satisfied as of June 30, 2020, and whether any waiver or amendment was required.
- Post-reopening revenue, cash flow and Adjusted EBITDA trends, including the effect of capacity restrictions or renewed closures.
- The company’s ability to meet debt service and VICI lease obligations with low working capital and materially reduced operating cash flow.
- Whether the Calgary casino sale closes, its final proceeds and adjustments, and the value and terms of the earn-out and lease.
- Potential further impairment charges and any changes in Polish tax contingencies or casino-license availability.