Century Casinos, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts below are USD unless noted. The company operates casinos and related businesses in the United States, Canada and Poland, as well as cruise-ship casinos and other managed or development projects.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenue | $41.0m | $34.5m | $114.8m | $103.0m |
| Earnings from operations | $4.8m | $3.8m | $12.9m | $12.5m |
| Adjusted EBITDA | $7.5m | $6.3m | $20.7m | $19.4m |
| Net earnings attributable to Century Casinos shareholders | $7.6m | $1.9m | $11.6m | $6.4m |
| EPS, diluted | $0.31 | $0.08 | $0.47 | $0.26 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $14.5m | $15.6m |
Revenue rose 18.9% in Q3 and 11.5% year to date; Adjusted EBITDA increased 20.3% and 6.4%, respectively. Operating margin was approximately 11.6% in Q3 versus 11.1% a year earlier, and 11.2% for nine months versus 12.1%. Adjusted EBITDA margin was approximately 18.4% versus 18.2% in Q3 and 18.0% versus 18.9% year to date. These margins are calculated using net operating revenue.
Q3 and nine-month shareholder earnings included a $5.1m benefit from releasing the U.S. deferred-tax valuation allowance. Accordingly, reported net income growth substantially exceeded operating-income growth. Nine-month interest expense was $2.7m, up from $2.2m; non-operating expense was $2.0m versus $0.4m, partly reflecting lower foreign-currency/cost-recovery gains than in 2016.
At September 30, cash and cash equivalents were $44.3m (plus $1.0m restricted cash), working capital was $22.5m, and total assets were $241.3m. Debt principal was $58.6m, including $5.6m current and $53.0m long-term; reported long-term debt net of financing costs was $58.3m in total. Management’s non-GAAP net debt measure was $14.3m, down from $25.8m at September 30, 2016. The company reported compliance with its BMO financial covenants.
Material changes versus prior period
- Canada revenue grew 27.3% in Q3 and 11.3% year to date, with the October 2016 acquisition of Century Casino St. Albert contributing $2.3m and $6.5m in net revenue, respectively. Canada Adjusted EBITDA increased 43.8% in Q3 and 10.2% year to date.
- U.S. net revenue increased 10.4% in Q3 and 6.6% year to date; U.S. Adjusted EBITDA rose 18.5% and 11.7%, respectively.
- Poland net revenue increased 16.4% in Q3 and 13.3% year to date, but operating costs grew faster. Poland Adjusted EBITDA declined 27.5% in Q3 and 5.0% year to date.
- Operating cash flow decreased to $14.5m from $15.6m for the nine-month period. Investing outflow was $6.8m versus $28.2m in 2016, when acquisition-related restricted cash was a major use; financing outflow was $3.6m versus $17.1m provided in 2016.
- The company corrected 2016 nine-month results for an earlier pari-mutuel revenue error: revenue and operating earnings were increased by $0.7m, and shareholder net earnings by $0.4m. Comparisons above use the corrected figures.
Outlook, projects and risks
- Management said available cash and operating cash flow should cover anticipated operating costs, existing-property capital expenditures and current debt payments for at least 12 months. This is subject to development spending and financing availability.
- Century Mile construction began in July 2017. Estimated cost is CAD 60m (about $48.1m); expected completion is Q4 2018. The company stated that project needs exceed current borrowing capacity and that it was seeking additional financing.
- The Bath, England casino project was under development, with estimated construction and fit-out costs of about GBP 5m (about $6.7m), plus conditional seller payments. A GBP 2m project loan was outstanding; repayment was scheduled to begin in December 2018. The filing expected opening in the first half of 2018.
- In Poland, four casino licenses were due to expire in 2018; management intended to apply for replacements. Awards for Katowice and Bielsko-Biala had been appealed, and licenses had not yet been issued. The company reported subsequent awards in October and expected openings in Q1 2018, subject to issuance and appeals. It also noted potential future competition from changes to Polish gaming law and possible gaming-winnings taxation.
- Casinos Poland’s employee-tip tax disputes remain a contingency. The recorded liability was PLN 6.3m (about $1.7m); a completed audit could entail an estimated additional PLN 4.8m (about $1.3m), for which no official decision had been issued. The company warned further assessments could be material. An arbitration award of PLN 1.2m (about $0.3m) in the company’s favor was being appealed.
- Other exposures include foreign-currency movements, variable-rate borrowing and development funding needs. The Bermuda casino application had no set timetable or assurance of approval; if awarded, the company would also provide a $5m equipment loan. The Hilton Aruba management agreement was to end November 30, 2017; management did not expect a material operating impact.
Important facts for investors to verify
- Separate recurring operating performance from the $5.1m valuation-allowance release and other non-operating items; review the company’s Adjusted EBITDA definition and reconciliation.
- Track financing, total cost, schedule and cash requirements for Century Mile and Bath, including the extent of any new borrowing or equity issuance.
- Monitor Polish license issuance, appeals and renewals, as well as the employee-tip tax audits, appeals and any additional assessments.
- Assess debt maturities, covenant headroom, interest-rate exposure and the location and availability of cash: about $37.3m of the $44.3m cash balance was held by foreign subsidiaries and may require repatriation to fund U.S. needs.
- Compare reported growth with constant-currency performance: nine-month net revenue growth was approximately 10% on a constant-currency basis versus 12% reported.