Business context and reporting period
Century Casinos, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operates casinos and related gaming, hotel, food and beverage, and horse-racing businesses in Canada, the United States, Poland and England, and has cruise-ship and other operations. Unless stated otherwise, financial amounts below are in U.S. dollars; figures are in millions.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net operating revenue | $39.65 | $37.33 | $80.27 | $73.73 |
| Earnings from operations | $1.00 | $3.64 | $4.25 | $8.13 |
| Net earnings attributable to CCI shareholders | $0.32 | $1.80 | $1.24 | $3.96 |
| Diluted earnings per share | $0.01 | $0.07 | $0.04 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $4.66 | $6.41 | $11.23 | $13.13 |
- Net operating revenue rose 6.2% in Q2 and 8.9% for the first half. At constant currency, management reported growth of 2% for both periods.
- Operating costs and expenses rose 14.7% in Q2 and 15.9% in the first half, outpacing revenue growth. Approximate operating margins were 2.5% versus 9.8% in Q2 and 5.3% versus 11.0% for the first half; Adjusted EBITDA margins were approximately 11.8% versus 17.2% and 14.0% versus 17.8%, respectively.
- Q2 consolidated net earnings were $0.10 million, compared with $2.17 million a year earlier; first-half consolidated net earnings were $1.42 million versus $4.97 million. These differ from earnings attributable to CCI shareholders because of non-controlling interests.
- Six-month operating cash flow was $4.93 million, down from $8.17 million. Investing activities used $25.04 million, primarily for property and equipment; financing activities used $0.24 million.
- Cash and cash equivalents were $54.44 million at June 30, 2018, versus $74.68 million at year-end 2017. Cash, cash equivalents and restricted cash for cash-flow purposes totaled $55.16 million. Working capital was $26.0 million, down from $49.9 million at year-end.
- Debt principal was $54.50 million, including $8.37 million current; the balance-sheet carrying amount, net of deferred financing costs, was $54.30 million. Company-defined net debt was $0.07 million, compared with $16.18 million at June 30, 2017. Approximately $26.7 million of cash was held by foreign subsidiaries and would not be available to fund U.S. operations unless repatriated.
- Six-month income tax expense was $0.99 million on $2.41 million of pretax income, a 41.2% effective rate, compared with 27.2% in 2017. The filing attributes the higher rate in part to an intercompany dividend, Canadian taxes, and nondeductible expenses.
Material changes versus the prior comparable period
- Profitability declined sharply despite reported revenue growth: Q2 shareholder earnings fell 82.4% and first-half earnings fell 68.6%; Adjusted EBITDA declined 27.3% and 14.5%, respectively.
- Poland was the largest operating pressure. Q2 segment Adjusted EBITDA fell to $0.15 million from $1.57 million; first-half Adjusted EBITDA fell to $2.26 million from $3.95 million. License expirations, delayed awards, temporary closures, payroll and rental costs while awaiting decisions, and asset-disposal costs weighed on results.
- Canada performed better: first-half segment revenue increased 10.3% and Adjusted EBITDA rose 15.8%. U.S. first-half Adjusted EBITDA increased 2.1%, although gaming revenue declined.
- Corporate and Other losses increased, including costs at the newly opened Century Casino Bath and higher corporate expenses. Bath opened in May 2018 and contributed $0.5 million of first-half revenue but a $0.8 million net loss.
- Foreign currency translation generated a $5.35 million other comprehensive loss in the first half, compared with $4.56 million of comprehensive income in the prior-year period.
- Revenue presentation changed with adoption of ASU 2014-09: promotional allowances are now reflected as reductions to gaming revenue rather than shown separately. Therefore, reported gross revenue lines are not directly comparable; net operating revenue is the more useful comparison. Adoption also reclassified certain promotional costs among expense categories.
Outlook, commentary, risks and unusual items
- Management said existing cash and expected operating cash flows should cover anticipated operating costs, planned capital expenditures and current debt repayments for at least the next 12 months. This is management’s assessment, not earnings guidance.
- Century Mile, a racetrack and entertainment center near Edmonton, was under construction. The company estimated a cost of approximately CAD 60 million and completion in early 2019. A CAD 35 million increase in BMO borrowing capacity had been approved, but the amended credit agreement was expected to be finalized in Q3 2018. The company had spent $14.1 million of stock-offering proceeds on the project by June 30.
- Casinos Poland had seven licenses and five casinos operating at June 30. Krakow reopened in July, Lodz was expected to reopen in August, and an additional Warsaw license was awarded in July, with an opening anticipated in January 2019. The company lost the Plock and Poznan licenses; the Polish licenses are not renewable and must be won through new tenders.
- Polish authorities have pursued employee personal income tax on casino tips. CPL paid PLN 4.9 million (about $1.3 million) in May 2018 on 2012–2013 assessments and appealed. The recorded liability for open periods was PLN 1.7 million (about $0.5 million); additional future obligations were not considered probable or estimable, but could be material.
- The company reported a $0.86 million first-half loss on disposition of fixed assets, largely associated with closed Polish casinos, and $1.44 million of pre-opening expenses. Interest expense increased 15.4% year over year for the first half.
- Other risks include foreign-exchange movements, competition from Polish online gaming and slot arcades, execution and financing of development projects, and uncertainty in provisional Tax Act accounting. Management stated it was in compliance with BMO and CPL financial covenants at June 30.
- The filing said no material change had occurred in market-risk exposure since the 2017 Form 10-K. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the BMO amendment and Century Mile financing were finalized, and whether construction remained on budget and on schedule.
- Updated operating results and margins in Poland as reopened and newly licensed casinos ramped up, and any costs or consequences from lost licenses.
- The status and potential remaining exposure of the Polish tips-tax disputes, including the appeal and any new assessments.
- Cash availability by jurisdiction, debt maturities and covenant headroom, particularly given the decline in working capital and ongoing capital spending.
- Underlying revenue trends using comparable accounting presentation and constant-currency results; reported growth was materially higher than constant-currency growth.
- Whether Bath and other new or developing operations improve sufficiently to offset start-up and corporate costs, and the final impact of Tax Act accounting estimates.