Century Casinos, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unless otherwise noted, amounts are in U.S. dollars and millions; the filing’s financial statements present amounts in thousands. The filing was signed November 1, 2016.
Business context
Century Casinos operates casinos and related gaming, hospitality and entertainment businesses in the United States, Canada and Poland, as well as cruise-ship casinos and other gaming and management activities. Results are reported in Canada, United States, Poland, and Corporate and Other segments.
Financial performance and liquidity
- Revenue: Q3 net operating revenue was $34.5 million, up 3.0% year over year; nine-month revenue was $102.3 million, up 0.4%. Q3 gaming revenue rose 3.1% to $30.6 million. Nine-month gross revenue included no 2015-equivalent termination-agreement revenue; 2015 included $3.4 million from the Norwegian concession termination.
- Profitability: Q3 operating earnings were $3.8 million, down 6.1%; net earnings attributable to Century shareholders were $1.9 million, down 30.8%, or $0.08 per diluted share versus $0.11. Nine-month operating earnings were $11.8 million, down 16.1%; attributable net earnings were $6.0 million, down 46.0%, or $0.25 per diluted share versus $0.46. The filing attributes the wider nine-month net-income decline partly to higher income taxes and the prior-year one-time termination revenue and Austrian tax valuation-allowance release.
- Adjusted EBITDA: Q3 was $6.3 million versus $6.7 million; nine-month EBITDA was $18.7 million versus $18.3 million. This is a non-GAAP measure defined by the company.
- Cash flow: Nine-month operating cash flow was $15.6 million versus $14.3 million. Investing cash outflow was $28.2 million, including $23.2 million of restricted cash for the Apex acquisition and $5.0 million of property and equipment purchases. Financing cash inflow was $17.1 million. Cash and cash equivalents increased to $33.0 million from $29.4 million at year-end 2015.
- Liquidity: Working capital was $14.5 million, compared with $11.2 million at December 31, 2015. Of period-end cash, approximately $26.7 million was held by foreign subsidiaries and was not available for U.S. operations unless repatriated. The company said cash, operating cash flow and further BMO borrowing capacity were expected to cover operating costs, planned existing-property capital spending and current debt repayments for at least 12 months.
- Debt: Total debt principal was $58.8 million ($58.4 million net of deferred financing costs), including $5.5 million current debt; net debt, as defined by the company, was $25.8 million. Debt increased principally to fund the Apex acquisition. BMO borrowing capacity was increased to CAD 69.2 million; approximately CAD 5.2 million remained available at September 30. The company reported compliance with BMO covenants.
Material changes and operating developments
- Canada’s nine-month revenue increased 10.4%, principally as Century Downs Racetrack and Casino and the pari-mutuel network operated for more of the comparative period. Canadian segment operating earnings declined 6.9%, with higher operating costs.
- Poland’s Q3 revenue increased 7.3% and operating earnings increased 44.8%; nine-month revenue rose 0.9% and operating earnings rose 19.1% in U.S. dollars. Currency translation affected comparisons.
- On October 1, 2016, the company completed its Apex acquisition for CAD 29.9 million, funded through the expanded BMO facility. At September 30, the purchase funds were recorded as restricted cash; the acquired casino contributed no revenue or earnings to the reported periods. Purchase accounting was not complete.
- The company began operating three additional cruise-ship casinos during 2016. It expects to begin operating another TUI ship casino in the third quarter of 2017.
Outlook, risks and unusual items
- Century Mile, a proposed Edmonton-area racetrack and entertainment facility, is estimated to cost approximately CAD 50 million and be completed by the end of 2018. It remains subject to financing and regulatory and governmental approvals.
- Poland’s Supreme Administrative Court ruled for the Polish tax authority on certain historical employee-tip tax periods. The company accrued an estimated PLN 8.6 million ($2.2 million) for open periods. Further employment-tax obligations are possible, not currently probable or estimable, and could be material. Payroll-process changes increased Q3 costs by approximately $0.4 million; management estimated annual payroll costs would rise by about $1.3 million.
- The Katowice casino license expired; in October the company was informed it would not receive the available license. Operations moved to Sosnowiec. The company is pursuing a new license or alternative use; absent either, impairment of leasehold improvements may be necessary, though management did not expect a material impact.
- The company is exposed to Canadian-dollar, Polish-zloty and euro exchange-rate movements. It uses interest-rate swaps on part of its variable-rate Canadian debt; the swaps are not designated as accounting hedges.
- The filing corrected the 2015 nine-month cash-flow statement: operating cash flow and investing cash outflow were each understated by $1.0 million. The prior-period comparative was revised.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether Apex integration and purchase accounting affect future earnings, cash needs and debt service as expected.
- Progress on Century Mile financing, approvals, project cost and construction schedule.
- Final resolution and potential additional exposure from the Polish tip-tax proceedings, including the ongoing 2009 audit and increased payroll costs.
- Renewal prospects or alternative use for the Katowice property and any resulting impairment.
- Cash accessibility across jurisdictions, remaining BMO facility availability, covenant headroom and upcoming debt maturities.
- Whether reported EBITDA trends translate into sustained operating cash flow given rising costs and currency movements.