Business context and reporting period
Century Casinos, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The international casino operator owned properties in the U.S., Canada and Poland, operated shipboard casinos, managed a casino in Aruba, and was developing Century Downs Racetrack and Casino in Alberta. Financial amounts below are in U.S. dollars; unless indicated otherwise, amounts are in millions.
Financial results and liquidity
- Third quarter: Net operating revenue was $28.1, down 2.4% from $28.8 a year earlier. Operating earnings fell 47.8% to $0.7. Consolidated net earnings were $0.1 versus $1.1; earnings attributable to Century shareholders were $0.8 versus $1.1, or $0.03 versus $0.04 per diluted share.
- Nine months: Net operating revenue increased 18.1% to $88.8. Operating earnings declined 63.3% to $2.0. Consolidated net loss was $0.4, compared with net earnings of $6.6 in 2013; earnings attributable to Century shareholders were $1.5 versus $6.4, or $0.06 versus $0.26 per diluted share.
- Margins: Operating margin was approximately 2.5% for Q3, versus 4.8% a year earlier; for the nine months it was approximately 2.3%, versus 7.3%. No separate company-reported margin measure is provided.
- Cash flow: Nine-month operating cash flow was $2.2, down from $6.5. Investing used $8.2, including $8.7 of property and equipment purchases, partly offset by $0.5 of note proceeds. Financing provided $6.4. Cash declined $0.05 to $27.3.
- Debt and liquidity: Total debt, including the CDR land-lease financing obligation, was $38.6 at September 30, up from $34.1 at year-end 2013. Current debt was $6.5. Cash was $27.3; current assets were $32.4 and current liabilities $27.3, implying working capital of about $5.0. Management reported working capital of $5.4. The BMO facility had approximately $19.3 of borrowing availability; the company reported compliance with its debt covenants.
- Other metrics: Nine-month foreign-currency translation losses in other comprehensive income were $4.0. The effective tax rate was unusually high at 208.5% on $0.4 of pretax income, reflecting jurisdictional mix and foreign-exchange effects.
Material changes versus the prior comparable period
- Nine-month revenue growth primarily reflects consolidating Casinos Poland for all of 2014, compared with consolidation beginning April 8, 2013. Casinos Poland generated $37.1 of 2014 nine-month revenue and a $0.6 net loss; its Q3 revenue declined 6.2% and it recorded a $0.6 operating loss.
- Excluding the consolidation effect, U.S. properties were pressured: nine-month revenue declined 10.0% at Central City and 10.6% at Cripple Creek. Central City cited reduced customer volumes and access disruptions; Cripple Creek cited lower volumes and increased promotional allowances.
- Interest expense rose to $2.1 for the nine months from $0.6, largely due to CDR debt. Prior-year results also included a $2.1 gain on the CPL business combination, which did not recur.
- Revenue from shipboard casinos and Aruba increased 9.0% for the nine months, reflecting new shipboard operations, though associated costs also rose.
Outlook, commentary, risks and unusual items
- Management expected Century Downs construction to finish by Q1 2015. The project had preliminary regulatory approval, but the final casino license would not be issued until opening. Management said cash, operating cash flow and further BMO borrowing should cover anticipated operating needs, existing-property capital spending and debt payments for at least 12 months.
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and identified foreign-exchange movements, gaming-market conditions, project execution and financing needs as relevant uncertainties.
- The shortened Nova Star sailing season ended October 14, 2014, earlier than planned. The filing also reported post-quarter agreements: a $1.0 investment for 7.5% of an Argentine gaming-services venture, with an option to acquire up to 50%, and an expanded TUI Cruises agreement for Mein Schiff 4, scheduled to begin service in June 2015.
- Casinos Poland recorded a $0.7 write-down of the Sosnowiec casino license and leasehold improvements after suspending operations there. A Polish tax dispute over employee tips had an estimated remaining liability of $4.7; appeals were planned after adverse court decisions.
- About $22.9 of the $27.3 cash balance was held by foreign subsidiaries and was not available for U.S. operations unless repatriated, potentially with adverse tax consequences. The CDR land-lease financing obligation was $17.4 and carried an implicit 10% interest rate.
Important facts for investors to verify
- Reconcile the reported $5.4 working-capital figure in management’s discussion with the balance-sheet calculation of approximately $5.0.
- Assess whether operating performance at Casinos Poland and the Colorado properties can improve, and whether Sosnowiec’s suspension or other strategic changes could result in further charges.
- Track Century Downs construction, final licensing, remaining funding requirements and the timing of conversion of the CDR loan into an ownership interest.
- Review debt maturities, interest costs, covenant headroom and the availability of BMO borrowing capacity, including the concentration of cash overseas.
- Monitor outcomes of the Polish tax litigation, foreign-exchange exposure and the financial contribution of new shipboard and Argentine operations.