Century Casinos, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the three and nine months ended September 30, 2012. Amounts are U.S. dollars unless stated otherwise. The company operates casinos in the U.S., Canada and Poland, manages cruise-ship casinos and has an Aruba casino management contract.
Financial performance and position
- Third quarter: Net operating revenue was $28.8 million, up 54.0%; operating earnings were $1.37 million, down 15.2%; and earnings attributable to Century Casinos shareholders were $1.07 million, down 9.5%. Basic and diluted EPS were $0.04 versus $0.05. Operating margin was approximately 4.8%, compared with 8.6%.
- Nine months: Net operating revenue was $75.2 million, up 39.0%; operating earnings were $5.50 million, up 12.6%; and shareholder-attributable earnings were $6.39 million, up 84.4%. EPS was $0.26 versus $0.14. Operating margin was approximately 7.3%, compared with 9.0%.
- The nine-month results included a $2.07 million non-cash gain from remeasuring the company’s previously held Casinos Poland stake upon gaining control. The gain was not taxable, and materially contributed to higher reported earnings.
- Cash flow: Nine-month operating cash flow was $6.48 million, versus $5.90 million. Investing used $7.17 million, including $4.58 million net cash for the Casinos Poland acquisition; financing provided $6.52 million. Cash increased $5.70 million to $30.45 million.
- Liquidity: Current assets were $33.33 million and current liabilities $27.21 million. The resulting balance-sheet working capital is approximately $6.13 million; MD&A separately states $5.9 million. Cash was $30.45 million.
- Debt: Total debt was $16.02 million, including $6.23 million current and $9.78 million long-term, versus $3.56 million total at December 31, 2012. The company reported a 4.4% weighted-average debt rate for the nine-month period. It had approximately $14.9 million available under the BMO facility and was in compliance with reported covenants.
- Total assets were $169.34 million and total equity $128.55 million at September 30, 2013. The company had 24.38 million common shares outstanding as of October 25, 2013.
Material changes versus the prior period
- On April 8, 2013, the company acquired an additional 33.3% of Casinos Poland (CPL) for $6.8 million, raising ownership to 66.6% and triggering consolidation; the remaining 33.3% is a non-controlling interest. CPL contributed $22.0 million in net operating revenue and approximately $0.5 million in operating earnings from acquisition through September 30. Comparisons are therefore affected by the change from equity-method accounting to consolidation.
- For the third quarter, CPL reported $11.12 million revenue and a $57,000 operating loss. CPL’s reported nine-month contribution includes only the post-acquisition period.
- Revenue growth was primarily acquisition-driven. Existing properties were mixed: Edmonton improved, while Calgary and the Colorado properties generally faced weaker revenue. Company-wide operating costs increased 61.0% in the quarter, faster than revenue, contributing to lower quarterly operating earnings.
- Debt, goodwill and intangible assets increased substantially following the CPL acquisition. The balance sheet also recognized a $5.87 million contingent liability associated with a Polish tax dispute involving employee tips.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash flows should fund anticipated operating costs, existing-property capital expenditures and current debt repayments for at least 12 months. Additional growth projects may require more financing.
- Colorado flooding, evacuations and road closures, together with mudslide-related highway closures, were estimated to have reduced third-quarter revenue at the Central City and Cripple Creek properties by $0.4 million. Calgary operations were also disrupted by June flooding and temporary closures.
- CPL closed its Hyatt Hotel casino in Warsaw in August and opened a second Marriott Hotel casino in October 2013. Management was evaluating further licensing or strategic changes and cautioned that additional closures or changes could create one-time costs. Several newer CPL casinos performed below expectations.
- The proposed Calgary Racing Entertainment Center remains subject to development and Alberta licensing approvals. The company anticipated completion in 12–18 months, was negotiating a further loan estimated at CAD 11 million and was seeking additional BMO financing. Prior litigation against the project’s partner was settled.
- The company applied for a 15-year Vienna casino license, with a decision expected in the first quarter of 2014. If awarded, it expected to invest approximately $7.5 million; there is no assurance the license will be granted.
- The company discontinued plans to proceed with a proposed Southeast Asian casino project, but the $0.5 million loan remains outstanding under its original repayment terms.
- Foreign exchange movements can affect translated operating results and reported earnings. Management cited foreign currency gains and losses as a source of variability in the effective tax rate. CPL’s Polish tax-tip dispute remains unresolved; CPL planned a further appeal, and an adverse final outcome could result in assessments for periods dating back to 2007.
- No specific company-wide earnings or revenue guidance was provided. Management identified forward-looking statements as subject to risks and uncertainties. Disclosure controls were assessed as effective; integration of CPL’s financial reporting controls was ongoing.
Key facts for investors to verify
- How much of reported revenue and earnings growth reflects CPL consolidation rather than performance at comparable properties, and how CPL performs after the acquisition period.
- The status, potential assessment range and timing of the CPL employee-tips tax litigation and the assumptions behind the recorded contingent liability.
- Whether the Calgary project obtains remaining approvals and financing, and whether the Vienna license is awarded and the stated investment proceeds.
- Debt maturities, borrowing availability and covenant headroom, particularly at CPL and under the BMO facility.
- The working-capital figure: balance-sheet current assets less current liabilities implies approximately $6.13 million, while MD&A reports $5.9 million.
- The impact of flooding, road access, competition and any further CPL casino changes on future operating performance.