Century Casinos, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; dollar amounts below are USD unless otherwise noted.
Business context
Century operates casinos in the United States and Canada, manages cruise-ship casinos and the Aruba casino, and has international operations. On April 8, 2013, it acquired an additional 33.3% of Casinos Poland Ltd. (CPL), increasing its ownership to 66.6% and triggering consolidation. CPL operates casinos in Poland. Much of the reported revenue growth reflects adding CPL’s results from the acquisition date, rather than growth at existing properties.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net operating revenue | $28.35m | $17.79m | $46.34m | $35.36m |
| Earnings from operations | $2.08m | $1.70m | $4.13m | $3.27m |
| Net earnings attributable to Century shareholders | $3.66m | $1.15m | $5.32m | $2.28m |
| Basic and diluted EPS | $0.15 | $0.05 | $0.22 basic; $0.22 diluted | $0.10 basic; $0.09 diluted |
| Net cash provided by operating activities | Not separately presented for the quarter | $2.76m | $2.05m |
Q2 net operating revenue rose 59.3% and six-month revenue rose 31.0%. CPL contributed $10.9m of revenue and $0.3m of earnings from April 8 through June 30. Existing-property trends were mixed: Edmonton improved, while Calgary and Central City revenue declined; Cripple Creek was broadly flat. Q2 operating margin was approximately 7.3%, compared with 9.5% a year earlier; six-month operating margin was approximately 8.9%, compared with 9.2%.
Reported earnings included a $2.07m non-cash gain from remeasuring Century’s previously held CPL interest at fair value upon obtaining control. The gain was not taxable. The worldwide effective income tax rate for the first half was 9.2%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $28.17m, versus $24.75m at December 31, 2012. Working capital was $5.3m, down from $13.4m.
- Total debt was $16.43m, compared with $3.56m at year-end, including $6.4m of CPL debt acquired in the transaction. Current debt was $6.28m. The consolidated weighted-average debt interest rate was 6.7% for the first half.
- Cash from operations of $2.76m and net financing inflows of $7.55m were more than offset by $6.38m of investing outflows, including the $4.58m net cash cost of acquiring CPL and a $0.5m project loan. Cash increased $3.42m overall.
- The BMO facility had $10.0m outstanding and approximately $14.9m available; the company and CPL were reported in compliance with applicable debt covenants. Management said cash and operating flows should cover anticipated operating costs, existing-property capital expenditures, and current debt obligations for at least 12 months.
Material changes, outlook and risks
- CPL acquisition and integration: The acquisition added Polish casino revenue, assets, debt, goodwill and a 33.3% non-controlling interest. The company was integrating CPL’s policies, processes, personnel, technology and operations; management expected to assess CPL’s inclusion in its year-end internal-control evaluation.
- Contingency: CPL recorded a $5.5m liability for potential Polish personal-income-tax claims relating to employee tips for open periods dating back to 2007. Management considered an unfavorable outcome reasonably possible; the appeal remained pending and a final decision was not expected in 2013.
- Property and project matters: CPL planned to close its underperforming Gdynia casino effective August 14, 2013. Century had opened a second Warsaw casino in April. Calgary flooding caused temporary casino closures and access disruption in June.
- Development opportunities: The proposed Calgary-area racing entertainment center remained subject to regulatory approvals and licensing; no loan funds had been advanced by June 30. A separate Southeast Asia casino project was dropped, with the $0.5m loan still subject to its original repayment terms. Century had applied for a 15-year Vienna casino license, with a decision expected in Q4 2013; if awarded, the company expected to invest approximately $18m. Neither license outcome was assured.
- Other risks: Foreign-exchange movements can affect translated earnings and comprehensive income; first-half foreign-currency translation reduced other comprehensive income by $3.45m. Approximately $7.0m held by a European subsidiary was not available for U.S. operations unless repatriated, potentially with adverse tax consequences. Management cited no significant change in market-risk exposure. Disclosure controls were deemed effective.
Important facts for investors to verify
- How much of revenue and earnings growth is attributable to CPL consolidation versus underlying performance at existing casinos.
- The outcome and potential scope of the Polish tips-tax litigation, and whether the $5.5m recorded liability proves adequate.
- The effect of the Gdynia closure and operating trends at Calgary and Central City on future results.
- Debt repayment requirements, availability under the BMO facility, covenant compliance and the decline in working capital.
- Regulatory progress, financing needs and expected returns for the proposed Calgary and Vienna projects.
- Progress in CPL integration and the company’s planned assessment of internal controls at year-end.