Century Casinos, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited; dollar amounts below are in millions unless noted. The company operates casinos in the U.S. and Canada, ship-based casinos, and manages a casino in Aruba. CPL, its Polish casino investment, was reported under the equity method during Q1.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Gross revenue | $19.895 | $19.523 | +1.9% |
| Promotional allowances | $1.904 | $1.954 | −2.6% |
| Net operating revenue | $17.991 | $17.569 | +2.4% |
| Operating earnings | $2.048 | $1.572 | +30.3% |
| Net earnings | $1.662 | $1.133 | +46.7% |
| Basic and diluted EPS | $0.07 | $0.05 | +$0.02 |
| Operating margin on net operating revenue | 11.4% | 8.9% | +2.5 percentage points |
| Net margin on net operating revenue | 9.2% | 6.4% | +2.8 percentage points |
Operating costs and expenses fell 1.9% to $15.847 million. Interest expense decreased to $82,000 from $148,000; the company attributed the reduction to lower average debt and interest rates. The effective tax rate was 16.0%.
Cash, debt and liquidity
- Cash and cash equivalents were $32.106 million at March 31, 2013, up from $24.747 million at December 31, 2012. Working capital was $21.862 million, versus $13.464 million at year-end; current assets were $34.170 million and current liabilities $12.308 million.
- Operating cash flow was $1.187 million, compared with $764,000 a year earlier. Investing used $824,000, including a $500,000 loan for a proposed Southeast Asia casino and $336,000 of property and equipment purchases. Financing provided $7.189 million, primarily from borrowings.
- Long-term debt totaled $10.619 million, including $1.173 million current and $9.446 million long-term, compared with $3.564 million at year-end. The Bank of Montreal facility had approximately $14.9 million available; its outstanding borrowings cannot be reborrowed once repaid. The company reported compliance with its covenants.
- The BMO facility carries a floating rate; the stated current rate was approximately 4.0%, and the Q1 weighted-average rate on borrowings was 4.25%.
Management said cash on hand and operating cash flows should cover anticipated operating costs, existing-property capital spending and scheduled debt payments for at least 12 months. New development or acquisitions could require additional financing.
Changes and operating drivers
- Edmonton net operating revenue rose 8.7%, supported by 30 additional slot machines, stronger Baccarat play, and higher hotel occupancy and customer volumes. Operating earnings increased 28.3%.
- Calgary revenue fell 9.5%, principally due to lower Baccarat hold and fewer showroom events; reduced operating expenses helped lift operating earnings from $49,000 to $114,000.
- Central City revenue declined 1.4% and operating earnings fell 6.5%. Cripple Creek revenue was nearly flat, but lower costs contributed to a 75.1% increase in operating earnings.
- Ship-based casinos and Aruba management revenue increased 12.5%, including contribution from the Riviera, which began operations in May 2012, and higher Aruba management fees.
- Foreign-currency translation produced a $1.213 million other comprehensive loss, versus $1.067 million of income in Q1 2012. The filing notes that exchange-rate movements can affect translated earnings and the effective tax rate.
Transactions, outlook and risks
- On April 8, 2013, the company’s subsidiary acquired an additional 33.3% interest in Casinos Poland Ltd. (CPL), bringing ownership to 66.6%; the filing states a $6.8 million purchase price funded with BMO borrowings. From Q2, CPL is to be consolidated, with the remaining 33.3% reported as a non-controlling interest. This will increase reported revenue and expenses relative to equity-method accounting.
- CPL reported Q1 net operating revenue of $12.168 million and a net loss of $287,000. Its Gdynia casino was scheduled to close June 30, 2013 because of poor performance. CPL received a second Warsaw license and opened a casino in the Hyatt hotel on April 24, 2013.
- The proposed Calgary-area Racing Entertainment Center remains subject to development approvals and licensing. The company agreed to lend UHA up to CAD $13 million; no funds had been advanced at March 31, 2013. Litigation involving UHA and another party has arisen; the company says it is not a party and is considering its position and alternatives.
- The company had advanced $500,000 to an Asian company for a proposed casino project and was completing due diligence. The agreement permits further non-revolving advances up to $1.1 million.
- CPL is contesting a Polish tax authority decision concerning income tax on employee tips; a final decision was not expected in 2013. The company also reported valuation allowances on U.S., Calgary and CCE deferred tax assets due to uncertainty about future taxable income.
- No numerical earnings or revenue guidance was provided. Forward-looking statements are subject to risks, including licensing and development approvals, project execution, foreign exchange, and the risks described in the company’s 2012 Form 10-K. Management reported effective disclosure controls and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Completion terms and accounting treatment for the CPL acquisition, including the purchase price, financing, non-controlling interest, and Q2 consolidation effects.
- Availability and covenant terms of the BMO facility, floating-rate exposure, debt maturities, and financing needs for growth projects.
- Status and potential exposure from the UHA litigation, Calgary project approvals, and the Southeast Asia loan and due diligence.
- Outcome and potential financial effect of CPL’s Polish tips-tax appeal, and recoverability of deferred tax assets subject to valuation allowances.
- Whether Q1 operating improvements—particularly Edmonton growth and cost reductions—are sustained, and the effects of market competition and currency movements.