Century Casinos, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; amounts below are USD unless stated otherwise. The company operates casinos in the U.S., Canada and Poland, plus cruise-ship and other gaming businesses.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net operating revenue | $37.3M | $35.2M | $73.7M | $68.4M |
| Earnings from operations | $3.6M | $4.5M | $8.1M | $8.6M |
| Net earnings | $2.2M | $4.3M | $5.0M | $7.1M |
| Net earnings attributable to Century shareholders | $1.8M | $2.2M | $4.0M | $4.5M |
| Diluted EPS | $0.07 | $0.09 | $0.16 | $0.18 |
| Adjusted EBITDA | $6.4M | $6.9M | $13.1M | $13.2M |
Gaming revenue increased 8.1% in Q2 and 11.6% year to date. Operating costs rose faster than net revenue: 9.9% in Q2 and 9.7% year to date. Calculated operating margin on net operating revenue was approximately 9.8% in Q2 versus 12.9% a year earlier, and 11.0% year to date versus 12.6%. Calculated shareholder earnings margin was approximately 4.8% versus 6.4% in Q2 and 5.4% versus 6.6% year to date.
- Cash flow: Six-month operating cash flow was $7.2M, down from $8.9M. Investing used $4.7M; financing used $3.6M. Cash was $38.8M at June 30, essentially unchanged from year-end.
- Liquidity: Working capital was $19.8M, up from $17.3M at December 31, 2016. Current assets were $45.0M and current liabilities $25.2M.
- Debt: Total principal debt was $55.0M, including $15.0M related to the Century Downs land lease; reported debt net of deferred financing costs was $54.7M. Net debt, the company’s non-GAAP measure, was $16.2M, compared with $5.9M at June 30, 2016. The company reported compliance with BMO and Casinos Poland financial covenants.
- Other balance-sheet items: Total assets were $223.6M and total equity $148.3M. Cash includes $0.97M of restricted cash reported separately.
Changes versus the prior comparable period
- Revenue growth did not translate into higher operating or shareholder earnings. Q2 operating earnings declined 19.8%, shareholder earnings 19.9%, and Adjusted EBITDA 6.5%; year-to-date shareholder earnings declined 12.5% while Adjusted EBITDA was nearly flat.
- Canada revenue benefited from the October 2016 acquisition of Century Casino St. Albert, which contributed $2.1M of Q2 and $4.1M of six-month revenue. Excluding that addition, some Canadian properties reported weaker revenue.
- Poland revenue grew, but Q2 operating earnings fell 53.1% as operating expenses rose 11.8%, including gaming-related, payroll and new-casino opening costs. U.S. six-month operating earnings rose 12.7%.
- Non-operating results weakened partly because prior-year comparisons included $1.6M of cost-recovery income related to Century Downs infrastructure. Interest expense also increased.
- Foreign currency translation generated $4.6M of other comprehensive income in the first half of 2017. Currency movements affect reported results and asset values.
Outlook, projects, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said cash and operating cash flows should fund anticipated operating costs, existing-property capital expenditures and current debt repayments for at least 12 months.
- Construction of Century Mile Racetrack and Casino began in July 2017. Estimated cost is CAD 60M (about $46.2M); completion was expected in Q4 2018. The company was seeking financing, and stated that planned Century Mile and Bath project needs exceed current borrowing capacity.
- The company acquired casino licenses for a planned Bath, England casino. It estimated a further GBP 5.0M (about $6.5M) for construction and fit-out, in addition to conditional payments to the seller. Opening was expected in the first half of 2018; the filing also describes the project’s financing as not yet secured.
- Four Casinos Poland licenses were due to expire in 2018; the company intended to apply for them. It had won tenders for licenses in Katowice, Wroclaw and Bielsko-Biala, but the licenses had not yet been issued. Management expected to receive them and open the casinos in Q4 2017.
- Polish tax audits concern personal income tax on employee tips. The company accrued a $2.4M potential liability; a further $0.8M audit assessment was pending an official decision, and additional exposure from open audits was described as not probable or estimable. The company warned future assessments could be material. An arbitrator awarded the company $0.3M against a former Casinos Poland owner for certain related tax payments.
- Polish gaming-law changes permitting state-operated online gaming and slot arcades were not expected to materially affect 2017, but could increase future competition. Other notable items included a $0.1M impairment of Warsaw leasehold improvements following a casino relocation and a $0.25M loss on asset dispositions in the first half.
- About $33.0M of the $38.8M cash balance was held by foreign subsidiaries and was not available for U.S. operations unless repatriated. Management noted possible adverse tax consequences if foreign earnings were repatriated. Financing may not be available on acceptable terms and could dilute shareholders.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It was evaluating internal control procedures related to revenue recognition.
Key facts for investors to verify
- Whether financing for Century Mile and the Bath casino is secured, and the resulting capital requirements and potential dilution.
- Progress and regulatory approvals for the Poland licenses, including renewal of the four licenses expiring in 2018.
- Developments in Polish tip-tax audits, the accrued liability and any additional exposure.
- Whether revenue growth can improve margins, particularly amid higher gaming and payroll costs in Poland and weaker results at certain Canadian properties.
- Cash availability by jurisdiction, debt maturities and covenant headroom; also monitor exposure to Canadian dollar, Polish zloty and British pound exchange rates.
- The filing revised six-month 2016 results for an earlier $0.7M pari-mutuel revenue error: corrected shareholder earnings were $4.529M and EPS $0.18, versus previously reported $4.142M and $0.17. Comparisons in this summary use the corrected figures.