Century Casinos, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement. Comparisons below are full-year 2014 versus 2013.
Business context
Century Casinos develops and operates casinos and related hospitality businesses. At year-end, its operations included casinos in Canada, Colorado and Poland; casino concessions on cruise ships; management of the Radisson Aruba casino; and development of Century Downs Racetrack and Casino near Calgary. Century owned 66.6% of Casinos Poland and consolidated it, and held a controlling interest in the developing Century Downs project despite owning 15% before a planned conversion of debt to equity.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net operating revenue | $120.0 million | $104.6 million | +14.8% |
| Earnings from operations | $2.7 million | $5.5 million | -51.5% |
| Net earnings (loss), consolidated | -$1.1 million | $6.1 million | Decrease |
| Net earnings attributable to Century shareholders | $1.2 million | $6.2 million | -80.1% |
| Basic and diluted EPS | $0.05 | $0.26 | Down $0.21 |
| Adjusted EBITDA | $12.9 million | $12.7 million | +1.3% |
| Operating cash flow | $7.3 million | $7.4 million | Down slightly |
Net operating revenue grew primarily because Casinos Poland was consolidated for all of 2014, compared with only part of 2013. Operating expenses rose 18.6%, faster than revenue. Earnings from operations were approximately 2.2% of net operating revenue, versus 5.2% in 2013. The company reported a consolidated net loss because income tax expense of $1.5 million exceeded pre-tax income of $0.4 million; a $2.3 million allocation of losses to non-controlling interests resulted in positive earnings attributable to Century shareholders.
Poland generated $51.2 million of net operating revenue, or 43% of the total; Canada generated $34.6 million, the United States $26.7 million, and corporate and other operations $7.6 million. Revenue in the U.S. segment declined, including declines at both Colorado casinos. Casinos Poland reported a $0.1 million operating loss, although its Adjusted EBITDA was $3.7 million.
Cash and cash equivalents were $24.7 million at year-end, down from $27.3 million; working capital was $2.0 million, down from $5.6 million. Investing activities used $16.5 million, including substantial Century Downs construction spending, while financing activities provided $7.3 million. Total reported debt was $38.2 million, including $16.8 million for the Century Downs land lease; the company’s consolidated weighted-average debt interest rate was 7.95%. The BMO facility had approximately $13.0 million available. About $20.2 million of cash was held by foreign subsidiaries and was not available to fund U.S. operations unless repatriated.
Management said cash, operating cash flows and expected additional BMO borrowings would be sufficient for anticipated operating costs, existing-property capital expenditures and current debt repayments for at least 12 months. This is management’s assessment, not specific earnings guidance.
Material changes and unusual items
- Revenue rose with full-year consolidation of Casinos Poland; this makes the year-over-year comparison less directly comparable. Poland’s costs also rose, reflecting the additional consolidation period, higher gaming taxes and marketing, and Sosnowiec-related impairment charges.
- Interest expense increased to $2.8 million from $1.0 million, principally due to approximately $2.0 million of interest expense on the Century Downs land-lease financing obligation.
- The 2013 results included a $2.5 million gain on business combinations related to Casinos Poland and Century Downs; there was no comparable gain in 2014.
- Century recorded approximately $0.7 million of Sosnowiec impairment costs, including a $0.5 million write-down of leasehold improvements and a $0.2 million casino-license impairment. It also recorded $1.0 million of stock-based compensation expense.
- Foreign-currency translation reduced 2014 comprehensive income by $6.7 million. The Canadian dollar weakened against the U.S. dollar on an average-rate basis, affecting translated Canadian results.
- The company recorded a 359.7% effective income tax rate, driven by low pre-tax income, taxes in profitable jurisdictions, losses without recognized tax benefits, foreign exchange effects and valuation allowances.
Outlook, risks and contingencies
- Century expected Century Downs to open in April 2015. The project had preliminary regulatory approval, but the Alberta Gaming and Liquor Commission would not issue its final license until opening. The company had advanced CAD 18.6 million of a CAD 24 million commitment to the project; it expected to convert CAD 11 million of Loan A into up to an additional 60% ownership interest by opening as a licensing condition. Alberta extended its moratorium on new casinos and racetrack entertainment centers indefinitely in February 2015.
- Century expected to operate new ship casinos on Mein Schiff 4, planned for June 2015, and to begin operating a Southern Alberta off-track betting network in the second quarter of 2015. These are forward-looking plans, not guaranteed results.
- Casinos Poland’s current liquidity ratio was 0.5, below the 0.6 covenant threshold under two mBank loans. The company had obtained waivers; it reported compliance with the other relevant covenants. Poland’s Sosnowiec casino resumed limited operations in February 2015 and was expected to continue until its license expires in May 2017.
- Casinos Poland faces Polish tax litigation concerning income tax on employee tips. Century recorded a PLN 12.0 million ($3.4 million) contingent liability for open periods. Appeals remained pending, with a decision expected in 2015; an adverse outcome could require additional cash funding.
- Key risks include intense competition, gaming-license renewal and regulatory risk, consumer-spending and seasonal variability, foreign-currency exposure, project construction and financing risks, and the significant gaming taxes and revenue-sharing obligations in operating jurisdictions.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end; its auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Century Downs opened on schedule, obtained its final license, stayed within budget, and converted the planned loan into majority ownership.
- Century Downs’ continuing funding needs and the economics and cash burden of its land-lease financing obligation.
- The outcome and final exposure from Casinos Poland’s employee-tip tax litigation, and whether its covenant waivers or liquidity position change.
- Whether the decline in Colorado casino revenue and operating earnings stabilizes, and whether Poland’s operating performance improves after the Sosnowiec suspension and related impairment.
- The availability and location of cash, debt covenant headroom, and the effect of foreign exchange rates and any potential repatriation taxes.