Century Casinos, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
Century Casinos operates gaming, hotel, food and beverage, racing and related businesses in the United States, Canada and Poland, as well as cruise-ship casino concessions and other activities. The December 2019 acquisition of Mountaineer and the Cape Girardeau and Caruthersville casinos materially expanded the U.S. business. Those properties contributed a full quarter of revenue in Q1 2020 but were not in the reported Q1 2019 results, so the reported year-over-year comparison is not like-for-like.
COVID-19 led the company to close all casinos, hotels and other facilities between March 14 and March 17, 2020. The quarter includes only part of the shutdown period.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net operating revenue | $87.7 | $45.6 |
| Operating income (loss) | ($31.8) | $3.4 |
| Net income (loss) attributable to Century shareholders | ($45.9) | $1.1 |
| Basic and diluted EPS | ($1.55) | $0.04 |
| Adjusted EBITDA (non-GAAP) | $9.6 | $6.7 |
| Net cash provided by operating activities | $4.7 | $4.2 |
| Capital expenditures | $4.4 | $7.6 |
Revenue increased 92.2%, largely reflecting the acquired casinos; COVID-related closures reduced estimated quarterly revenue by approximately $18.2 and Adjusted EBITDA by approximately $11.4. Operating costs rose to $119.4, including $34.0 of impairment charges. Approximate operating margin was negative 36.3% versus positive 7.6% a year earlier; Adjusted EBITDA margin was approximately 11.0% versus 14.7%.
Cash and cash equivalents were $63.7 at March 31; cash, cash equivalents and restricted cash totaled $64.5. Working capital was $25.2. Long-term debt, net of deferred financing costs, was $194.0, including $10.6 current; total debt principal was $204.1. Net Debt, a non-GAAP measure, was $140.4. Separately, the VICI-related financing obligation was $276.6; its associated triple-net lease had initial annual rent of approximately $25.0. Interest expense was $11.4, compared with $1.3 in Q1 2019.
Total assets were $670.1, total liabilities $557.4 and total equity $112.7 at quarter-end. Foreign currency translation reduced accumulated other comprehensive equity by $12.8 during the quarter.
Material changes versus the prior comparable period
- Reported revenue increased $42.0, or 92.2%, but the increase primarily reflects the acquired U.S. casinos, which generated $46.7 of Q1 2020 revenue and were absent from reported Q1 2019 results.
- Century reported a $45.9 shareholder-attributable loss versus $1.1 of earnings a year earlier. Impairment charges included $22.0 of goodwill and $11.0 of casino licenses, plus a $1.0 write-off of its MCE investment.
- Adjusted EBITDA increased 43.9% to $9.6, while the reported comparison was affected by the acquisition and shutdowns. Canada and Poland Adjusted EBITDA declined year over year.
- Interest expense increased by $10.1, principally reflecting acquisition financing and the VICI financing obligation.
- Cash from operations was $4.7, compared with $4.2. Cash increased from $54.8 at December 31, 2019 to $63.7, helped by additional borrowing, despite operating and investing cash outflows.
Outlook, risks and unusual items
- Closures and reopening: Management expected Poland’s casinos, which reopened May 18, to operate with distancing and enhanced health protocols. It anticipated reopening most other locations from June through August 2020, subject to government decisions and customer demand; the timing and pace of recovery were uncertain.
- Liquidity and going concern: As of April 30, the company reported $50.0 of cash, no remaining availability under its Macquarie and UniCredit facilities, an estimated cash outflow of approximately $8.0 per month while operations remained fully suspended, and an estimated $19.8 needed to reopen and cover near-term casino cash needs. Management identified a potential Macquarie revolving-facility covenant violation. If the covenant were breached while the $10.0 revolver balance exceeded $3.5, Macquarie could demand repayment. The filing states these conditions raised substantial doubt about the company’s ability to continue as a going concern; management believed a proposed waiver and/or additional financing from Macquarie was probable of alleviating that doubt, but planned to use those measures only if needed.
- Cost actions and lease: The company furloughed most personnel, reduced work weeks, suspended most marketing and targeted approximately $13.7 of non-labor cost reductions in 2020. It planned to defer or eliminate discretionary capital projects. VICI waived 2020 capital-improvement requirements and deferred certain other expenditures to no later than December 31, 2021.
- Impairment and taxes: COVID-related assumptions about future cash flows and valuations drove the $34.0 impairment charge; management warned further material impairments were possible. The company also recorded $2.5 of income tax expense on a $43.1 pretax loss, including valuation allowances on U.S. and Canadian deferred tax assets.
- Other developments: Century Casino Bath was permanently closed; its casino license was surrendered April 28 and the entity entered creditors’ voluntary liquidation May 6. The concession agreement for four of five TUI cruise-ship casinos ended May 12 and was not extended. The company recorded a $0.7 write-down of a receivable from LOT related to Polish tax payments. CPL’s Polish employee-tip tax matter had a recorded liability of approximately $1.0, with possible additional exposure not then considered probable or estimable.
Important facts for investors to verify
- Actual reopening dates, operating restrictions, customer return rates and cash burn compared with management’s estimates.
- Whether the Macquarie covenant waiver or additional financing was obtained, and the company’s subsequent covenant compliance and available liquidity.
- Whether the targeted cost reductions and deferred capital spending were achieved without impairing operations or growth plans.
- Final purchase-price allocation for the acquired casinos and any further goodwill or intangible-asset impairments.
- Subsequent developments in the Polish tip-tax contingency, LOT receivable recovery, Century Casino Bath liquidation and cruise-ship concession arrangements.
Adjusted EBITDA and Net Debt are non-GAAP measures and should be considered alongside the company’s GAAP results and definitions.