Century Casinos, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. The company operates casinos and related lodging, food and beverage, racing, and entertainment businesses in the United States, Canada, Poland, and other locations.
Business context and material developments
- On December 6, 2019, Century acquired the operations of Mountaineer Casino in West Virginia and casinos in Cape Girardeau and Caruthersville, Missouri, for approximately $110.6 million. These properties contributed only from the acquisition date to 2019 reported results.
- The properties’ real estate was sold to VICI Properties affiliates and leased back under a 15-year triple-net master lease, with approximately $25 million initial annual rent and four five-year renewal options. The transaction was accounted for as a financing obligation.
- Century Mile Racetrack and Casino opened in Alberta in April 2019. The company also acquired the remaining 25% of Century Bets! Inc. and exited its investment in Golden Hospitality Limited.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net operating revenue | $218.2 million | $168.9 million |
| Operating income (loss) | $(5.2) million | $9.5 million |
| Net income (loss) attributable to Century shareholders | $(19.2) million | $3.4 million |
| Basic earnings (loss) per share | $(0.65) | $0.12 |
| Adjusted EBITDA | $30.3 million | $23.4 million |
| Cash provided by operating activities | $18.8 million | $22.3 million |
Revenue increased 29.2%, reflecting the opening of Century Mile, improved results in Poland as casinos operated for more months, and the December acquisition. Reported revenue includes just 26 days of the acquired casinos; unaudited pro forma revenue assuming the acquisition at the start of 2019 was $422.7 million. Adjusted EBITDA rose 29.5%, but is a non-GAAP measure and excludes specified costs and items.
Operating costs and expenses increased 40.1% to $223.4 million. The company recorded a $16.5 million impairment, primarily related to Century Casino Bath, which had sustained losses and faced enhanced customer due diligence requirements. Interest expense rose to $8.3 million from $4.2 million. The operating margin was approximately (2.4)%, compared with 5.6% in 2018.
Fourth quarter: Net operating revenue was $67.2 million; operating loss was $14.7 million; and the loss attributable to Century shareholders was $20.1 million, or $0.68 per share. The quarter included the Bath impairment and acquisition-related effects.
Liquidity, debt, and cash flow
- At year-end, cash and cash equivalents were $54.8 million; working capital was $22.8 million. Management believed available cash, operating cash flow, and potential revolving borrowings would cover anticipated costs, capital expenditures, lease payments, and current debt obligations for at least 12 months.
- Operating cash flow was $18.8 million. Investing activities used $120.7 million, including $96.6 million for the acquisition net of cash acquired and $24.0 million for property and equipment. Financing activities provided $113.9 million.
- Debt principal was $189.0 million, all variable-rate; reported debt net of deferred financing costs was $179.0 million. Net debt, a non-GAAP measure, was $134.2 million, up from $14.4 million at year-end 2018. A one-percentage-point rate change would change annual cash interest by approximately $1.5 million.
- The Macquarie facility included a $170 million term loan due in 2026 and a $10 million revolving facility, undrawn at year-end. The term loan rate was variable and reported at 7.22% at year-end.
- The VICI master lease is a substantial additional commitment: the balance-sheet financing obligation was $275.6 million, while estimated future contractual payments totaled $1.187 billion, including imputed interest and estimates over the lease term and renewal options. These amounts are not directly comparable to debt principal.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management described expected slow growth in Colorado and stated that it was exploring projects and acquisition opportunities. Sports betting in Colorado was expected to begin in May 2020; agreements with partners were in negotiation, with one license agreement signed.
- Management reported that COVID-19 had not significantly affected its U.S. or Canadian markets as of the filing, while Poland had weakened by approximately 10%. It cautioned that the evolving outbreak could materially affect operations through lower customer activity, restrictions, added costs, or closures.
- Key exposures include casino licensing and regulatory changes, intense competition, consumer spending and local economic conditions, foreign exchange movements, variable interest rates, and the ability to service debt and master-lease obligations. Polish casino licenses are not renewable and require reapplication upon expiration.
- Polish tax authorities’ audits concerning employee tips resulted in $4.2 million paid through year-end and a recorded contingent liability of $0.3 million for open periods. Further potential obligations were not considered probable or estimable and could be material.
- The company adopted lease accounting standard ASC 842 in 2019, recognizing $38.3 million of right-of-use assets and $40.4 million of operating lease liabilities at adoption. The financial statement audit received an unqualified opinion. Management and the auditor excluded the acquired casinos’ internal controls from their year-end assessment; those properties represented 56% of consolidated assets.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth is sustainable from existing properties versus acquisitions, new openings, and currency effects.
- The final purchase-price allocation and acquired-property performance, including integration costs, synergies, and the economics of the VICI lease.
- Liquidity and covenant headroom under the Macquarie facility, cash interest sensitivity, and the capacity to meet debt, rent, and capital expenditure commitments.
- Whether Bath’s operating performance improves after the impairment and regulatory changes, and whether further impairments are required.
- COVID-19 effects, Polish license renewals and tax disputes, and the status and economics of planned Colorado sports betting.