Business context and reporting period
Century Casinos, Inc. is an international casino and entertainment operator with properties in Canada, the United States, Poland and England, plus cruise-ship casino and other activities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net operating revenue | $52.4m | $39.6m | $98.1m | $80.3m |
| Earnings from operations | $2.6m | $1.0m | $6.0m | $4.2m |
| Operating margin, approximately | 5.0% | 2.5% | 6.2% | 5.3% |
| Adjusted EBITDA | $6.7m | $4.7m | $13.4m | $11.2m |
| Net earnings (consolidated) | $0.4m | $0.1m | $2.1m | $1.4m |
| Net earnings (loss) attributable to Century shareholders | $(0.6)m | $0.3m | $0.5m | $1.2m |
| Basic and diluted EPS | $(0.02) | $0.01 | $0.02 | $0.04 |
Q2 revenue rose 32.3% and first-half revenue rose 22.2% year over year. Gaming was the largest revenue source. Adjusted EBITDA increased 43.9% in Q2 and 19.5% in the first half; it is a non-GAAP measure defined by the company. Despite consolidated net income, Q2 shareholders’ results were a loss because earnings attributable to non-controlling interests were $0.9m.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $7.5m, investing cash flow was $(15.8)m, and financing cash flow was $9.6m. Property and equipment purchases were $15.9m, including $11.3m for Century Mile.
- Cash and cash equivalents were $47.0m at June 30, 2019; cash, cash equivalents and restricted cash totaled $47.7m. Working capital was $4.7m.
- Total debt principal was $72.5m; reported debt net of deferred financing costs was $72.1m, including $17.8m current and $54.2m long-term. The company’s non-GAAP net debt measure was $25.5m. Operating and finance lease liabilities added $45.1m.
- The company reported approximately $9.9m of remaining availability under the BMO credit agreement, subject to facility terms. It was in compliance with reported financial covenants at quarter-end.
Material changes versus prior comparable periods
- Century Mile opened its casino in April 2019 and held its first horse race that month. The new operation contributed $6.5m of Q2 revenue and $8.0m for the first half, while reporting operating losses of $0.1m and $0.8m, respectively.
- Poland revenue increased as more casinos were operating for more months than in 2018 following license awards. The Polish segment reported operating earnings of $1.0m in Q2 and $2.7m for the first half, versus losses in the comparable periods.
- Canada and Poland drove most of the revenue growth. U.S. revenue increased 3.9% in Q2 and 4.3% in the first half.
- Operating costs rose 29.0% in Q2 and 21.0% in the first half, including higher costs associated with Century Mile, expanded Polish operations, and the company’s newer England casino.
- Adjusted EBITDA improved, but first-half earnings attributable to Century shareholders fell to $0.5m from $1.2m, with higher interest expense and income tax expense among the factors affecting results.
- Foreign currency translation and exchange rates affected reported results. Management’s constant-currency presentation showed first-half revenue growth of 29%, compared with 22% as reported.
Outlook, commentary and risks
- Management stated that cash on hand and expected operating cash flows should cover anticipated operating costs, capital expenditures at existing properties and current debt repayments for at least 12 months. This outlook depends in part on financing and refinancing arrangements.
- A $15.3m CAD portion of BMO debt was scheduled to mature October 31, 2019, after an extension of the prior maturity trigger. The company intended to seek a further extension if needed pending replacement financing.
- The company had a commitment from Macquarie Capital for a proposed $180m facility, comprising a $170m senior secured term loan and a $10m revolving facility. It expected to use the financing to repay BMO debt and finance its proposed acquisition.
- In June 2019, Century agreed to acquire the operations of three casinos from Eldorado Resorts for approximately $107m, expected to close in early 2020 subject to regulatory approvals and customary conditions. VICI was to acquire the real estate for approximately $278m, with Century entering a 15-year triple-net lease at initial annual rent of approximately $25m. The transaction and financing were not completed as of the report date.
- Century planned a modest Century Downs gaming-floor expansion by year-end 2019 and was exploring additional hotel rooms at Cripple Creek. Casinos Poland planned to open a third Warsaw casino in August 2019. The Bermuda casino proposal remained subject to conditions and approvals.
- The company recorded a $1.0m write-down related to the Glory Sea ship-based casino agreement; the ship was not sailing, and Century had not decided whether to resume operations if it sailed again. Several cruise-ship concession agreements ended, and management was considering further exits as contracts expire.
- Century recorded $0.5m of tax expense from a valuation allowance on certain England-related deferred tax assets. The first-half effective tax rate was 50.1%.
- Casinos Poland had paid $4.2m related to employee tip-tax audits and accrued a further $0.9m for open periods. The company said potential additional tax obligations were not probable or estimable; future assessments could be material.
- Other risks include foreign-exchange movements, competition from Polish online gaming and slot arcades, gaming-license availability and renewal, debt maturities and covenant requirements, acquisition approvals and financing, and operating performance at recently opened or expanded properties.
Important facts for investors to verify
- Progress and final terms of the proposed Macquarie financing, the BMO maturity/refinancing, and the Eldorado/VICI transaction, including regulatory approvals and lease economics.
- Century Mile’s ongoing revenue, operating costs and cash needs after opening, and whether the new operation can reach profitability.
- Cash generation and capital expenditure requirements against debt service, lease commitments and the company’s relatively limited working-capital cushion.
- Polish casino license status and results, including the planned Warsaw opening, as well as any outcome or additional exposure from the employee tip-tax matter.
- Whether the Glory Sea impairment, cruise-concession exits, and the England deferred-tax valuation allowance lead to further charges or changes in operating plans.
- Underlying segment performance excluding new-property timing, Poland license comparisons, foreign-exchange effects and the company’s non-GAAP adjustments.