Business context and reporting period
Century Casinos, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2018. The company operates casinos and related businesses in Canada, the United States, Poland and England, as well as cruise-ship casinos and other managed or invested operations. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenue | $43.6m | $41.0m | $123.8m | $114.8m |
| Earnings from operations | $3.2m | $4.8m | $7.5m | $12.9m |
| Net earnings attributable to Century Casinos shareholders | $1.6m | $7.6m | $2.9m | $11.6m |
| Diluted EPS | $0.05 | $0.31 | $0.10 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $6.4m | $7.5m | $17.6m | $20.7m |
For Q3, operating margin was approximately 7.4%, compared with 11.6% a year earlier; for the nine-month period it was approximately 6.0%, compared with 11.2%. Operating costs and expenses rose 11.2% in Q3 and 14.2% year to date, outpacing reported net operating revenue growth.
- Cash flow: Nine-month cash from operations was $14.6m, versus $16.0m. Investing used $40.8m, primarily for property and equipment, including Century Mile and the Bath casino. Financing used $2.0m.
- Liquidity: September 30 cash and cash equivalents were $46.8m; cash, cash equivalents and restricted cash were $47.5m. Working capital was slightly negative at approximately $0.04m, versus positive $49.9m at December 31, 2017.
- Debt: Principal debt was $53.5m ($53.3m net of deferred financing costs), including $20.1m current and $33.2m long-term. Net Debt, a non-GAAP measure, was $6.7m. The company reported compliance with applicable financial covenants.
Material changes versus prior comparable periods
- Shareholder-attributable earnings fell 78.5% in Q3 and 75.1% for the first nine months; Adjusted EBITDA declined 15.9% and 15.0%, respectively. Nine-month earnings also reflect the absence of the $5.1m U.S. deferred-tax valuation-allowance release recognized in Q3 2017.
- Reported net operating revenue increased 6.1% for Q3 and 7.9% year to date, but comparisons are affected by adoption of the new revenue standard. The 2018 presentation records promotional goods and services as a reduction to gaming revenue, whereas 2017 comparative figures show promotional allowances separately. The filing states the accounting change did not alter net operating revenue.
- Poland revenue grew, but costs rose faster: the segment recorded an operating loss of $0.3m for the nine months, versus operating earnings of $3.2m in 2017; Adjusted EBITDA fell 41.7%. License expiration delays, temporary casino closures and costs at newly opened or reopened locations affected results.
- Canada’s nine-month net operating revenue rose 7.5% and Adjusted EBITDA rose 9.8%. U.S. net operating revenue rose 4.3% and Adjusted EBITDA 1.4%. Corporate and Other losses widened, including costs at Century Casino Bath, which opened in May 2018.
- Cash declined from $74.7m at year-end 2017, chiefly reflecting substantial construction and other capital spending. Property and equipment purchases were $40.0m in cash-flow reporting, with additional purchases on account.
Outlook, commentary, risks and unusual items
- Management said cash on hand and operating cash flows should fund anticipated operating costs, capital spending and current debt obligations for at least 12 months. It expects to refinance approximately CAD 16.1m (about $12.4m) of BMO debt due in August 2019, with refinancing anticipated in Q3 2019; completion is not assured.
- Century Mile was estimated to cost approximately CAD 60m (about $46.4m) and was expected to open in April 2019. The BMO facility was expanded by CAD 33m for the project. The company had used $24.2m of the prior equity-offering proceeds for construction by September 30, 2018.
- Polish casino licenses are not renewable. CPL regained certain licenses and planned to open a third Warsaw casino in Q1 2019, but did not win licenses in Poznan and Plock. The filing warns that future competition from state-run online gaming or slot arcades could adversely affect results.
- CPL’s Polish tax dispute concerns personal income tax on casino employee tips. The recorded potential liability was PLN 3.0m (about $0.8m); further assessments are not considered probable or estimable, but could be material. CPL paid PLN 4.9m (about $1.3m) in May 2018 for 2012–2013 assessments and appealed.
- Other risks include foreign-currency exposure; cruise casino concessions ending on Wind Star and Marella Discovery in Q4 2018; and uncertainty around Bermuda casino licensing and approvals. The company’s provisional Tax Act accounting may change as guidance and analysis develop.
- The company acquired a 51% interest in Golden Hospitality, which invested in and manages a hotel and gaming club in Vietnam. Its planned further investment in Minh Chau creates a disclosed maximum exposure of $3.6m.
Important facts for investors to verify
- Progress and terms of refinancing the BMO amount due in August 2019, and remaining Century Mile funding and completion costs.
- Whether operating cost growth moderates and Poland’s reopened/newly licensed casinos improve segment profitability.
- Final outcomes and potential additional exposure in the Polish tax matters, along with the status of lost and newly awarded casino licenses.
- Cash conversion and liquidity after construction spending, including the impact of negative working capital and the portion of cash held by foreign subsidiaries.
- Changes to tax estimates, foreign-exchange effects, and results after the cruise concession agreements expire.