Century Casinos, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. The company operates casinos and related gaming, lodging, dining, racing and cruise-ship businesses in the U.S., Canada, Poland and other markets.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net operating revenue | $36.4 million | $33.2 million | Up 9.5% |
| Operating earnings | $4.5 million | $4.1 million | Up 10.0% |
| Operating margin | 12.3% | 12.3% | Approximately unchanged |
| Net earnings attributable to Century Casinos shareholders | $2.2 million | $2.3 million | Down 5.3% |
| Basic and diluted EPS | $0.09 | $0.09 | Unchanged |
| Adjusted EBITDA (non-GAAP) | $6.7 million | $6.3 million | Up 6.4% |
| Net cash from operating activities | $5.4 million | $3.3 million | Up $2.1 million |
Gaming revenue grew 15.4%; food and beverage revenue increased 15.5%. Other revenue fell 31.1%. Operating expenses rose 9.5%, in line with revenue growth. Higher interest expense and a larger share of earnings allocated to non-controlling interests contributed to the decline in parent-attributable earnings. The filing reports a 26.2% effective tax rate, versus 22.1% in Q1 2016.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $39.7 million, current assets $44.9 million and current liabilities $25.2 million; working capital was approximately $19.7 million. Cash increased $0.9 million from year-end 2016.
- Total debt principal was $54.9 million ($54.6 million net of deferred financing costs), including $5.4 million current and $49.2 million long-term. Net debt, a company-defined non-GAAP measure, was $15.2 million, versus $8.2 million at March 31, 2016; the year-over-year increase primarily reflects financing for the Apex acquisition.
- Cash used in investing activities was $2.6 million, including $1.1 million for property and equipment and $1.5 million for an Apex working-capital adjustment. Cash used in financing was $2.2 million, including $1.6 million of principal repayments and $0.6 million distributed to non-controlling interests.
- The company reported compliance with debt covenants. Approximately CAD 5.6 million remained available under the Bank of Montreal agreement, subject to facility terms.
Material changes and business developments
- The October 2016 Apex acquisition, now operated as Century Casino St. Albert, contributed $2.0 million of Q1 2017 net revenue and $0.1 million of earnings attributable to Century Casinos shareholders. It was a key contributor to the Canada segment’s year-over-year comparison.
- Poland revenue increased 18.6% and segment Adjusted EBITDA rose 39.6%, helped by a major competitor’s Warsaw closure in September 2016. Canada Adjusted EBITDA declined 7.9%, while U.S. Adjusted EBITDA increased 17.6%.
- At Century Resorts Alberta, revenue declined amid increased competition from a new downtown Edmonton casino. Calgary revenue also declined. In the U.S., Central City and Cripple Creek revenue improved, though Cripple Creek market share fell.
- The company received Alberta regulatory approval for the planned Century Mile racetrack and entertainment center. Estimated cost is CAD 50 million (about $37.5 million); construction is conditional on obtaining financing, with completion estimated for Q4 2018 or Q1 2019.
- The planned Palace Hotel restoration and expansion in Cripple Creek was postponed; the renovation project was placed on hold during the quarter.
Outlook, risks and unusual items
- Management said available cash and expected operating cash flows should fund operating costs, existing-property capital expenditures and current debt repayments for at least 12 months. New development, including Century Mile, may require additional debt, equity or bank financing. No numerical earnings or revenue guidance was provided.
- In April 2017, Polish authorities approved moving the LIM Center casino license to the Warsaw Marriott location and transferring the Warsaw Marriott license to a new Hilton Warsaw location. LIM Center was expected to close in May; the company anticipated a roughly PLN 0.5 million ($0.1 million) leasehold-improvement impairment in Q2.
- Casinos Poland’s Wroclaw license was due to expire in June 2017; the company had applied for a new license and expected a decision in Q2. It had also applied for a new Katowice license after losing the prior one; reopening there by year-end was conditional on obtaining a license. Polish gaming-law changes may increase future competition.
- A Polish tax dispute concerns personal income tax on casino employee tips. The company accrued a $2.2 million contingent liability for open periods. A further PLN 2.9 million ($0.7 million) assessment was identified but had not become an official decision; the company intended to appeal. Additional potential obligations were not considered probable or estimable and were not accrued; future assessments could be material.
- Q1 2016 comparative figures were revised after the company identified an erroneous $0.7 million reduction in pari-mutuel revenue. The correction increased reported Q1 2016 net revenue and parent-attributable earnings; 2016 Adjusted EBITDA was revised from $5.6 million to $6.3 million. Investors should use the corrected comparatives shown in this filing.
- Foreign exchange movements affect translated results and the company holds substantial cash at foreign subsidiaries: approximately $34.0 million of the $39.7 million total was held abroad and would not be available for U.S. operations unless repatriated, potentially with adverse tax consequences. Interest-rate swaps mitigate some, but not all, variable-rate debt exposure.
Important facts for investors to verify
- Whether Century Mile financing is secured, and how its projected CAD 50 million cost will be funded.
- Outcomes and timing of Polish casino-license applications, relocations and the tip-tax dispute, including any incremental exposure beyond the recorded accrual.
- Whether Poland’s revenue improvement and the company-wide EBITDA increase persist after competitor changes and currency effects.
- Debt repayment capacity, remaining borrowing availability and covenant headroom, particularly alongside planned development spending.
- The effects of the revised Q1 2016 comparatives when assessing year-over-year performance.