Business context and reporting period
Century Casinos, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company operates casinos and related hotels, restaurants, racetracks and entertainment businesses across Canada, the United States, Poland and other markets. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net operating revenue | $168.9 million | $154.1 million |
| Earnings from operations | $9.5 million | $14.6 million |
| Net earnings attributable to Century Casinos shareholders | $3.4 million | $6.3 million |
| Basic / diluted earnings per share | $0.12 / $0.11 | $0.25 / $0.24 |
| Adjusted EBITDA (non-GAAP) | $23.4 million | $26.1 million |
| Net cash provided by operating activities | $22.3 million | $19.4 million |
| Cash and cash equivalents at year-end | $45.6 million | $74.7 million |
| Working capital at year-end | $5.0 million | $49.9 million |
| Total debt principal | $60.0 million | $57.0 million |
| Net debt (company-defined, non-GAAP) | $14.4 million | Net cash of $17.7 million |
FY 2018 operating margin was approximately 5.6%; net earnings attributable to shareholders were approximately 2.0% of revenue. Adjusted EBITDA was approximately 13.8% of revenue. These are calculated from reported figures; Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures at other companies.
Revenue rose 9.7% as reported, while earnings from operations fell 35.3%, shareholder net earnings fell 45.8%, and Adjusted EBITDA fell 10.4%. Total operating costs and expenses increased 14.4% to $159.5 million. Interest expense was $4.2 million, up from $3.7 million.
Cash used in investing activities was $57.7 million, principally reflecting Century Mile construction. Financing activities provided $7.2 million. Cash, cash equivalents and restricted cash declined $30.2 million during the year. The filing reports cash and cash equivalents of $45.6 million and working capital of $5.0 million at year-end.
Fourth-quarter results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Net operating revenue | $45.1 million | $39.3 million |
| Earnings from operations | $2.0 million | $1.7 million |
| Net earnings (loss) attributable to Century Casinos shareholders | $0.5 million | $(5.3) million |
| Basic earnings (loss) per share attributable to shareholders | $0.02 | $(0.20) |
Q4 2018 revenue increased approximately 14.8% year over year. Q4 2017 shareholder results included a $5.4 million tax expense related to the U.S. Tax Act, a significant factor in the prior-year quarterly loss.
Material changes versus the prior comparable period
- Revenue growth was led by Poland, up $8.4 million, and Canada, up $3.6 million; U.S. revenue increased $1.3 million.
- Poland’s operating earnings declined to $0.1 million from $2.6 million. Management estimated that closures of four casinos reduced 2018 Polish revenue by $9.8 million and Adjusted EBITDA by $3.3 million. Two closed locations did not receive replacement licenses.
- Canada’s operating earnings were essentially flat at $14.6 million. Century Downs revenue benefited from a longer thoroughbred racing season; expenses also rose, including payroll and racing costs.
- U.S. operating earnings increased to $5.9 million from $5.6 million. Central City market share fell to 26.8% from 29.3%, while Cripple Creek share rose to 10.4% from 10.1%.
- Century Casino Bath opened in May 2018, contributing $2.7 million in revenue and a $2.1 million net loss for the year. Its operating costs exceeded revenue during its opening year.
- Corporate and Other Adjusted EBITDA loss widened to $9.1 million from $6.5 million, reflecting higher costs and new operations.
- Cash fell from $74.7 million to $45.6 million, primarily as the company invested in Century Mile. Debt principal increased from $57.0 million to $60.0 million.
Comparability requires care: adoption of the revenue standard changed presentation of promotional allowances and related expenses in 2018. The filing states the adoption did not change net operating revenue for 2018, but it reclassified revenue and expense line items; 2017 figures were not presented on the same line-item basis.
Outlook, risks, contingencies and unusual items
- Century Mile: Management expected the Edmonton racetrack and entertainment center to open April 1, 2019. Estimated project cost was CAD 61.5 million (about $45.1 million at the December 31, 2018 exchange rate); $24.2 million of the 2017 equity-offering proceeds had been used by year-end. Remaining funding was expected from BMO borrowing capacity and available cash.
- Liquidity and refinancing: Management said cash and expected operating cash flows should fund anticipated operating costs, capital expenditures and current debt obligations for at least 12 months. Approximately CAD 16.1 million (about $11.8 million) under the BMO facility was due in August 2019; management intended to extend or refinance it and expected completion in Q3 2019. The filing cautions that refinancing is not assured.
- Other plans: The company was exploring a Cripple Creek hotel expansion, estimated at $6.5 million to $20.0 million depending on scope. A Bermuda casino had a provisional license subject to conditions and approvals; no final award was assured. Management described expected slow growth in Colorado but provided no quantified earnings or revenue guidance.
- Ship operations: The company would not renew several Windstar casino concessions expiring in 2019 because the cruise line planned other uses for the casino spaces. Management expected ship-casino revenue and related expenses to decrease in 2019.
- Polish tax matter: The company had paid PLN 14.3 million (about $4.2 million) related to audits over employee taxes on casino tips and recorded a $0.8 million contingent liability at year-end. Additional potential obligations were not considered probable or estimable and were not accrued; future assessments could be material.
- Other principal risks: Gaming-license renewals and awards, intense competition and online gaming, high gaming-tax and regulatory burdens, construction execution and cost overruns, foreign-exchange exposure, consumer spending and severe weather, cyber incidents, and debt covenants. The company did not hedge its foreign-currency exposure. A 10% weakening of the U.S. dollar was estimated to increase translated debt by $6.1 million and annual operating earnings by $1.7 million, based on year-end exposure.
- Unusual accounting and tax items: FY 2018 income-tax expense was $1.9 million, with an effective rate of 32.4%. The filing says the 2017 release of a $5.7 million U.S. valuation allowance and a separate $5.4 million Tax Act expense affected prior-year results. The company completed its accounting for the Tax Act in 2018.
The independent auditor issued an unqualified opinion on the 2018 consolidated financial statements and on internal control over financial reporting. Management also concluded disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether the August 2019 BMO maturity was extended or refinanced, and the resulting borrowing terms, covenants and liquidity.
- Whether Century Mile opened as planned, its final project cost and funding, and its subsequent revenue and cash generation.
- Whether Polish casino license transfers and renewals proceeded as expected, and the effect of license losses and new online or slot-arcade competition.
- The eventual outcome and possible additional exposure from Polish IRS audits concerning employee tips.
- The pace of revenue and earnings recovery, particularly in Poland, and the 2019 decline in cruise-ship concessions.
- The effect of lease accounting adoption, foreign-currency movements and the company’s relatively low year-end working capital on reported results and liquidity.