Century Casinos, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Century Casinos operates casinos and related businesses in the United States, Canada and Poland, as well as cruise-ship casinos and management and consulting operations. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance and position
- Revenue: Net operating revenue was $32.530 million, up 7.0% from $30.405 million. Gross revenue was $34.536 million; promotional allowances were $2.006 million.
- Profit and margins: Operating earnings rose 61.2% to $3.385 million, or approximately 10.4% of net revenue versus 6.9% a year earlier. Consolidated net earnings were $2.224 million versus $1.497 million; earnings attributable to Century Casinos shareholders were $1.894 million, up 2.7%. Basic and diluted EPS were $0.08, unchanged. Adjusted EBITDA, a non-GAAP measure, was $5.611 million, up 17.7%; its margin was approximately 17.3% versus 15.7%.
- Cash flow: Operating activities provided $3.263 million, compared with $2.577 million. Investing used $2.245 million, including property and equipment purchases; financing used $1.140 million, mainly debt repayments. Cash increased $0.566 million to $29.932 million, including a $0.688 million favorable exchange-rate effect.
- Liquidity and debt: Working capital was $12.9 million. Total debt was approximately $37.9 million, including $4.1 million current debt; net debt was $7.9 million. The consolidated weighted-average debt interest rate was 8.43%. Approximately CAD $5.2 million remained available under the Bank of Montreal facility, and the company reported compliance with its financial covenants.
- Other financial items: Income tax expense was $0.598 million, with a 21.2% effective tax rate. Other comprehensive income was $3.757 million, primarily reflecting foreign-currency translation.
Material changes versus Q1 2015
- Canada revenue increased 45.6% to $12.298 million, mainly reflecting Century Downs, which opened in April 2015, and Century Bets, which began operations in May 2015. Canadian segment Adjusted EBITDA rose 16.7% to $3.518 million.
- Poland revenue declined 9.4% to $12.264 million and Adjusted EBITDA declined 8.1% to $1.704 million. Management cited lower table-game revenue and the weaker average zloty versus the U.S. dollar.
- U.S. revenue increased 4.2% to $7.080 million; Adjusted EBITDA increased 1.7% to $1.504 million. Management reported market-share declines in both Central City and Cripple Creek despite market growth.
- Corporate and Other revenue fell 45.6% to $0.888 million, mainly following the 2015 termination of the Oceania and Regent casino concessions; lower cruise-related costs partly offset the revenue reduction.
- General and administrative expense increased 16.2% to $11.067 million, while interest expense increased to $0.778 million from $0.678 million. The reported gain on foreign-currency transactions and other decreased to $0.198 million from $0.495 million.
Outlook, risks and unusual items
- Liquidity outlook: Management stated cash on hand and operating cash flows should cover anticipated operating costs, existing-property capital expenditures and current debt repayments for at least the next 12 months. It noted that future development or acquisitions could require additional financing. About $25.4 million of the $29.9 million cash balance was held by foreign subsidiaries and was not available for U.S. operations unless repatriated.
- Growth plans: New cruise-ship casino agreements were expected to begin in Q2 2016 on TUI Discovery and Glory Sea; Mein Schiff 5 was expected to begin operations in Q3 2016. These are expectations reported in the filing, not earnings guidance. The filing provides no quantified full-year revenue or earnings guidance.
- Polish tax contingency: In March 2016, Poland’s Supreme Administrative Court orally ruled for the Polish tax authority on two historical audits involving personal income tax on casino employee tips. The company had paid PLN 3.6 million for those periods. It carried an estimated $2.3 million liability for open periods; management warned that future assessments could be material, but said additional obligations were not then probable or estimable. A separate 2009 audit matter remained pending, with a court decision expected in 2018.
- Debt and currency exposure: Canadian and Polish operations expose results to currency movements. The company had two interest-rate swaps, each with a CAD $10.1 million notional amount, expiring in August 2019; they were not designated as accounting hedges. CDR’s land-lease financing obligation was approximately $15.0 million and carried a 10.0% implicit interest rate.
- Other: Management reported no goodwill impairment indicators since its last annual assessment. It also reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the written Polish court decision and any resulting changes to the $2.3 million recorded contingency or future payroll-tax practices.
- Track Poland gaming revenue, table-game performance, license renewals and foreign-exchange effects.
- Assess whether new Canadian operations can grow profitably, given the associated increase in operating costs and the Calgary-area economic weakness noted by management.
- Monitor debt service, the high-cost CDR land lease, covenant compliance and the availability of cash held outside the United States.
- Reconcile Adjusted EBITDA trends to GAAP earnings and cash flow; Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures used by other companies.