Century Casinos, Inc. — 2013 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2013, compared with 2012. Century Casinos operates casinos in Canada and Colorado, nine casinos in Poland, ship-based casinos, and manages a casino in Aruba. It reports one aggregated operating segment. Results include Casinos Poland from April 8, 2013, after the company acquired an additional 33.3% interest and began consolidating its 66.6% ownership, and United Horsemen of Alberta (UHA) from November 29, 2013, after obtaining control with a 15% ownership interest.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net operating revenue | $104.6 million | $71.8 million |
| Gaming revenue | $95.5 million | $62.9 million |
| Earnings from operations | $5.5 million | $5.8 million |
| Net earnings | $6.1 million | $4.1 million |
| Net earnings attributable to Century shareholders | $6.2 million | $4.1 million |
| Basic and diluted earnings per share | $0.26 | $0.17 |
| Net cash provided by operating activities | $7.4 million | $9.2 million |
Revenue increased 45.6%, largely reflecting the consolidation of Casinos Poland, which contributed $34.8 million of net operating revenue from April 8 through year-end. Earnings from operations declined 5.1%. Operating margin, calculated as earnings from operations divided by net operating revenue, was approximately 5.2%, compared with 8.0% in 2012. Net earnings include a $2.5 million gain on business combinations: $2.1 million related to Casinos Poland and $0.4 million related to UHA. The difference between net earnings and earnings attributable to Century shareholders reflects losses allocated to non-controlling interests.
Cash, liquidity, and debt. Cash and cash equivalents were $27.3 million at year-end, up from $24.7 million; working capital was $5.6 million, down from $13.5 million. Operating cash flow fell to $7.4 million from $9.2 million. Investing activities used $10.9 million, including the Casinos Poland acquisition, UHA project advances, and capital expenditures; financing activities provided $6.3 million. Total reported debt was $34.1 million, compared with $3.6 million at year-end 2012; this includes an $18.3 million UHA land-lease financing obligation. The company reported $9.3 million outstanding and approximately CAD 17.0 million available under its existing BMO facility. Approximately $22.0 million of cash was held by foreign subsidiaries and was not available for U.S. operations unless repatriated, potentially with adverse tax consequences.
The worldwide effective income tax rate was 17.5%, versus 20.1% in 2012. No dividends were declared or paid. The company reported compliance with its debt covenants through the filing date.
Material changes versus 2012
- Poland became a consolidated operation following the additional Casinos Poland acquisition; it generated $34.8 million of revenue but only $0.3 million of operating earnings for the post-acquisition period.
- Consolidated net operating revenue rose 45.6%, while operating costs rose 48.9% and earnings from operations declined 5.1%.
- Revenue at Edmonton increased 2.8%; Calgary declined 14.3%; Central City declined 6.1%; Cripple Creek declined 0.9%; and ship-based casinos and other revenue declined 1.4%.
- Colorado properties experienced reduced customer traffic amid 2013 flooding and related road closures. Calgary operations were also disrupted by June flooding.
- Debt and non-controlling interests increased substantially following the Casinos Poland and UHA consolidations. Foreign currency translation reduced accumulated other comprehensive earnings by $2.6 million.
Outlook, commentary, risks, and contingencies
Management said cash on hand, operating cash flow, and expected additional BMO borrowings should be sufficient for anticipated operating costs, existing-property capital expenditures, and current debt repayments for at least 12 months. This outlook depends in part on the availability of financing and project execution.
- Century Downs project: CCE agreed to lend UHA up to CAD 24 million in two five-year loans to develop a Calgary-area racetrack and casino. Construction began in March 2014, with completion anticipated by year-end 2014. A final gaming license is not expected until opening. Loan A bears interest at BMO prime plus 600 basis points and includes an option to convert CAD 11 million into up to 60% ownership. UHA’s project, repayment capacity, construction costs, licensing, and additional borrowing needs are significant execution and credit risks.
- Other growth plans: The company anticipated adding casinos aboard new Windstar and TUI vessels in 2014–2015 and planned to operate a casino on the Nova Star ferry from May 2014. Its Vienna casino license application was one of four competing applications; approval was not assured and would require an estimated $7.9 million company investment.
- Polish tax dispute: CPL paid PLN 3.6 million ($1.3 million) relating to tax on employee tips and continued to appeal. Management recorded a contingent liability of PLN 14.8 million (approximately $4.9 million) for open periods and said an adverse outcome was reasonably possible; a final determination was expected in 2014.
- Principal operating risks: intense competition, extensive gaming regulation and taxation, seasonal and weather-related disruptions, foreign-currency exposure (not hedged), consumer discretionary spending, and the ability to fund capital needs. Management also cited potential impairment, construction, labor, cybersecurity, and international compliance risks.
- The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2013. The financial statements received unqualified audit opinions; the auditors did not express an opinion on internal control.
Important facts for investors to verify
- Track Casinos Poland’s operating performance, casino portfolio decisions, license renewals, and the outcome and ultimate cost of the Polish tax dispute.
- Verify Century Downs construction progress, final licensing, total project funding, loan advances and collateral, and whether the planned ownership conversion occurs.
- Reconcile the increase in reported debt—including the UHA financing obligation—with available borrowing capacity, maturities, covenants, and cash that can actually be deployed in the U.S.
- Assess whether core-property revenue and operating margins recover after the 2013 declines and weather disruptions, and whether planned cruise and Vienna opportunities deliver results without exceeding financing capacity.