Century Casinos, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; filed August 8, 2012. Unaudited results. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Century Casinos operates casinos in Edmonton and Calgary, Canada, and Central City and Cripple Creek, Colorado; it also operates casino facilities on cruise ships, manages the casino at a resort in Aruba, and owns 33.3% of Casinos Poland Ltd. (CPL). CPL operated eight casinos during the period, including several newly opened locations.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net operating revenue | $17.791m, down 1.2% from $18.002m | $35.360m, up 0.7% from $35.117m |
| Earnings from operations | $1.695m, up from $0.977m | $3.267m, up from $1.733m |
| Net earnings | $1.148m, up 78.3% from $0.644m | $2.281m, up 126.3% from $1.008m |
| Diluted earnings per share | $0.05, versus $0.03 | $0.09, versus $0.04 |
- For the quarter, gaming revenue was $15.709m versus $15.928m; gross revenue was $19.947m versus $20.073m. For six months, gaming revenue was $30.968m versus $30.753m.
- Operating costs and expenses declined 5.9% for the quarter and 3.9% for six months. Lower general and administrative and depreciation costs were important contributors to improved operating earnings.
- Calculated operating earnings as a share of net operating revenue were approximately 9.5% for the quarter (5.4% in 2011) and 9.2% for six months (4.9% in 2011). Net earnings margins were approximately 6.5% and 6.4%, respectively, versus 3.6% and 2.9%. These ratios are calculated from reported figures.
- Interest expense increased to $0.395m for the quarter and $0.543m for six months, partly reflecting Edmonton mortgage prepayment charges. The six-month effective tax rate was 17.7%, compared with 32.2% in 2011.
Cash, liquidity and debt
- Cash and cash equivalents were $19.744m at June 30, 2012, down from $25.192m at year-end 2011. Working capital was $11.6m, compared with $6.0m at year-end.
- Six-month operating cash flow was $2.046m, compared with $2.607m in 2011. Investing activities used $1.618m, principally for property and equipment. Operating cash flow less reported property purchases was approximately $0.426m.
- Financing activities used $5.620m. The company repaid its Edmonton mortgage and entered a five-year Bank of Montreal (BMO) credit agreement; it had $3.631m outstanding and approximately $23.8m available at quarter-end. Total debt was $3.631m, versus $9.100m at December 31, 2011.
- The BMO agreement carries a floating rate; the company reported a current rate of approximately 4.0%. It was in compliance with covenants at June 30, but the agreement imposes leverage, fixed-charge coverage, equity and capital expenditure restrictions.
- Management stated that cash, operating cash flows and available BMO borrowing capacity should fund expected operating needs, existing-property capital expenditures and current debt obligations for at least 12 months.
Material changes, outlook and risks
- Consolidated quarterly revenue declined modestly while earnings rose, reflecting lower costs. Central City earnings improved substantially, while Calgary reported an operating loss for the quarter. Cruise-ship and Aruba segment earnings declined despite revenue growth.
- The Waldo Canyon wildfire and an eight-day closure of the main highway to Cripple Creek adversely affected second-quarter revenue; management estimated the impact at $0.2m. Edmonton road construction was expected to affect access through September 2012.
- Edmonton received approval to add 30 slot machines, expected to be installed gradually in the third quarter. A new casino across from the Cripple Creek property was expected to open in August, increasing local competition.
- Ship operations changed during the period: the Insignia casino operation was suspended in April while the vessel was leased to another cruise line; the Riviera casino began operating in May.
- CPL’s six-month operating revenue fell to $21.357m from $25.199m and net earnings declined to $1.313m from $1.422m. The company’s equity-method earnings were $0.438m for six months. CPL openings and start-up operations affected results; additional Polish license applications remained pending.
- Comprehensive earnings were affected by foreign-currency translation: the quarter recorded a $1.357m translation loss, resulting in a $0.209m comprehensive loss despite net earnings. Six-month translation loss was $0.290m.
- Management provided no specific earnings or revenue guidance. It cautioned that interim results are not necessarily indicative of full-year results. Other risks include currency movements, gaming-market competition, reliance on casino operating cash flows, and BMO covenant/default restrictions. The filing reported no material changes to previously disclosed risk factors other than the BMO agreement risks.
- Deferred tax assets remain subject to valuation allowances, including $5.2m for U.S. assets; realization depends on future taxable income. Management also noted that repatriating foreign earnings could have adverse tax consequences.
Important facts for investors to verify
- Whether cost reductions and improved earnings persist, particularly given modest revenue growth and quarterly weakness in Calgary and cruise/Aruba operations.
- Actual installation and performance of Edmonton’s additional slot machines, and the effect of construction and new Cripple Creek competition.
- Use of the BMO facility, future debt service, floating-rate exposure, and ongoing compliance with its financial and capital expenditure covenants.
- CPL’s performance as new casinos mature, planned Lodz refurbishment and Plock opening, and outcomes of pending license applications.
- Foreign-currency effects, tax valuation allowances, and any consequences if foreign earnings must be repatriated.