Century Casinos, Inc. — Q3 2011 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2011, compared with the same periods in 2010. Century Casinos operates casinos in Colorado and Alberta, casino operations on cruise ships, and manages a casino in Aruba. It also owns 33.3% of Casinos Poland Ltd. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenue | $18.15 | $15.98 | $53.26 | $45.06 |
| Earnings from operations, including equity earnings | $1.55 | $0.74 | $3.28 | $1.43 |
| Net earnings | $1.42 | $0.32 | $2.43 | $0.19 |
| Diluted earnings per share | $0.06 | $0.01 | $0.10 | $0.01 |
| Operating earnings / net operating revenue | 8.5% | 4.7% | 6.2% | 3.2% |
| Net earnings / net operating revenue | 7.8% | 2.0% | 4.6% | 0.4% |
- Cash flow: Nine-month operating cash flow was $5.65 million, compared with $4.62 million. Investing used $2.11 million and financing used $3.50 million. Cash decreased $0.16 million to $21.31 million.
- Liquidity: Working capital was $12.5 million at September 30, versus $9.4 million at December 31, 2010. Management said cash and expected operating cash flows should fund anticipated operating costs, existing-property capital spending and current debt obligations for at least 12 months.
- Debt: Balance-sheet long-term debt, including the current portion, was $9.45 million, down from $13.51 million at year-end 2010. The Edmonton mortgage balance was reported as $9.4 million; the company said it was in compliance with its covenants.
- Equity investment: Century recorded $0.72 million of equity earnings from CPL for the nine months. Its investment carrying value was $3.03 million; maximum exposure to losses was stated as $3.0 million.
Changes versus the prior comparable period
- Net operating revenue rose 13.5% in Q3 and 18.2% for the nine months. Gaming revenue increased 13.2% and 17.0%, respectively.
- Net earnings rose by $1.10 million in Q3 and $2.24 million year to date. Lower interest expense and higher CPL equity earnings also contributed to improvement.
- Revenue grew at all properties for the nine-month period. Q3 revenue declined 2.0% at Central City; the company attributed this mainly to lower slot hold and a weaker local market. Central City also faced increased competition after a rival expanded.
- Calgary revenue increased substantially, but operating costs rose faster year to date, and the property reported a nine-month net loss of $0.15 million.
- Foreign currency translation reduced comprehensive earnings by $2.36 million for the nine months, despite positive net earnings of $2.43 million. This translation effect was recorded in other comprehensive income, not net earnings.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects operating cash flow to remain the primary cash source and said future development or acquisitions could require financing beyond current borrowing capacity.
- Planned property investments included approximately $0.2 million for a 24-hour Calgary poker room, with construction expected to begin in Q4 2011 and operations expected in Q1 2012. Edmonton added 16 slot machines; Calgary added poker and craps tables.
- CPL expects to begin operating a newly licensed casino in Sosnowiec in Q2 2012. Its Krakow casino lease will expire December 31, 2011; CPL intends to relocate, and leasehold improvements are being written off. Century estimated its share of an additional 2011 write-off at approximately $0.3 million.
- CPL’s other shareholders proposed selling their combined 66.66% stake to Poland’s state-owned national lottery company. Century was evaluating the required consent request.
- Century maintained valuation allowances of $5.6 million on U.S. deferred tax assets and $0.8 million on foreign deferred tax assets, reflecting uncertainty about realization. The nine-month effective tax rate was 14.0%, versus 70.0% in 2010.
- Management cited foreign-exchange exposure and competitive conditions among relevant risks; it reported no significant change in market-risk exposure from its 2010 Form 10-K. The filing also notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether revenue and profitability gains persist, particularly after separating operational growth from foreign-currency translation effects.
- Central City’s performance amid stronger local competition and Calgary’s ability to convert revenue growth into profits.
- Actual timing, cost and returns of the Calgary poker room and other planned capital expenditures.
- The Krakow relocation and write-off outcome, and any change in Century’s investment or governance rights if CPL’s proposed share sale proceeds.
- Cash generation, debt repayments and covenant compliance, together with the recoverability of deferred tax assets.