Century Casinos, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Unless noted, dollar amounts below are USD millions. Century Casinos operates casinos and related businesses in Canada, the United States and Poland, as well as ship-based casinos and other gaming operations.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net operating revenue | $40.620 | $36.398 | +11.6% |
| Earnings from operations | $3.251 | $4.490 | -27.6% |
| Net earnings | $1.319 | $2.797 | -52.8% |
| Net earnings attributable to Century Casinos shareholders | $0.926 | $2.159 | -57.1% |
| Diluted EPS | $0.03 | $0.09 | Down $0.06 |
| Adjusted EBITDA (non-GAAP) | $6.562 | $6.711 | -2.2% |
| Net cash provided by operating activities | $5.795 | $5.360 | +$0.435 |
Operating margin on net operating revenue declined to approximately 8.0% from 12.3%; shareholder net margin declined to approximately 2.3% from 5.9%. The effective income tax rate was 42.6%, versus 26.2%, partly due to a $0.3 million intercompany dividend-related tax expense and taxes in foreign jurisdictions.
Revenue comparisons are affected by adoption of the new revenue standard: promotional allowances moved from a separate deduction to a reduction of gaming revenue. The filing reports Q1 2018 net operating revenue of $40.620 million; Q1 2017 was $36.398 million after promotional allowances. On a constant-currency basis, management reported revenue growth of 2%, versus 12% as reported. The company attributed segment revenue growth primarily to Canada and Poland; Poland’s operating costs rose faster than revenue, reducing its earnings from operations.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $65.939 million; restricted cash was $1.062 million on the balance sheet, with an additional $0.729 million restricted cash included in deposits and other. Cash, cash equivalents and restricted cash for cash-flow reporting totaled $67.730 million.
- Working capital was $41.741 million, compared with $49.883 million at December 31, 2017. Cash and cash equivalents declined from $74.677 million at year-end.
- Total debt principal was $54.189 million, including $5.568 million current; debt net of deferred financing costs was $53.969 million. Management’s non-GAAP net debt measure was negative $11.750 million, reflecting cash exceeding debt principal.
- Operating cash flow of $5.795 million was outweighed by $12.198 million of investing outflows, mainly property and equipment purchases. Financing outflows were $2.091 million, including debt repayments and distributions to non-controlling interests; cash, cash equivalents and restricted cash fell $8.714 million.
- Capital spending included Century Mile construction, the Bath casino project, and improvements and equipment for new Polish casinos. The company stated that existing cash and operating cash flow should fund anticipated operating costs, capital expenditures and debt repayments for at least 12 months.
Material changes, outlook and risks
- Revenue growth did not translate into higher operating profit: operating expenses increased 17.1%, including higher gaming, food and beverage, and general and administrative expenses. Adjusted EBITDA was broadly flat, while earnings attributable to shareholders fell substantially.
- Poland revenue increased, but expenses rose more quickly. Several casino licenses expired in 2018; some locations closed, and the company had applied for replacement licenses. Management cautioned that any licensing gap could suspend casino operations for an estimated three to six months, with no assurance licenses would be awarded. New Polish casinos were expected to partly offset disruption. The filing also noted potential future competition from state-run online gaming and slot arcades, and a new tax on certain casino patron winnings.
- Century Mile was under construction, with estimated cost of CAD 60 million and expected completion in early 2019. On May 4, 2018, the company received approval to increase BMO borrowing capacity by CAD 35 million for the project; finalization was expected in Q2 2018.
- The Bath casino was expected to open in May 2018; estimated additional construction and fit-out costs were GBP 5.7 million, alongside certain further seller payments. A provisional Bermuda casino license remained subject to conditions and government approvals; the company would provide a $5 million equipment loan if a license is awarded.
- After quarter-end, the company announced agreements to acquire interests in a Vietnam hotel and gaming business for stated consideration of $0.6 million for 51% of Golden and $0.4 million for 6.36% of Minh Chau, with options for additional Minh Chau shares.
- Polish tax audits concern employee tips. The company accrued a potential liability of PLN 6.5 million ($1.9 million); further assessments could be material, and the company stated additional obligations were not probable or estimable. An April 2018 appeals decision favored the Polish tax authority on a 2009 audit, for which the company said it had already paid the amount due.
- Foreign exchange movements materially affect reported results: management’s constant-currency analysis showed Q1 operating earnings down 34% and shareholder earnings down 71%, compared with reported declines of 28% and 57%, respectively. Tax Act accounting remained provisional, including estimates relating to GILTI and the transition tax.
- No specific earnings or revenue guidance was provided. Management noted that financing may not be available on acceptable terms and that further debt or equity financing could be dilutive. BMO covenant compliance was reported at quarter-end.
Key investor verification points
- Assess operating expense growth and margin pressure, particularly in Poland, against the reported revenue gains.
- Track Polish license decisions, casino closures or reopening dates, and potential tax exposure relating to employee tips.
- Verify Century Mile and Bath project costs, construction progress, opening schedules and funding, including completion of the BMO facility increase.
- Reconcile cash and restricted cash classifications and monitor cash usage against planned capital expenditures and debt maturities.
- Review the assumptions underlying Adjusted EBITDA and constant-currency results, which are non-GAAP measures, and the revenue-standard presentation changes.
- Monitor the Vietnam transaction, Bermuda licensing conditions, currency exposure and final tax accounting under the Tax Act.