Century Casinos, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Century Casinos operates casinos in the U.S., Canada and Poland, plus cruise-ship casinos and other management and gaming businesses. Century Downs Racetrack and Casino opened April 1, 2015, after quarter-end.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net operating revenue | $30.4 million | $29.1 million |
| Operating earnings | $2.1 million | $1.0 million |
| Net earnings attributable to Century Casinos shareholders | $1.8 million | $0.5 million |
| Diluted earnings per share | $0.08 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $4.8 million | $2.8 million |
| Cash from operating activities | $2.6 million | $0.3 million |
Net revenue increased 4.4%; gaming revenue rose 7.9%, while other revenue declined 30.7%. Operating margin was approximately 6.9%, versus 3.4% in Q1 2014. Management attributed the earnings improvement primarily to stronger results in Poland and the U.S.; foreign-exchange movements affected reported results.
At March 31, cash and cash equivalents were $25.9 million; working capital was $4.3 million. Current assets were $30.0 million and current liabilities $25.7 million. Total debt, including the CDR land-lease financing obligation, was $41.7 million, of which $6.5 million was current. Debt increased from $38.2 million at year-end 2014. The reported weighted-average interest rate was 6.98%; the CDR land-lease obligation carries an implicit 10% rate. The company reported compliance with debt covenants.
Investing activities used $7.1 million, chiefly for Century Downs development; financing activities provided $6.7 million net. Cash increased by $1.2 million, including a negative $1.0 million effect from exchange-rate changes. Approximately $21.7 million of cash was held by foreign subsidiaries and would not be available for U.S. operations unless repatriated.
Material changes and notable items
- Poland net revenue rose 9.0% in U.S. dollars and segment Adjusted EBITDA increased to $1.9 million from $0.8 million. The company cited stronger slot and table-game revenue and cost efficiencies; currency translation materially affected reported comparisons.
- U.S. net revenue rose 5.1%, and Adjusted EBITDA increased to $1.5 million from $0.9 million, supported by higher gaming revenue and lower operating costs.
- Canada net revenue declined 1.4% in U.S. dollars, while Adjusted EBITDA increased to $3.0 million from $2.5 million. Management said Canadian-dollar revenue increased in local currency; the weaker Canadian dollar reduced reported U.S.-dollar results.
- On March 20, the company converted CAD 11 million of loans to Century Downs into an additional 60% ownership interest, bringing its stake to 75%. Century Downs opened after quarter-end and had $345,000 of Q1 pre-opening expenses.
- The company agreed to end its Oceania and Regent casino concessions effective June 1, 2015, receiving $4.0 million for early termination. It also agreed to a two-year consulting arrangement for $2.0 million, payable in quarterly installments beginning July 2015. Assets with a $0.6 million net book value were classified as held for sale.
- Foreign-currency translation generated a $5.2 million comprehensive loss, despite positive net earnings, and reduced accumulated other comprehensive equity.
Outlook, risks and contingencies
Management expected cash on hand, operating cash flow and additional BMO borrowing to fund anticipated operations, capital expenditures and debt service for at least 12 months. It estimated approximately $3.0 million remained to complete Century Downs construction. This is management’s expectation, not a guarantee.
Key exposures include exchange-rate fluctuations in the Canadian dollar, euro and Polish zloty; casino regulation and operating performance; and liquidity constraints associated with foreign-held cash and debt obligations. Casinos Poland had a recorded $3.2 million contingent liability for disputed employee-tip income taxes; appeals were pending, with decisions expected by year-end 2015. A separate Century Downs promissory-note settlement was paid April 2, 2015. The company maintained full valuation allowances on U.S. and Austrian deferred tax assets; management said it might release the Austrian allowance if positive evidence emerged.
Important facts for investors to verify
- Whether Century Downs ramped up successfully after opening and whether remaining project costs stayed near management’s estimate.
- The timing and accounting treatment of the $4.0 million termination payment and the $2.0 million consulting fees, alongside the revenue impact of losing eight ship-based casinos.
- Progress and potential cash exposure in the Polish tax-tip litigation, including whether the $3.2 million reserve remains adequate.
- Cash availability by jurisdiction, foreign-exchange effects, and covenant headroom as debt and capital spending evolve.
- The sustainability of Q1 earnings growth and Adjusted EBITDA, including the non-GAAP measure’s exclusions and the strength of Poland’s reported improvement.