Century Casinos, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions. Century Casinos operates casinos in the U.S., Canada and Poland, as well as ship-based casinos and gaming-related management and wagering businesses. Results are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net operating revenue | $37.9 | $31.6 | $68.3 | $60.7 |
| Earnings from operations | $7.8 | $0.3 | $9.9 | $1.3 |
| Net earnings attributable to Century shareholders | $6.6 | $0.2 | $8.4 | $0.7 |
| Diluted EPS | $0.27 | $0.01 | $0.35 | $0.03 |
| Adjusted EBITDA | $6.8 | $3.2 | $11.6 | $5.9 |
- Operating margin, calculated as earnings from operations divided by net operating revenue, was 20.7% in Q2 2015 versus 1.0% in Q2 2014; first-half margin was 14.6% versus 2.2%.
- Q2 total net earnings were $7.6 million, including earnings attributable to non-controlling interests; first-half total net earnings were $9.1 million.
- Cash from operating activities was $7.2 million for the first half, compared with $2.7 million a year earlier. Investing activities used $11.1 million, including $11.8 million of property and equipment purchases; financing activities provided $8.6 million.
- At June 30, cash and cash equivalents were $28.9 million; working capital was $9.1 million. Total debt, including the CDR land-lease financing obligation, was $44.7 million, of which $6.8 million was current. Total assets were $194.7 million.
- Reported first-half income tax provision was less than $0.1 million on $9.1 million pretax income. The second-quarter reduction of the Austrian deferred-tax valuation allowance generated a $1.5 million tax benefit. The company continues a full valuation allowance on U.S. deferred tax assets and certain Canadian deferred tax assets.
Changes and operating drivers
- Revenue rose 20.0% in Q2 and 12.6% for the first half. Growth was led by Canada, where Century Downs Racetrack and Casino opened in April and Century Bets! began operations in May. Q2 contributions included $4.7 million of revenue from Century Downs and $0.8 million from Century Bets!; management reported $0.9 million and $0.1 million, respectively, in net earnings.
- U.S. revenue increased 7.0% in Q2 and 6.1% in the first half, with higher customer volumes at Central City and Cripple Creek. Poland revenue declined 9.6% in Q2 and 0.9% in the first half in U.S.-dollar terms; management attributed much of the reported-period comparison to the weaker zloty, while local-currency revenue increased.
- In March, the company agreed with Norwegian Cruise Line Holdings to end its Oceania and Regent casino concessions effective June 1, transferring operations of eight shipboard casinos. It received $4.0 million in June; $3.365 million was recorded as revenue after accounting for assets sold. A separate two-year consulting agreement provides $2.0 million in fees, payable in eight quarterly installments beginning July 2015.
- The company converted CAD 11 million of loans to Century Downs into an additional 60% interest in March, bringing its ownership to 75%. First-half results include a $3.740 million foreign-currency translation loss attributable to Century shareholders in other comprehensive income.
Liquidity, debt, outlook and risks
- The BMO credit agreement had approximately CAD 5.3 million (about $4.2 million) available at quarter-end and matures in August 2019. The company reported compliance with its covenants. The facilities’ shares and the company’s 75% interest in Century Downs are pledged as collateral.
- Approximately $25.0 million of the $28.9 million cash balance was held by foreign subsidiaries and was not available for U.S. operations unless repatriated; repatriation could have adverse tax consequences. Management stated that cash and expected operating cash flows should cover anticipated operating costs, existing-property capital expenditures and current debt payments for at least 12 months. No specific earnings or revenue guidance was provided.
- Century Downs’ agreement with Horse Racing Alberta is tied to an agreement with the Alberta government that expires March 31, 2016. Management cautioned that failure to extend it, or a change in terms, could adversely affect Century Downs.
- Casinos Poland has recorded a $3.2 million contingent liability for disputed Polish employee-tip tax assessments. Appeals were pending, with decisions expected by year-end 2015; the company had already paid certain assessments. The filing also identifies regulatory and competitive risks to gaming operations.
- Two interest-rate swaps partially mitigate variable-rate exposure on BMO debt but are not designated as accounting hedges. Their fair-value changes are recognized in interest expense; the filing reports $0.171 million of swap liabilities at June 30.
Key facts for investors to verify
- How much of reported growth and profit is repeatable after excluding the $3.365 million concession-termination revenue and the $1.5 million Austrian tax benefit; note that Adjusted EBITDA excludes the termination item.
- Century Downs’ ongoing profitability and the outcome and terms of any extension of the Alberta government–HRA agreement.
- Progress and potential cash exposure from the Polish tax appeals, including whether the recorded $3.2 million liability remains adequate.
- Foreign-currency exposure and the practical availability of overseas cash, as well as debt maturities, covenant headroom and capital needs for the new operations.
- Performance following the transfer of the Oceania and Regent casino concessions, including receipt of the consulting fees and the contribution from remaining shipboard operations.