Century Casinos, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Although the request references 2015 Q4, this filing is an annual report; fourth-quarter figures are separately noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Century Casinos develops and operates casinos and related hospitality and entertainment businesses. Its reportable segments are Canada, the United States, Poland, and Corporate and Other. In 2015, major additions included the opening of Century Downs Racetrack and Casino and commencement of Century Bets’ southern Alberta pari-mutuel network. Century owned 75% of each. Casinos Poland, which operates nine casinos, was 66.6%-owned.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net operating revenue | $134.4 million | $120.0 million |
| Earnings from operations | $16.5 million | $2.7 million |
| Net earnings attributable to Century shareholders | $11.9 million | $1.2 million |
| Diluted earnings per share | $0.49 | $0.05 |
| Adjusted EBITDA | $23.5 million | $12.9 million |
| Cash provided by operating activities | $19.7 million | $7.3 million |
| Capital expenditures | $18.9 million | $16.1 million |
Operating margin was approximately 12.3% and net income attributable to shareholders was approximately 8.9% of revenue. Adjusted EBITDA margin was approximately 17.5%; this non-GAAP measure excludes specified items, including the termination-agreement consideration.
At year-end, cash was $29.4 million, working capital was $11.2 million, and debt was $36.5 million, including $4.1 million current. Net debt was $7.2 million, down from $13.2 million in 2014. Total liabilities were $59.8 million. The consolidated weighted-average interest rate on debt was 8.21%; the company attributed the high average partly to the CDR land financing obligation, at a 12.94% weighted-average rate. Approximately $3.8 million remained available under the Bank of Montreal facility. Management said cash and operating cash flows should cover anticipated operating costs, existing-property capital expenditures, and current debt repayments for at least 12 months.
By segment, 2015 net revenue was Canada $45.9 million, United States $28.4 million, Poland $52.2 million, and Corporate and Other $7.9 million. Operating cash flow included $4.0 million received for early termination of cruise concession agreements. Investing activities used $18.2 million, principally for the Century Downs development.
Material changes versus prior periods
- Revenue rose 12.0% year over year, with Canada up 32.7%, primarily from the new Century Downs and Century Bets operations. The U.S. segment increased 6.5%; Poland rose 2.0% in reported dollars.
- Operating earnings increased by $13.8 million. Net earnings attributable to shareholders increased by $10.7 million. Results benefited from lower operating costs in Poland and the new Canadian operations, as well as a $3.4 million net revenue item related to the early termination of Oceania and Regent casino concessions.
- Adjusted EBITDA increased 82.8% to $23.5 million. The company excludes the termination payment from this non-GAAP measure; segment results also reflect the new operations and other adjustments.
- Foreign exchange movements were significant: the average Canadian dollar and Polish zloty exchange rates weakened against the U.S. dollar by 15.8% and 19.5%, respectively, affecting translated results. Foreign currency translation reduced comprehensive income by $9.9 million.
- Quarter four 2015 revenue was $32.6 million, operating earnings $2.5 million, net earnings $1.3 million, and earnings attributable to Century shareholders $0.7 million. Comparable fourth-quarter 2014 figures were $31.3 million, $0.6 million, a net loss of $0.7 million, and a shareholder-attributable loss of $0.2 million.
Outlook, risks, contingencies, and unusual items
- No quantified revenue, earnings, or EBITDA guidance was provided. Management described continued investment and growth opportunities as objectives, while noting that development and acquisition projects may require funding beyond current borrowing capacity.
- Key risks include intense casino competition, dependence on discretionary consumer spending, extensive gaming regulation and license renewals, significant gaming taxes, foreign currency exposure without hedging, and debt covenant restrictions. Near-term license renewals included Century Downs in 2016 and two Polish casinos in 2016; Colorado renewals were scheduled for 2017.
- The Canadian horse-racing industry agreement with the Alberta government was due to expire March 31, 2016; the filing cautioned that non-renewal or less favorable terms could adversely affect Century Downs.
- Century recorded a $2.2 million liability for open Polish employee-tip tax audit periods. The Polish Supreme Administrative Court ruled for the tax authority on two periods on March 9, 2016; the company said the potential impact on unaudited future tax years could be material. A separate 2009 case remained pending, with a decision expected in 2018.
- The $3.4 million net termination-agreement revenue was a non-recurring item. The company also recorded a $0.9 million reduction in the Polish tax contingency after the 2010 tax year became time-barred, and released a $1.5 million Austrian deferred-tax valuation allowance.
- Most year-end cash was held abroad: approximately $24.3 million of $29.4 million was outside the United States. Repatriation could have adverse tax consequences. The company reported no dividends and no share repurchases in 2015.
- Deloitte issued an unqualified opinion on the financial statements and internal controls; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- How much of 2015’s earnings and EBITDA improvement is sustainable after separating new-property contributions, currency effects, tax adjustments, and the one-time cruise termination payment.
- Century Downs’ operating performance and the terms or renewal of the Alberta government–HRA agreement.
- Potential additional Polish tip-tax exposure, including the effect of the March 2016 court rulings on unaudited periods.
- Debt service and refinancing needs, particularly the BMO facility scheduled to mature in August 2019 and the high-cost CDR land financing obligation.
- Cash availability by jurisdiction, foreign-exchange sensitivity, and the effect of any future repatriation on taxes and U.S. liquidity.