Century Casinos, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; dollar amounts below are U.S. dollars unless indicated.
Business context
Century Casinos operates casinos in Canada, Colorado and Poland, casino operations on cruise ships, and manages a casino in Aruba. It consolidates Casinos Poland (66.6% ownership) and UHA, the developer of the planned Century Downs Racetrack and Casino (15% ownership with control). Casinos Poland operates nine casinos; the company reported one operating segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net operating revenue | $31.6m | $28.3m | $60.7m | $46.3m |
| Operating income | $0.3m | $2.1m | $1.3m | $4.1m |
| Net income (loss), consolidated | $(0.7)m | $3.8m | $(0.5)m | $5.5m |
| Net income attributable to Century shareholders | $0.2m | $3.7m | $0.7m | $5.3m |
| EPS, basic and diluted | $0.01 | $0.15 | $0.03 | $0.22 |
- Q2 net revenue increased 11.3%, but operating income fell 84.5%. Operating margin was approximately 1.0%, versus 7.3% in Q2 2013.
- Six-month net revenue increased 30.9%, while operating income decreased 68.4%; operating margin was approximately 2.2%, compared with 8.9%.
- Gaming generated $29.2m of Q2 gross revenue and $55.3m for the first half. Food and beverage, hotel and other revenue were considerably smaller contributors.
- Interest expense was $0.7m in Q2 and $1.4m for the first half, up from $0.3m and $0.3m, respectively, in 2013. The prior-year comparison included a $2.1m gain on the Casinos Poland business combination, which did not recur.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $26.5m, down from $27.3m at year-end 2013. Working capital was $3.3m, down from $5.6m.
- Total debt, including the UHA land-lease financing obligation, was $35.7m: $5.8m current and $29.8m long-term. Debt was $34.1m at December 31, 2013. The UHA financing obligation was $18.3m and carries an implicit 10% rate.
- For the first six months, operating cash flow was $2.7m, investing cash outflow was $5.0m, and financing cash inflow was $1.5m. Capital expenditures were $5.1m; cash declined by $0.9m.
- The company reported compliance with its BMO and Casinos Poland debt covenants. BMO debt outstanding was $10.1m, with approximately CAD 15.5m (about $14.5m) available. CPL had $0.6m available under its line of credit.
- Approximately $22.6m of the company’s $26.5m cash was held by foreign subsidiaries and unavailable for U.S. operations unless repatriated, which could have adverse tax consequences.
Material changes, outlook and risks
- Results are not fully comparable year over year: Century consolidated Casinos Poland beginning April 8, 2013, so the 2013 first-half results include only part of its operations; UHA was consolidated beginning November 29, 2013. Casinos Poland contributed $26.7m revenue and a $0.3m net loss in the first half of 2014.
- Performance varied by property. Casinos Poland revenue rose with the full-period consolidation and additional slot machines, but its Q2 operating results were a loss. Colorado properties weakened: Cripple Creek first-half revenue fell 14.6%, amid lower customer volumes and declining market share; Central City revenue fell 9.4%, with management citing a declining market and Interstate 70 construction. Edmonton and Calgary benefited in Q2 from expanded table-game hours; Calgary also added off-track betting.
- Casinos Poland suspended operations at its unprofitable Sosnowiec casino for five months beginning June 30. The company recorded impairment charges related to the casino’s license and leasehold improvements; the filing describes the charge as approximately $0.7m in management’s discussion. The Polish management board was evaluating possible further strategic changes to other casinos.
- Century Downs construction began in March 2014. Management expected completion by the first quarter of 2015; the project is planned to include a racetrack and 550 slot machines. Final Alberta gaming approval is required before opening. The company anticipated funding the project with loans and additional BMO borrowing, including a CAD 11m committed term sheet.
- New ship-based casino operations on Mein Schiff 3, Star Pride and Nova Star, and the return of Insignia, increased revenue but also raised operating costs. Two additional Windstar vessels were planned to begin service in Q2 2015, with Century expecting to operate their casinos.
- After the quarter, on July 27, 2014, the company announced that another applicant had been awarded the Vienna casino license it had sought.
- Casinos Poland faces unresolved tax proceedings concerning employee tips. The estimated liability for open periods was PLN 14.8m, approximately $4.9m, at June 30, 2014; management expected decisions on appeals in 2014. CPL had already paid amounts related to certain periods while pursuing appeals.
- Management stated that cash, operating cash flow and expected BMO borrowing should cover anticipated operating costs, existing-property capital expenditures and current debt obligations for at least 12 months. This outlook depends in part on operating cash flow and access to financing.
- Foreign exchange movements affect reported results and taxes. The filing also identifies gaming-market competition, regulation and project execution as relevant business risks; no significant change in market-risk exposure was reported.
Important facts for investors to verify
- Whether Century Downs meets its expected completion schedule, secures final licensing, and stays within its financing and development plan.
- Future operating trends and profitability at Casinos Poland, including the Sosnowiec suspension, further strategic decisions, and resolution of the Polish tip-tax proceedings.
- Whether weakness in Cripple Creek and Central City continues, and whether growth at Canadian properties and new ship casinos offsets it.
- Debt repayment needs, availability of BMO and CPL facilities, and the effects of the 10% UHA land-lease obligation on interest costs and liquidity.
- How much foreign-held cash may be needed in the U.S. and the tax consequences of repatriation; also monitor the unusually high reported first-half effective tax rate of 407.5%, which management attributed to jurisdictional earnings and losses, valuation allowances and currency effects.