Century Casinos, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Century Casinos owns and operates casinos in Alberta and Colorado, manages cruise-ship casinos and an Aruba casino, and holds a 33.3% equity-method interest in Casinos Poland Ltd. (CPL). Unless noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net operating revenue | $17.6 million | $17.1 million; up 2.7% |
| Operating earnings | $1.6 million | $0.8 million; up 107.9% |
| Net earnings | $1.1 million | $0.4 million; up 211.3% |
| Basic and diluted EPS | $0.05 | $0.02 |
| Net cash from operations | $0.8 million | $2.3 million |
- Revenue growth reflected increases across the company’s properties and ship-based casinos. Operating costs and expenses declined 1.8% to $16.2 million; lower depreciation and certain property cost reductions helped offset higher gaming expenses.
- Cash and cash equivalents were $22.9 million at March 31, down from $25.2 million at year-end 2011. Working capital was $7.6 million, versus $6.0 million at year-end.
- Cash used in investing was $0.6 million, primarily for slot machines and other property improvements, including the Calgary poker room. Financing cash outflow was $2.5 million, primarily repayment and prepayment of the Edmonton mortgage.
- Long-term debt’s current portion was $6.7 million at quarter-end; management identified this as the remaining Edmonton mortgage balance. The company reported compliance with all loan covenants.
- Total assets were $135.3 million and total liabilities $20.5 million. The income tax provision was $0.3 million, a 20.5% effective rate versus 38.0% in Q1 2011.
Material changes versus Q1 2011
- Net earnings improved by $0.8 million. Better results at Edmonton, Calgary, Central City and corporate operations contributed; Calgary returned to a small profit from a prior-year loss.
- Operating cash flow fell by $1.6 million, partly reflecting working-capital movements, including payments of accounts payable and taxes.
- Interest expense declined to $0.15 million from $0.25 million, attributed to lower Edmonton mortgage balances. Foreign currency transactions and other shifted to a $5,000 loss from a $75,000 gain.
- CPL reported revenue of $10.4 million, down from $11.5 million, and net earnings of $0.5 million, up from $0.3 million. Century’s equity earnings from CPL rose to $0.16 million from $0.09 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said cash on hand plus operating cash flows should cover expected operating needs, existing-property capital expenditures and current debt obligations for at least 12 months. It noted that future development or acquisitions could require additional financing.
- After quarter-end, the Riviera cruise-ship casino began operations on May 3, 2012; the Insignia contract expired April 5 and was not renewed. CPL opened casinos in Lodz and Krakow during the quarter and in Sosnowiec in April; two additional licensed locations were expected to open in 2012, with other license applications pending.
- CPL’s other shareholders proposed a conditional sale of their combined 66.66% interest to Poland’s state-owned lottery group. Century was evaluating the requested consent.
- Management disclosed a prior-identified material weakness concerning support for international tax positions and legal-entity structure; it had identified $502,000 of income-tax expense errors. Management described corrective steps taken in Q1 2012 and believed the weakness had been remediated. Separately, management concluded disclosure controls were effective at quarter-end.
- The company maintained valuation allowances against certain U.S., Calgary and European deferred tax assets due to uncertainty about future taxable income. Foreign-currency movements and casino-market conditions remain relevant risks; the filing refers investors to the risk factors in the 2011 Form 10-K.
Key facts for investors to verify
- Whether the improvement in earnings is sustainable, particularly given modest revenue growth and lower depreciation expense.
- Why operating cash flow declined and whether working-capital outflows normalize in subsequent quarters.
- Mortgage repayment schedule, covenant requirements and remaining debt obligations.
- Progress and evidence supporting remediation of the tax-control weakness, and the recoverability of deferred tax assets.
- Effects of the Insignia departure, Riviera launch, CPL ownership-sale process and pending Polish casino licenses.