Century Casinos, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly results are also provided below. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Century Casinos develops and operates casinos and related lodging, food and beverage, horse racing, and entertainment businesses. Its reportable segments are Canada, the United States, Poland, and Corporate and Other. The company acquired Century Casino St. Albert in October 2016, operated 13 ship-based casinos, and held majority interests in Casinos Poland, Century Downs Racetrack and Casino, and Century Bets.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net operating revenue | $139.2 million | $133.7 million |
| Earnings from operations | $16.2 million | $15.8 million |
| Net earnings attributable to Century Casinos shareholders | $9.2 million | $11.5 million |
| Basic / diluted EPS attributable to shareholders | $0.38 / $0.37 | $0.47 / $0.47 |
| Adjusted EBITDA | $25.8 million | $22.8 million |
| Cash provided by operating activities | $22.3 million | $19.6 million |
Revenue rose 4.1%; operating earnings rose 2.3%; shareholder-attributable net earnings declined 20.0%. Approximate operating margin was 11.6% versus 11.8%, and adjusted EBITDA margin was 18.5% versus 17.0%. Adjusted EBITDA is a non-GAAP measure defined by the company.
Net operating revenue by segment was Canada $50.2 million, Poland $54.9 million, United States $30.1 million, and Corporate and Other $4.0 million. Adjusted EBITDA was Canada $16.3 million, Poland $8.1 million, United States $7.2 million, and Corporate and Other a loss of $5.8 million.
At December 31, 2016, cash and cash equivalents were $38.8 million, working capital was $17.3 million, total assets were $217.8 million, and total liabilities were $79.3 million. Debt, including current maturities and net of deferred financing costs, was $55.6 million; net debt was $17.2 million, up from $7.4 million a year earlier. Approximately $32.9 million of cash was held by foreign subsidiaries and was not available to fund U.S. operations unless repatriated.
Cash flow from investing activities was a $26.8 million outflow, including $19.7 million net cash paid for the St. Albert acquisition. Financing activities provided $15.6 million, mainly reflecting $22.8 million of borrowing for the acquisition. The company reported $5.6 million of current debt maturities. It said cash on hand and operating cash flow should cover anticipated operating costs, existing-property capital expenditures, and current debt repayments for at least 12 months.
Fourth quarter: Net operating revenue was $36.3 million, operating earnings were $3.7 million, consolidated net earnings were $4.3 million, and shareholder-attributable net earnings were $2.8 million. Basic EPS was $0.12 and diluted EPS was $0.11. In fourth-quarter 2015, the corresponding figures were revenue of $31.9 million, operating earnings of $1.8 million, shareholder-attributable earnings of $0.4 million, and EPS of $0.01.
Material changes versus the prior comparable period
- Canada revenue increased 11.1%, including the St. Albert acquisition and a full year of operations at Century Downs and Century Bets. Century Downs revenue also benefited from additional operating months versus 2015.
- U.S. revenue increased 6.0%, with growth at both Colorado properties. Management cited stronger VIP patronage at Central City and increased hotel revenue at Cripple Creek.
- Poland revenue increased 5.1%. A competitor’s Warsaw closure supported revenue at the Warsaw Marriott, while the Katowice casino closed after its license expired in June 2016.
- Corporate and Other revenue declined 49.6%, largely because 2015 included $3.4 million from the termination of Oceania and Regent cruise-casino agreements. New ship openings in 2016 partly offset the decline.
- Shareholder-attributable earnings fell despite higher revenue and Adjusted EBITDA. Corporate and Other’s loss widened, and non-controlling interests attributable to minority owners increased to $4.6 million from $1.5 million.
- Debt increased to fund the St. Albert acquisition. The company expanded its Bank of Montreal credit facility borrowing capacity to CAD 69.2 million and borrowed CAD 30.0 million for the acquisition.
Outlook, risks, contingencies, and unusual items
- Management expected Canada segment revenue growth to continue in 2017 and identified possible operating, marketing, and staffing synergies. It anticipated slow growth in its Colorado markets and expected increased Warsaw Marriott revenue to continue during 2017.
- Century Mile, a planned Edmonton-area racetrack and entertainment center, was estimated to cost CAD 50.0 million (approximately $37.2 million at the year-end exchange rate) and take about 15 months to construct. Construction depended on financing and additional regulatory and governmental approvals.
- The planned Palace Hotel restoration and expansion in Cripple Creek was estimated at $6.5 million, with completion targeted for early 2018, subject to financing.
- The company did not anticipate renewing its Hilton Aruba casino management agreement, which expires in December 2017. It also planned to apply for Polish casino licenses, including a replacement license for Wroclaw, whose license expires in June 2017. Management believed it was likely to receive at least one of the licenses for which it applied.
- Polish gaming-law changes effective April 2017 permit online gaming and reintroduce slot arcades through a state-run company. Management did not expect a significant 2017 impact but warned of possible future competition and adverse results.
- Polish tax audits concerning employee tips had resulted in $2.1 million of payments through year-end and a recorded contingent liability of $2.1 million. CPL planned a further payment of about $0.7 million in March 2017 and intended to appeal. Additional potential obligations were not considered probable or estimable and were not accrued; the company warned they could be material. Arbitration against former CPL shareholder LOT Polish Airlines over related amounts was pending.
- Following court decisions on tips, payroll and withholding changes increased CPL payroll costs by $0.7 million in the second half of 2016. Management estimated annual payroll costs would rise by about PLN 5.0 million (approximately $1.2 million at the year-end exchange rate).
- Other significant risks include intense competition, gaming-license renewal and suitability requirements, high gaming taxes, restrictive debt covenants, foreign-currency exposure without hedging, economic weakness in Alberta, and the need to finance expansion. The company reported compliance with its credit covenants at year-end.
- Unusual items included a $2.2 million Canadian deferred-tax valuation allowance release, $2.2 million of Century Downs cost-recovery income, and a $0.4 million impairment of Katowice leasehold improvements. The 2015 comparison included the $3.4 million cruise-agreement termination gain.
Important facts for investors to verify
- Review the terms, maturities, covenants, collateral, and remaining availability under the Bank of Montreal facility, and assess the increase in net debt and future refinancing needs.
- Track funding, approvals, cost, and construction timing for Century Mile and the Palace Hotel project; both plans depend on financing, and Century Mile also requires regulatory approvals.
- Monitor Polish license applications and the competitive effects of the 2017 gaming-law changes, including the Wroclaw license outcome.
- Follow the Polish tip-tax audits and appeal, the $2.1 million recorded liability, and any additional assessments or outcome of the LOT arbitration.
- Assess how much of reported earnings and cash generation is repeatable, given the 2015 termination gain, the 2016 tax allowance release and cost-recovery income, and minority ownership in key operations.
- Note that the company corrected 2015 results for $0.7 million of improperly recognized pari-mutuel revenue and receivables, and revised 2014 cash-flow reporting for a $1.8 million error. Management and the auditor reported effective internal controls, but the assessment excluded St. Albert, acquired in October 2016.