Century Casinos, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 6, 2015. Financial amounts below are in U.S. dollars unless noted. The company operates casinos in the U.S., Canada and Poland, as well as cruise-ship casinos, a racetrack and related businesses, and management and consulting operations.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenue | $33.5 million | $28.1 million | $101.8 million | $88.8 million |
| Earnings from operations | $4.1 million | $0.7 million | $14.0 million | $2.0 million |
| Operating margin | 12.2% | 2.5% | 13.8% | 2.3% |
| Net earnings (loss) attributable to Century shareholders | $2.7 million | $0.8 million | $11.2 million | $1.5 million |
| Diluted earnings per share | $0.11 | $0.03 | $0.46 | $0.06 |
| Adjusted EBITDA | $6.7 million | $2.9 million | $18.3 million | $8.8 million |
Adjusted EBITDA is a non-GAAP measure defined by the company and may not be comparable with similarly named measures used by other companies.
- Revenue and performance: Q3 net operating revenue increased 19.2% and nine-month revenue rose 14.7%. Gaming was the largest revenue source. For nine months, Canada revenue grew 33.0%, U.S. revenue 7.4% and Poland revenue 4.8%.
- Margins and expenses: Operating costs and expenses increased 7.4% in Q3 and 1.2% for nine months, slower than revenue. General and administrative expense rose 24.1% in Q3 and 11.5% for nine months; nine-month stock-based compensation was $1.2 million.
- Cash flow: Nine-month operating cash flow was $13.3 million, investing cash flow was negative $13.7 million, and financing cash flow was positive $6.3 million. Property and equipment purchases were $14.3 million, largely for Century Downs development. Cash rose $5.1 million to $29.8 million; the period included a $0.9 million adverse exchange-rate effect on cash.
- Liquidity: Current assets were $35.7 million and current liabilities $24.9 million, or working capital of $10.8 million. Management said cash on hand and operating cash flows should fund anticipated operating costs, existing-property capital expenditures and current debt repayments for at least 12 months.
- Debt: Total debt was $39.8 million, including $5.5 million current and $34.3 million long-term; net debt was $10.0 million. The consolidated weighted-average interest rate was 7.80% for the nine-month period. The CDR land-lease financing obligation was $14.6 million, with a 10.0% implicit interest rate. The company reported compliance with its debt covenants at quarter-end.
- Taxes: Nine-month income tax expense was $0.4 million on pretax income of $12.7 million, an effective rate of 3.2%. The company cites a $1.5 million tax benefit from eliminating its Austrian deferred-tax valuation allowance; its estimated 2015 effective tax rate was 16.45%.
Material changes versus the prior comparable period
- Century Downs casino opened in April 2015 and the horse-racing season began that month; Century Bets! began operating in May. Together, they contributed $10.6 million of net operating revenue and $1.7 million of net earnings for the first nine months. Century Casinos held 75% ownership in each at September 30.
- Canada’s results benefited from those new operations. Poland’s operating improvement reflected higher gaming revenue, including additional and upgraded slot machines and increased roulette play, along with cost efficiencies; the stronger results in U.S. dollars were affected by foreign-exchange translation.
- The company terminated its Oceania and Regent cruise-ship concession agreements effective June 1, 2015, receiving $4.0 million in consideration and recording $3.4 million as operating revenue after $0.6 million of assets sold. A two-year consulting agreement provides $250,000 per quarter. The termination reduced ongoing cruise-casino revenue.
- Nine-month earnings improved substantially from 2014, when the company reported a net loss of $0.4 million overall. The 2015 comparison includes the termination revenue and Austrian tax benefit; those items are not equivalent to recurring casino operations.
- Foreign-currency translation reduced nine-month other comprehensive income by $7.8 million. Average Canadian-dollar and Polish-zloty rates weakened against the U.S. dollar versus 2014, affecting translated results and asset values.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management described gaming operations as the expected primary source of cash and said future development or acquisitions could require financing beyond current borrowing capacity.
- Approximately $24.6 million of the $29.8 million cash balance was held by foreign subsidiaries and was not available for U.S. operations unless repatriated; repatriation could have adverse tax consequences.
- Currency movements affect reported results and cash. The company entered two interest-rate swaps in April 2015 to partially limit variable-rate exposure on BMO borrowings. The swaps were not designated as accounting hedges; their fair-value changes are recognized in interest expense. The quarter-end recorded swap liability was $0.2 million.
- Casinos Poland recorded a contingent liability of PLN 12.0 million, reported as approximately $3.2 million, for disputed employee-tip income-tax assessments. Appeals remained pending; decisions on two matters were expected in Q1 2016, and a separate 2009 matter had been returned for potential review by a different tax authority.
- Other relevant exposures include gaming regulation and licensing, debt covenants and refinancing, foreign-exchange risk, and the execution and performance of new operations. The filing refers investors to the risk factors in the company’s 2014 Form 10-K.
- The company said its disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings and EBITDA improvement is recurring, compared with the $3.4 million concession-termination revenue and $1.5 million Austrian tax benefit?
- Whether Century Downs and Century Bets! sustain revenue and profitability after their first operating year, and how their results are affected by seasonality and non-controlling interests.
- The status and potential financial outcome of the Polish employee-tip tax proceedings, particularly the decisions expected in 2016.
- Foreign-currency exposure and the extent to which the interest-rate swaps offset borrowing costs, including their effect on reported interest expense and cash flows.
- Availability and location of cash, remaining borrowing capacity, debt maturities and covenant headroom; the BMO agreement had approximately CAD 5.2 million available, while most reported cash was held outside the U.S.