Century Casinos, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company operates casinos and related hotels, food and beverage, racing and entertainment businesses in the United States, Canada and Poland. Results include Mountaineer and the Missouri casinos acquired in December 2019, so comparisons with 2019 are not like-for-like.
Key financial metrics
Amounts in millions, except per-share data. Adjusted EBITDA is a non-GAAP measure.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net operating revenue | $95.7 | $52.9 | $219.5 | $151.0 |
| Operating income (loss) | $15.0 | $3.5 | ($18.9) | $9.5 |
| Net income (loss) attributable to Century shareholders | $3.7 | $0.5 | ($54.7) | $1.0 |
| Diluted earnings (loss) per share | $0.13 | $0.02 | ($1.85) | $0.03 |
| Adjusted EBITDA | $22.2 | $7.1 | $30.0 | $20.5 |
| Operating margin | 15.7% | 6.6% | (8.6%) | 6.3% |
Q3 interest expense was $10.6 million versus $1.4 million a year earlier; nine-month interest expense was $32.5 million versus $4.1 million, reflecting increased borrowings and the VICI financing obligation. Nine-month operating results included $35.1 million of impairment charges for goodwill, intangible assets and an investment.
Cash flow and liquidity: Nine-month operating cash flow was $5.4 million, compared with $10.9 million in 2019; investing cash flow was an outflow of $1.8 million, versus $18.7 million; financing cash flow was an inflow of $4.1 million, versus $9.1 million. September 30 cash and cash equivalents were $62.1 million (cash, cash equivalents and restricted cash totaled $62.9 million), and working capital was $12.1 million. About $35.2 million of cash was held by foreign subsidiaries and was not available to fund U.S. operations unless repatriated.
Debt was $184.1 million net of deferred financing costs, including $10.5 million current and $173.6 million long-term; total principal was $193.8 million. Net debt, the company’s non-GAAP measure, was $131.7 million. The VICI-related financing obligation was $277.9 million. The revolving facility had $9.95 million available at quarter-end.
Material changes versus the prior period
- Q3 revenue and Adjusted EBITDA rose substantially, primarily reflecting the acquired U.S. properties and reopened operations; the acquired properties were not in the 2019 comparative results. U.S. revenue increased, while Canada and Poland revenue declined year over year.
- For the first nine months, revenue growth did not prevent a net loss, due to pandemic-related disruption, higher interest expense and impairment charges. The company estimated COVID-19 closures reduced nine-month revenue by about $91.3 million and Adjusted EBITDA by about $34.3 million.
- Cash increased from $54.8 million at December 31, 2019, aided in part by the $7.5 million deposit for the Calgary casino operations sale. Working capital declined from $22.8 million.
Outlook, risks and unusual items
- All locations had reopened by mid-June, but capacity, gaming-floor and operating-hour restrictions remained. Management expected COVID-19 to continue materially affecting results and liquidity through the remainder of 2020 and possibly into 2021; further closures could not be ruled out. During full shutdowns, estimated operating cash outflows averaged about $8.0 million per month.
- Management planned continued cost controls and reduced marketing, with most planned 2020 capital projects on hold for reassessment in Q1 2021. It expected Canadian payroll costs to rise as wage subsidies ended and table games reopened.
- The Macquarie agreement amendment waived past financial-covenant noncompliance and suspended further testing until the quarter ending September 30, 2021. Certain restricted-payment baskets were suspended until June 30, 2021. The company reported compliance with applicable covenants at quarter-end.
- The company reported that it may need additional capital; financing might not be available on acceptable terms, and failure to fund debt service, rent and operating needs could materially harm liquidity. The VICI master lease has initial annual rent of about $25 million, a 15-year initial term and renewal options.
- Century Casino Bath entered creditors’ voluntary liquidation and was deconsolidated, resulting in a $7.4 million gain. Calgary casino operations were under agreement for sale for CAD 10.0 million plus a three-year earn-out; regulatory approval was received November 5, with closing expected November 30, 2020, subject to customary conditions. The company planned to retain the real estate and Century Sports business.
- Other risks include potential additional Polish employment-tax liabilities related to tips, which the company said were not probable or estimable beyond amounts accrued, and Polish casino-license expirations: licenses are not renewable and future availability is subject to new applications. Management did not expect the proposed Bermuda casino project to proceed.
Important facts for investors to verify
- Whether COVID-related restrictions, demand and any renewed closures affect casino revenue, operating costs and cash flow beyond the period reported.
- Cash availability by jurisdiction, future liquidity needs, and the terms and covenant requirements of debt and lease obligations.
- Whether the Calgary sale closes on the expected terms and how the earn-out and retained-property lease perform.
- Whether further impairment charges or Polish tax liabilities arise, and the renewal or replacement prospects for Polish casino licenses.
- The reconciliation and comparability of Adjusted EBITDA and net debt, which are non-GAAP measures, and the effect of acquired properties on year-over-year comparisons.