Century Casinos, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; fourth-quarter figures are identified separately and are not the full-year results. Century Casinos develops and operates casinos and related lodging, dining, racing and entertainment businesses. Its reportable segments are Canada, the United States and Poland, with other activities reported as Corporate and Other.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net operating revenue | $154.1 million | $139.2 million | +10.7% |
| Earnings from operations | $14.6 million | $16.2 million | -9.6% |
| Net earnings | $7.9 million | $13.8 million | -42.9% |
| Net earnings attributable to Century Casinos shareholders | $6.3 million | $9.2 million | -32.1% |
| Diluted EPS attributable to shareholders | $0.24 | $0.37 | Down $0.13 |
| Adjusted EBITDA (non-GAAP) | $26.1 million | $25.8 million | +1.3% |
| Operating cash flow | $19.4 million | $22.3 million | -$2.9 million |
Operating margin was approximately 9.5%, compared with 11.6% in 2016; net earnings attributable to shareholders were approximately 4.1% of revenue. Adjusted EBITDA was approximately 16.9% of revenue; the company cautions that this non-GAAP measure may not be comparable with similarly named measures at other companies.
FY 2017 revenue by segment was $59.8 million in Poland (39% of total), $57.7 million in Canada (37%), $32.2 million in the United States (21%) and $4.4 million in Corporate and Other (3%). Canada and the United States increased adjusted EBITDA to $18.2 million and $8.0 million, respectively; Poland adjusted EBITDA declined to $6.4 million from $8.1 million.
At December 31, 2017, cash and cash equivalents were $74.7 million, restricted cash was $1.0 million, working capital was $50.2 million, total assets were $274.9 million and total liabilities were $87.6 million. Long-term debt, including current maturities and net of deferred financing costs, was $56.7 million, versus $55.6 million a year earlier. Net debt, the company’s non-GAAP measure, was negative $17.7 million (net cash), compared with positive $17.2 million in 2016. The increase in cash primarily reflected $34.3 million of net proceeds from a November stock offering. Cash provided by operations was $19.4 million; investing activities used $13.0 million.
Material changes and unusual items
- Revenue rose 10.7%, while operating costs and expenses increased 13.3%, contributing to lower operating income. Revenue growth included a full year of St. Albert operations, stronger Century Downs results and favorable currency translation; constant-currency revenue growth was 8%.
- Poland revenue increased 8.9%, but operating income fell 52.2%, reflecting higher expenses, license-related closures and uneven table-game results. Four casino licenses were expiring in early 2018, and management anticipated possible temporary closures during tender processes.
- The effective income tax rate rose to 36.6% from 11.5%. FY 2017 included a $5.7 million release of the U.S. deferred-tax valuation allowance and a provisional $5.4 million Tax Act expense, including a $5.1 million transition-tax estimate. Tax Act accounting was not complete at filing.
- Fourth-quarter 2017 revenue was $39.3 million and operating income was $1.7 million. The company reported a $5.0 million net loss and a $5.3 million loss attributable to shareholders, largely reflecting the $5.4 million Tax Act expense; diluted EPS attributable to shareholders was negative $0.19.
- November’s public offering issued 4,887,500 shares and generated $34.3 million net proceeds, increasing shares outstanding and reducing 2017 EPS by approximately $0.01, according to management.
Outlook, risks and contingencies
- Management said cash on hand and expected operating cash flows should cover anticipated operating costs, capital spending and debt payments for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Century Mile construction began in July 2017. Estimated cost is CAD 60.0 million (about $47.8 million at year-end exchange rates), with opening expected in early 2019. Up to $25 million of offering proceeds is planned for the project; the balance is expected from borrowing or available cash.
- The Bath, England casino project was expected to open in the second quarter of 2018, subject to approvals, with an estimated additional fit-out cost of GBP 5.5 million (about $7.4 million). A provisional Bermuda casino license was conditional on further approvals and regulations; the company contemplated a $5 million equipment loan if awarded.
- Poland faces license-renewal uncertainty and new competition from state-operated online gaming and slot arcades expected to begin in 2018. New Polish rules also tax certain casino winnings above PLN 2,280 per visit. Management warned of potential temporary closures as licenses are retendered.
- The Polish tax authority has pursued employee-tip tax assessments. The company had paid PLN 9.4 million (about $2.9 million) through year-end and recorded a $1.8 million contingent liability for open periods. A separate audit was estimated to involve PLN 4.8 million (about $1.4 million); additional exposure was described as not probable or estimable. An arbitration award for PLN 1.2 million (about $0.3 million) against LOT Polish Airlines was under appeal.
- Other principal risks include gaming-license and regulatory compliance, competitive pressure, currency fluctuations (not hedged), consumer spending and economic conditions, project cost overruns, debt covenants, and weather, cyber, labor and operational disruption. The company reported compliance with BMO financial covenants at year-end. Management and the auditor reported effective internal controls; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Progress and final funding requirements for Century Mile and the Bath casino, including opening dates, approvals and cost overruns.
- Outcomes of Polish license applications and tax proceedings, and whether new gaming formats or tax rules affect patronage and profitability.
- Underlying operating trends behind revenue growth versus cost growth, especially Poland’s lower operating income and Canada’s performance.
- Final Tax Act accounting and effective tax rate, including the transition-tax estimate and future GILTI treatment.
- Debt maturities, covenant headroom and refinancing plans for the BMO facility, which includes 2019 maturities; liquidity also includes cash held abroad.