Century Casinos, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Dollar amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. The company operates casinos and related businesses in the United States, Canada and Poland, as well as cruise-ship casinos and other gaming services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net operating revenue | $35,201 | $37,875 | $67,731 | $68,279 |
| Earnings from operations | $4,541 | $7,839 | $7,924 | $9,940 |
| Net earnings attributable to Century shareholders | $2,249 | $6,597 | $4,142 | $8,442 |
| Diluted EPS | $0.09 | $0.27 | $0.17 | $0.35 |
| Adjusted EBITDA | $6,858 | $6,808 | $12,469 | $11,575 |
- Q2 operating margin was approximately 12.9%, versus 20.7% a year earlier; six-month operating margin was approximately 11.7%, versus 14.6%.
- Cash from operations was $8.9 million for the first half, compared with $8.4 million. Capital expenditures were $3.8 million, versus $13.0 million; financing activities used $3.6 million, compared with providing $8.6 million.
- At June 30, cash was $31.3 million, working capital was $15.1 million, and total debt principal was $37.2 million ($37.0 million net of deferred financing costs). Net debt, calculated using principal less cash, was $5.9 million. About $26.6 million of cash was held by foreign subsidiaries.
- Reported Q2 net earnings included a $1.6 million gain within “foreign currency transactions and other”; management said this primarily included CDR infrastructure-related receipts. Adjusted EBITDA is a non-GAAP measure.
Material changes versus prior periods
- Q2 net revenue fell 7.1%, while first-half revenue declined 0.8%. The comparison is affected by $3.4 million of 2015 revenue from the termination of cruise-ship concession agreements. Excluding that item, Q2 2016 revenue was higher than the comparable 2015 amount.
- Q2 operating earnings fell 42.1% and shareholder earnings fell 65.9%; first-half shareholder earnings fell 50.9%. Higher general and administrative costs and the prior-year termination revenue contributed to the decline. The prior-year period also benefited from a $1.6 million Austrian valuation-allowance release that did not recur.
- Adjusted EBITDA increased 0.7% in Q2 and 7.7% for the first half. U.S. segment revenue and EBITDA improved; Poland’s Q2 revenue and EBITDA improved, while its first-half revenue was lower in U.S. dollars. Canadian first-half growth reflected the longer operating periods of Century Downs and Century Bets.
- Foreign-currency gains and losses and translation affect reported results: the company has material Canadian and Polish operations and reports in U.S. dollars.
Outlook, risks and unusual items
- Apex acquisition: The company agreed to acquire Apex Casino and related land in St. Albert, Alberta, for CAD 29.9 million, subject to working-capital adjustment, financing, regulatory approvals and other closing conditions. Closing was expected in Q4 2016. The company was seeking to amend its BMO credit agreement to arrange financing.
- Polish casino licenses: The Katowice license expired in July 2016; operations were moved to Sosnowiec pending a decision expected in September. The Lim Center Warsaw license was due to expire in September, with a decision also expected then. Polish casino licenses are not automatically renewed.
- Polish tip-tax matter: The company accrued an estimated PLN 8.6 million, or about $2.2 million, for open periods. A court ruled for the Polish tax authority for certain periods; further potential employment-tax obligations were not probable or estimable and could be material. Payroll-process changes were expected in Q3 2016, with anticipated annual payroll costs increasing by about PLN 5.0 million ($1.3 million).
- Liquidity and financing: Management said cash, operating cash flows and additional BMO borrowings were expected to cover operating costs, planned capital spending and current debt obligations for at least 12 months. The acquisition and other growth opportunities may require additional financing. Approximately $26.6 million of cash was overseas and would not be available for U.S. use unless repatriated, potentially with adverse tax consequences.
- The BMO agreement had approximately CAD 5.2 million of remaining availability and matures in August 2019; the company reported compliance with its covenants at June 30. CDR’s land financing obligation was about $15.0 million and carried an implicit 10% interest rate. Two interest-rate swaps had a combined fair-value liability of $0.2 million.
- The company corrected its 2015 first-half cash-flow statement: operating cash flow and investing cash outflow had each been understated by $1.2 million. It revised the comparative amounts. Management stated disclosure controls were effective and reported no material change in internal control during the quarter.
Investor verification points
- Confirm financing, approvals, final consideration and closing status for the Apex acquisition, including the effect on debt and liquidity.
- Track the Katowice and Lim Center license decisions and any resulting changes to Polish casino operations.
- Review developments in the Polish tip-tax proceedings, recorded liability, and the realized impact of the planned payroll changes.
- Assess whether operating cash flow and available borrowing capacity can fund capital spending, debt service and acquisition plans, considering the location of cash and currency exposure.
- Reconcile reported earnings with the prior-period concession termination revenue, tax-valuation-allowance release and current-period foreign-currency and CDR-related gains; assess Adjusted EBITDA alongside GAAP results.