Century Casinos, Inc. — Q3 2012 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2012, compared with the same periods in 2011. Century Casinos operated casinos in Alberta and Colorado, managed casinos aboard cruise ships and in Aruba, and held a 33.3% equity-method interest in Casinos Poland Ltd. (CPL). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net operating revenue | $18.7 | $18.1 | $54.1 | $53.3 |
| Reported earnings from operations | $1.6 | $1.5 | $4.9 | $3.3 |
| Net earnings | $1.2 | $1.4 | $3.5 | $2.4 |
| Diluted earnings per share | $0.05 | $0.06 | $0.14 | $0.10 |
| Operating margin* | 8.6% | 8.5% | 9.0% | 6.2% |
| Net margin | 6.3% | 7.8% | 6.4% | 4.6% |
*Reported earnings from operations divided by net operating revenue; reported earnings from operations include the equity-investment result.
- Q3 net revenue grew 3.2%, while net earnings fell 16.7%. CPL contributed a $57,000 loss in the quarter, versus $249,000 of earnings a year earlier; higher income tax expense also weighed on the comparison.
- For the first nine months, revenue rose 1.5% and net earnings increased 42.6%. Reported operating earnings rose 48.8%, supported in part by lower operating costs, including lower depreciation, and reduced corporate expenses.
- Cash and cash equivalents were $22.9 million at September 30, down from $25.2 million at year-end 2011. Working capital was $13.6 million, compared with $6.0 million at year-end. Current assets were $25.0 million and current liabilities $11.3 million.
- Operating cash flow was $5.9 million, versus $5.7 million in the first nine months of 2011. Investing used $2.6 million, mainly for property improvements and equipment; financing used $5.7 million, primarily for debt repayment and financing costs. Cash declined by $2.3 million over the period.
- Total debt was $3.7 million, down from $9.1 million at December 31, 2011. The company repaid its Edmonton mortgage after entering a five-year CAD 28.0 million Bank of Montreal credit agreement; $3.7 million was drawn and approximately $24.8 million remained available. The current borrowing rate was approximately 4.0%; the filing reports a 3.75% period average under the facility. Covenants were met at quarter-end.
Changes, outlook and risks
- Performance varied by property. Central City revenue increased and its nine-month earnings improved substantially, while Calgary reported operating and net losses. Edmonton revenue improved, and ship-based casino and other revenue increased. CPL’s nine-month net revenue and earnings were below 2011, with recently opened or relocated properties in start-up phases.
- Edmonton added 28 slot machines in Q3, with two more planned for Q4. Road construction at the casino entrance was expected to adversely affect traffic in Q4. A new competitor opened across from the Cripple Creek property in August; management said it had not materially affected Q3 results but could affect future results. The Waldo Canyon fire and an eight-day highway closure were estimated to have reduced Cripple Creek Q2 revenue by $0.2 million.
- On October 11, 2012, a subsidiary agreed to buy an additional 33.3% of CPL for approximately $6.8 million, intending to use cash on hand. The deal requires Polish regulatory and co-shareholder approvals; completion and timing are uncertain. CPL had a net loss in Q3, and the company’s maximum exposure to losses on its existing investment was $3.4 million.
- Management stated that cash, operating cash flows and available credit were expected to cover anticipated operating needs, capital expenditures and current debt obligations for at least 12 months. The filing provides no quantified earnings or revenue guidance. Management also noted possible future funding needs for development or acquisitions, foreign-exchange exposure, and potential adverse tax consequences if foreign earnings were repatriated.
- Other material considerations include a $4.8 million valuation allowance on U.S. deferred tax assets, foreign-currency effects on results and tax rates, and variable-rate debt. A 1 percentage-point rate change on the quarter-end borrowing balance would affect annual interest expense by less than $0.1 million before tax. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Approval status, purchase funding and expected consolidation/accounting treatment of the proposed additional CPL stake.
- Whether Edmonton road work, Cripple Creek competition and market-share pressure in Central City affect subsequent-quarter results.
- Underlying operating trends by property, particularly Calgary losses and the contribution from CPL’s newly opened locations.
- Availability and covenant terms of the BMO facility, future debt maturities, and the company’s cash requirements if it pursues acquisitions or development.
- Assumptions supporting deferred tax asset realization and exposure to foreign-exchange movements and possible repatriation taxes.