Century Casinos, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; “year to date” refers to the nine-month period. Century operates casinos and related lodging, food and beverage, racing, sports betting and iGaming businesses in the United States, Canada and Poland.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Net operating revenue | $161.2 million | $112.6 million | $406.4 million | $326.8 million |
| Earnings from operations | $14.5 million | $20.0 million | $51.5 million | $53.9 million |
| Net earnings (loss) attributable to Century shareholders | $(14.2) million | $2.9 million | $(17.4) million | $12.0 million |
| Diluted earnings (loss) per share | $(0.47) | $0.09 | $(0.57) | $0.38 |
| Adjusted EBITDA (non-GAAP) | $33.3 million | $28.1 million | $88.7 million | $81.7 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $28.0 million | $36.7 million |
Operating margin was approximately 9.0% in Q3 versus 17.8% a year earlier, and 12.7% year to date versus 16.5%. Adjusted EBITDA increased, but the measure is non-GAAP and excludes specified costs; its definition may differ from similarly named measures used by other companies.
Revenue growth reflected acquisitions and higher hotel, food and beverage and other revenue, as well as gaming growth. Nugget contributed $32.5 million of Q3 revenue and Rocky Gap $14.6 million from its July 25 acquisition date. Revenue comparisons are therefore not on a fully comparable portfolio basis. Higher operating expenses and financing costs more than offset operating revenue growth in GAAP earnings.
- Cash and liquidity: Cash and cash equivalents were $189.0 million at September 30, 2023, versus $101.8 million at year-end 2022. Working capital was $134.5 million. The company had $30.0 million available on its revolving facility. Management estimated $132.9 million of cash was held by foreign subsidiaries, including $117.3 million in Canada.
- Debt: Debt, net of deferred financing costs, was $333.1 million, including $4.9 million current; principal was $347.9 million. The Goldman term loan carried a weighted average rate of 11.15% and matures in 2029. Net Debt, a company-defined non-GAAP measure excluding lease financing obligations, was $158.9 million.
- VICI obligations: The long-term VICI financing obligation was $654.0 million, up from $284.9 million at year-end 2022. The amended master lease adds substantial future rent: estimated total payments were $2.37 billion, including imputed interest, over the lease term and renewal periods. The lease is triple-net, and the company guarantees tenant obligations.
- Cash flows and investment: YTD investing cash outflow was $189.4 million, largely for the Nugget and Rocky Gap acquisitions and property projects; financing cash inflow was $147.9 million, including $162.6 million from the Canada real estate sale. Capital expenditures were $42.0 million.
Material changes versus prior periods
- Q3 revenue rose 43.2% and YTD revenue rose 24.4%; U.S. segment revenue increased 65.2% for Q3 and 34.6% YTD, substantially reflecting Nugget and Rocky Gap. Operating earnings declined 27.7% in Q3 and 4.4% YTD.
- Interest expense increased to $31.4 million in Q3 from $15.9 million and to $67.4 million YTD from $48.6 million. Drivers included higher Goldman borrowing rates, additional VICI lease financing obligations and a $7.3 million CDR land-lease debt-extinguishment charge.
- The company completed the Nugget operating-company acquisition in April and Rocky Gap acquisition in July. It consolidated Smooth Bourbon after acquiring Nugget; the remaining 50% interest is subject to a five-year purchase option for $105 million plus 2% annually.
- In September, Century sold the real estate of its Canadian portfolio to VICI for CAD 221.7 million ($162.6 million). It expected to retain approximately $114.6 million after the CDR land purchase, expenses, taxes and minority-owner proceeds. The properties were added to the VICI master lease, increasing initial annualized rent by approximately CAD 17.3 million ($12.8 million).
- Century ended its ship-based casino concession in April 2023. The 2022 comparison also included $100.2 million of restricted acquisition-escrow cash; that escrow funded the Nugget closing in 2023.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management planned approximately $15.5 million of remaining-2023 gaming equipment, renovation and security spending. It expected the $51.9 million Caruthersville land-based casino and hotel project to finish in the second half of 2024, and the $30.5 million Cape Girardeau hotel in the first half of 2024. At quarter-end, spending was approximately $16.7 million and $16.5 million, respectively.
- Two Casinos Poland properties, Katowice and Bielsko-Biala, closed October 16, 2023 after gaming licenses expired. Applications for new licenses were pending, with no assurance of approval. Together, the locations represented approximately 1.5% of consolidated YTD revenue. A Wroclaw license was also pending ahead of its November 2023 expiration.
- Management cited inflation in payroll, insurance, utilities, maintenance and food costs, as well as staffing difficulties that constrained some operating hours, table games and hotel rooms. Competition was affecting Century Downs; management also identified potential competition for Missouri and Colorado properties.
- Other material sensitivities include higher interest rates, foreign exchange movements, the company’s substantial lease and debt commitments, and possible future operating disruptions. The filing says future COVID-related impacts remain uncertain. The company was in compliance with Goldman financial covenants at quarter-end and reported effective disclosure controls.
- Unusual items include the $7.3 million CDR land-lease extinguishment loss, Canada real estate transaction costs, Calgary casino sale earn-out gains of $0.3 million in Q3 and $1.6 million YTD, and acquisition costs of $3.7 million in Q3 and $4.1 million YTD. Acquisition purchase-price allocations remained preliminary.
Important facts for investors to verify
- Whether the Polish casino licenses are awarded, and the resulting operational and revenue impact, including the Wroclaw license outcome.
- How recurring cash generation compares with debt service, the expanded VICI rent obligations and planned project spending, particularly given the high Goldman loan rate.
- Whether acquired Nugget and Rocky Gap operations deliver sustainable returns after acquisition costs, depreciation and financing, and how comparable-property performance is trending.
- The final retained proceeds and tax consequences of the Canadian real estate sale, and the effects of added rent and lease terms on liquidity.
- Progress, costs and completion timing for the Caruthersville and Cape Girardeau projects, plus effects of competition, inflation, staffing and currency changes.