Century Casinos, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars unless noted.
Business context
Century Casinos operates casinos and related hotels, restaurants, racetracks, sports betting and iGaming businesses in the United States, Canada and Poland. It also holds a 50% equity interest in Smooth Bourbon, which owns the real estate underlying the Nugget Casino Resort in Sparks, Nevada.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenue | $111.1m | $92.2m | $214.2m | $164.6m |
| Earnings from operations | $20.8m | $18.1m | $33.8m | $26.4m |
| Adjusted EBITDA | $29.8m | $25.2m | $53.6m | $40.0m |
| Net earnings attributable to Century shareholders | $8.9m | $6.9m | $9.1m | $5.4m |
| Diluted earnings per share | $0.28 | $0.22 | $0.29 | $0.18 |
- Q2 operating margin was approximately 18.7%, versus 19.6% a year earlier; first-half operating margin was approximately 15.8%, versus 16.0%. Adjusted EBITDA margin was approximately 26.8% in Q2 and 25.0% for the first half.
- Revenue increased 20.5% in Q2 and 30.1% year to date. Canada and Poland benefited from casinos being open compared with COVID-related closures in 2021; U.S. revenue declined 8.3% in Q2 and 3.9% year to date.
- Q2 reported a $0.6m pretax loss, despite higher shareholder earnings, primarily because of a $10.4m income tax benefit. For the first half, the $9.0m tax benefit included release of a $10.2m U.S. deferred-tax valuation allowance. The unusually favorable tax result makes reported net income less representative of operating performance.
- Operating cash flow for the first half was $26.1m, compared with $22.7m. Investing cash outflow was $97.4m, mainly the $95.0m Smooth Bourbon acquisition; financing inflow was $160.7m, reflecting new borrowing and refinancing activity.
- At June 30, cash and cash equivalents were $96.2m; an additional $100.1m was restricted, primarily in escrow for the Nugget acquisition. Working capital was $60.5m, excluding restricted cash. The company reported $30.0m available under its revolving facility.
- Debt carrying value, net of deferred financing costs, was $352.2m; principal was $369.9m. Net debt, a company-defined non-GAAP measure, was $273.7m, versus $112.2m at June 30, 2021. The separate VICI long-term financing obligation was $283.0m.
Material changes and unusual items
- On April 1, 2022, Century completed the $95.0m purchase of 50% of Smooth Bourbon. It expects to acquire 100% of Nugget operating company for about $100.0m, subject to Nevada Gaming Commission approval; $100.0m of loan proceeds was placed in restricted escrow for that transaction.
- The new Goldman Sachs credit agreement provided a $350.0m term loan and $30.0m revolving facility, replacing the Macquarie agreement. The term loan had $349.1m outstanding at quarter-end, bears variable-rate interest, and matures in 2029. A $7.3m write-off of deferred financing costs contributed to higher Q2 interest expense.
- Century sold its Calgary land and building in February for $6.3m and recorded a $2.2m loss. It also ceased operating Century Sports at that location.
- Management said the company’s annual debt service is expected to increase by $14.8m compared with 2021. There is no general earnings or revenue guidance in the provided filing text.
Outlook, risks and contingencies
- Planned projects include a Caruthersville hotel targeted to open in August 2022 (estimated total cost $3.6m); a new Caruthersville land-based casino and small hotel, estimated at $47.0m with opening expected in mid-2024; and a Cape Girardeau hotel estimated at $26.0m, with a start date not finalized. The filing cites supply-chain timing as a consideration for project schedules.
- Management reported some staffing difficulties in the U.S. and Canada, requiring adjustments to food-service hours and hotel-room availability. It had not seen a material operating impact from inflation during the first half, though some food and utility costs had risen.
- COVID-19 demand and potential future restrictions remain uncertain. Management also cited exposure to foreign exchange movements and noted that continued conflict in Ukraine could negatively affect results, although no material impact had been observed at the time of filing.
- Casinos Poland’s Warsaw Hilton license was due to expire in September 2022. Polish casino licenses are not renewable; a new license must be applied for and is subject to the regulatory process. The filing does not state the outcome.
- The Caruthersville project depends on project execution and available funding. The filing also describes a previously filed legal challenge to Missouri gaming-law changes; a standalone state law was signed in June 2022.
- Management said litigation arising in the ordinary course was not expected to have a material effect. Disclosure controls were reported effective, with no material changes to internal control during the quarter.
Important facts for investors to verify
- Whether regulatory approval and closing of the Nugget operating-company acquisition occur on the expected timetable, and how the acquisition affects debt and cash generation.
- Interest-rate exposure under the variable-rate Goldman term loan and the effect of higher debt service on liquidity.
- Progress, final costs, funding and opening schedules for the Caruthersville and Cape Girardeau projects.
- Status and renewal outcome of the Warsaw Hilton casino license, and any impact on Poland operations.
- Underlying earnings and cash generation excluding the one-time deferred-tax valuation-allowance release, financing-cost write-off and Calgary sale loss.
- Whether operating trends in Canada and Poland remain strong after the comparison period’s COVID closures, and the effects of U.S. softness, staffing, currency movements and any renewed pandemic restrictions.