Canterbury Park Holding Corporation — Q2 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Canterbury Park operates live and simulcast horse racing, an unbanked Card Casino, and food, beverage and event businesses in Shakopee, Minnesota. Live racing is seasonal, generally running from May through September.
Financial performance and position
- Q2 revenue: Net revenue was $15.85 million, up 14.1% year over year. Card Casino revenue rose 15.9% to $8.11 million; pari-mutuel revenue rose 16.0% to $3.50 million; food and beverage revenue rose 6.3% to $2.36 million.
- First-half revenue: Net revenue was $27.29 million, up 12.4%. Card Casino revenue was $15.82 million, pari-mutuel revenue $5.04 million, and food and beverage revenue $3.71 million.
- Profit and margins: Q2 operating income was $1.19 million and net income $717,000, versus $3.90 million and $2.27 million in Q2 2016. Q2 operating and net margins were approximately 7.5% and 4.5%, respectively. First-half operating income was $2.05 million and net income $1.23 million, versus $4.42 million and $2.59 million a year earlier; operating and net margins were approximately 7.5% and 4.5%. Comparisons are affected by a $3.99 million land-sale gain recognized in 2016.
- Per-share results and dividends: Q2 diluted EPS was $0.16 versus $0.53; first-half diluted EPS was $0.28 versus $0.60. Dividends declared per share were $0.06 for Q2 and $0.11 for the first half, compared with $0.25 for each comparable 2016 period.
- Costs and adjusted performance: Operating expenses increased 46.7% in Q2 and 27.1% for the first half, largely reflecting the absence of the 2016 land-sale gain that had reduced expenses. Excluding that gain, expenses increased 4.8% for Q2 and 5.8% for the first half. First-half adjusted EBITDA was $3.28 million versus $1.62 million in 2016, which excludes the prior-year land-sale gain; the company reported adjusted EBITDA margin of 12.0% versus 6.7%.
- Cash flow and investment: First-half operating cash flow was $5.49 million, compared with $2.81 million. Investing cash outflow was $2.73 million, primarily for building remodel projects; financing cash outflow was $285,000, mainly dividends. Cash and cash equivalents increased to $8.78 million from $6.30 million at year-end. Restricted cash was $6.30 million.
- Liquidity and debt: Current assets were $18.74 million and current liabilities $15.55 million at June 30, 2017. The company reported no borrowings on its $6.0 million Bremer Bank revolving credit line, which was due to expire November 11, 2017. Management said cash, credit availability and operating cash generation should cover regular operations and 2017 predevelopment costs; significant real-estate development would likely require additional financing.
Material changes and management commentary
- Revenue growth reflected higher Card Casino table-game play, more live racing days, higher live-race take-out rates than in 2016, and approximately $500,000 in first-half ADW source-market fees following legislation effective November 1, 2016. Poker revenue declined in the first half while table-game revenue increased.
- Higher live-racing activity and additional events supported food and beverage and admissions revenue. Management also cited higher jackpots and a stronger economy as contributors to Card Casino play.
- First-half cash flow benefited from increases in accounts payable and deferred revenue and amounts payable to horsepersons, and was partly offset by a $4.31 million increase in restricted cash. These working-capital movements are important when assessing cash-flow quality.
- The 2016 land sale generated the unusual $3.99 million gain; there was no comparable gain in 2017. The associated promissory notes receivable total $3.19 million, bear 1.43% interest, and were extended to May 2020, with annual payments totaling approximately $1.09 million due until maturity.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management continued evaluating development options for approximately 140 acres of underutilized land and warned that substantial development could require additional financing.
- The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through 2022. The community paid the company $1.58 million in marketing payments in the first half of 2017 and is obligated to pay $1.62 million annually from 2018 through 2022. Separate purse-enhancement payments are made directly to horsemen. The agreement restricts the company from promoting expanded gambling authority and requires support for the community’s opposition to expansion.
- Management considered potential repayment obligations under CMA covenants remote. It also considered a conditional earn-out tied to future legalization and commencement of off-track betting remote. Management said pending ordinary-course claims and legal actions were not expected to materially affect results or financial position.
- Risks identified include attendance and wagering trends, competition from other gaming and entertainment options, development costs and returns, labor-cost increases, purse-fund requirements, marketing expenses, and legislative or regulatory changes. Minnesota minimum-wage increases were cited as an ongoing cost pressure, with further inflation-linked increases beginning in 2018.
Key facts investors should verify
- How much of revenue growth and adjusted EBITDA improvement persists after the effects of ADW fees, additional racing days, table-game activity and marketing payments are considered.
- Whether operating cash flow remains strong after the large working-capital contributions and restricted-cash movements are separated from recurring cash generation.
- The status and renewal terms of the $6.0 million revolving credit facility, given its November 2017 expiration date.
- Development plans, expected predevelopment and project costs, financing needs, and potential returns on the underutilized land.
- The continued economics and compliance requirements of the CMA, including its marketing commitments and restrictions concerning expanded gambling.