Canterbury Park Holding Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Canterbury operates horse racing and pari-mutuel wagering, a 24/7 card casino, and food and beverage and other venue businesses in Shakopee, Minnesota. A holding-company reorganization took effect June 30, 2016; its shares began trading on Nasdaq on July 1 under ticker CPHC.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $16.63m | $16.73m | $40.86m | $41.46m |
| Operating income | $1.56m | $1.39m | $5.98m | $3.02m |
| Net income | $0.93m | $0.81m | $3.51m | $1.77m |
| Diluted EPS | $0.21 | $0.19 | $0.82 | $0.42 |
Q3 net revenue declined 0.6%; operating income rose about 12% and net income about 14%. Nine-month net revenue declined 1.4%. Nine-month operating income and net income improved substantially, primarily reflecting a $3.99m land-sale gain. The company reported a $592,000 insurance-recovery gain in the nine-month period. Excluding specified gains, nine-month Adjusted EBITDA was $3.26m versus $4.29m, down 23.9%; Adjusted EBITDA margin was 8.0% versus 10.3%.
Revenue trends: nine-month pari-mutuel revenue fell 7.1%, card casino revenue 0.8%, and food and beverage revenue 1.0%; other revenue increased. Total wagering handle rose 1.2%, as higher out-of-state handle offset lower live and simulcast handle. A live-racing take-out reduction supported wagering volume but reduced pari-mutuel revenue.
Cash, liquidity, and capital
- Nine-month operating cash flow was $2.54m, down from $4.14m. Capital additions were $3.78m; financing cash outflow was $2.59m, including $1.89m of capital-lease payments and $1.07m of dividends.
- Cash and equivalents were $4.45m at September 30, versus $8.27m at year-end 2015; restricted cash was $2.14m. Current assets were $10.53m and current liabilities $8.74m.
- The capital lease was fully paid in May; no capital-lease obligations remained at quarter-end. The company reported no borrowings on its former $3m revolving line. On November 11, 2016, it entered into a new secured revolving credit facility of up to $6m, expiring November 11, 2017.
- The May land sale generated approximately $4.3m in consideration, including $3.191m in notes receivable due in annual installments and maturing in May 2019. The company reported $3.99m gain on sale.
Changes, outlook, and risks
- Management said nine-month Adjusted EBITDA declined mainly because of lower revenue and higher salaries and benefits. Salaries and benefits rose 4.0%, partly due to Minnesota minimum-wage increases. The company expects further minimum-wage increases and said pricing or staffing measures to offset them could affect customer demand or service.
- The 2016 live-racing take-out reduction was intended to promote racing nationally; increased wagering volume did not offset the lower take-out rate. A 2016 statutory change to purse-rate calculations shifts expense timing between quarters; management did not expect a material annual impact.
- The company is evaluating development of approximately 140 acres of underused land. It said available funds should cover predevelopment costs, but real-estate development would likely require additional financing. No quantified earnings or development guidance was provided.
- Minnesota’s 2016 ADW legislation may create source-market fees for Canterbury, but management could not estimate the financial impact; online wagering may also affect handle. The filing identifies attendance, wagering demand, competition, labor costs, regulation, and development returns among principal risks.
- Under its agreement with the Shakopee Mdewakanton Sioux Community, marketing payments to Canterbury are scheduled at about $1.32m in 2017 and $1.35m annually in 2018–2022; purse-enhancement payments go directly to horsemen. The agreement restricts the company from advocating expanded gambling authority. Management considered potential covenant-repayment obligations remote.
- Additional storm-insurance proceeds of $592,000 were received in October and recognized as a gain in the September-quarter statements; further possible proceeds were not estimated. Management said pending ordinary-course legal matters were not expected to have a material impact. No material risk-factor changes were reported.
Key facts for investors to verify
- How much reported nine-month earnings depended on the land-sale and insurance gains, and how core operating results are trending.
- Whether pari-mutuel wagering and revenue respond to the take-out reduction, and the continuing trends in card casino and food and beverage activity.
- Cash generation, capital spending, restricted cash, and the terms and availability of the new secured credit line.
- Development plans, expected costs and financing needs for the underused land, and the eventual financial effect of ADW legislation.
- Exposure to minimum-wage increases and the obligations and restrictions under the marketing agreement.