Canterbury Park Holding Corporation — Q3 2023 Form 10-Q
Business and period: Canterbury Park operates a Minnesota racetrack and casino, with additional food and beverage, entertainment, and real estate development activities. This unaudited filing covers the three and nine months ended September 30, 2023, compared with the same periods in 2022.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $19.27 million | $22.29 million | $48.91 million | $53.70 million |
| Operating income | $1.81 million | $4.41 million | $10.91 million | $9.54 million |
| Net income | $1.14 million | $2.92 million | $9.20 million | $6.45 million |
| Diluted EPS | $0.23 | $0.60 | $1.86 | $1.32 |
| Adjusted EBITDA (non-GAAP) | $2.85 million | $5.34 million | $7.35 million | $12.45 million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $10.20 million | $9.87 million |
- Q3 performance: Revenue fell 13.6% and net income fell 61.1% year over year. Operating margin was approximately 9.4%, versus 19.8% in Q3 2022. Adjusted EBITDA margin was 14.8%, versus 24.0%.
- Nine-month performance: Revenue declined 8.9%, while net income rose 42.6%. The increase in reported operating income and net income includes a $6.49 million gain on a land sale; other income also benefited from insurance proceeds recognized through an equity-method investment. Adjusted EBITDA declined 41.0%, to $7.35 million.
- Cash and liquidity: At September 30, cash and cash equivalents were $25.73 million, restricted cash was $2.35 million, and short-term investments were $4.50 million. Current assets of $37.41 million exceeded current liabilities of $10.09 million. Nine-month operating cash flow was $10.20 million.
- Debt and capital spending: No balance was drawn on the $10 million revolving credit facility at September 30; it matures January 31, 2024. The company reported compliance with its financial covenants. Nine-month capital additions to land, buildings, and equipment were $5.58 million. Lease obligations were approximately $61,000.
- Dividends: The company declared $0.07 per share per quarter during the first nine months of 2023, or $0.21 per share in total, compared with $0.28 for the comparable 2022 period.
Material changes and management commentary
- Casino revenue was broadly flat: up 1.8% in Q3 and down 0.2% for the nine-month period. Pari-mutuel revenue fell 28% in Q3 and 27% year to date, primarily as live race days declined from 64 to 53 and guest fees from out-of-state wagering decreased.
- Food and beverage revenue declined 15.4% in Q3 and 4.8% year to date. Management attributed the Q3 decrease primarily to Twin Cities Summer Jam not being held in 2023, unlike 2022.
- Other revenue decreased 35.5% in Q3 and 27.3% year to date, primarily because the Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community expired December 31, 2022. No 2023 purse enhancement or marketing payments were made under that agreement.
- Management cited higher wages and benefits, including wage-rate increases and a larger 401(k) match. Professional and contracted services increased, attributed to strategic growth initiatives focused on casino revenue. Advertising and marketing expense fell with the expiration of the agreement.
- In Q2, the company sold approximately 37 acres to a Swervo affiliate for total consideration of approximately $8.8 million and recorded a $6.49 million gain. It intends to use substantially all net proceeds for redevelopment of the horse stabling area, including new barns and a dormitory. The first phase received approval in August 2023 and is expected to take about one year.
- The company’s $13.80 million TIF receivable includes $11.31 million principal and $2.50 million interest. Reimbursement depends on future tax revenues generated by development; management believes it is collectible and recorded no allowance.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management believes cash, operating cash flow, available credit, and potential land-sale proceeds will be sufficient for operations and planned development expenses for at least the next 12 months. Additional financing may be needed for major development, facility improvements, or strategic transactions.
- The company has agreed to indemnify Doran affiliates for certain loan payments, up to $5.7 million in total, only if the lender demands payment under Doran’s guarantee. Management said pending claims and legal actions are not expected to materially affect financial position or results.
- The company must complete specified TIF-eligible infrastructure improvements, with reimbursement capped at $17.59 million and dependent on future tax increments. It expects to substantially complete remaining developer improvements by July 17, 2027.
- Key disclosed risks include discretionary consumer spending, competition, reduced racing popularity and ability to attract horses, weather and public-health disruptions, gaming regulation and potential tax changes, labor costs and inflation, and execution and funding risks for real estate development. The filing reports no material changes to previously disclosed risk factors.
Investor verification checklist
- Review the next results for pari-mutuel trends, race-day count, and casino revenue growth, including whether operating performance improves after the CMA expiration.
- Separate recurring operating performance from the land-sale gain and equity-investment insurance proceeds; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.
- Verify the January 2024 revolving-credit facility renewal or replacement, any borrowings, and compliance with covenants.
- Track TIF reimbursement progress and collectability, remaining infrastructure spending, and the timing and cost of the barn and dormitory redevelopment.
- Assess the cash conversion and repayment prospects of the approximately $2.94 million related-party receivable from joint ventures, which management expects to recover as those ventures generate positive cash flow.