Canterbury Park Holding Corporation — Q3 2018 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2018. Canterbury Park operates a seasonal live horse-racing and year-round simulcast business, a 24/7 card casino in Shakopee, Minnesota, and food and beverage operations. It is also pursuing development of land surrounding the racetrack.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $18.37m | $17.67m | $47.10m | $44.96m |
| Operating income | $2.03m | $1.54m | $4.39m | $3.59m |
| Net income | $1.63m | $0.95m | $3.35m | $2.18m |
| Diluted EPS | $0.36 | $0.22 | $0.74 | $0.50 |
| Adjusted EBITDA | $2.69m | $2.18m | $6.36m | $5.46m |
- Revenue grew 4.0% in Q3 and 4.8% year to date; net income rose 71% and 53%, respectively. Operating margins were approximately 11.1% and 9.3% for those periods, versus 8.7% and 8.0% in 2017. Adjusted EBITDA margins were 14.6% and 13.5%, compared with 12.4% and 12.1%.
- Card casino revenue increased 8.3% in Q3 and 6.7% year to date. A change approved in March raised the maximum table-game revenue percentage from 18% to 20%; management attributed about $469,000 of Q3 and $963,000 of year-to-date revenue to this change. Higher table-game hold and play also contributed. Poker revenue declined.
- Pari-mutuel revenue increased 3.5% in Q3 and 2.5% year to date, supported by guest fees, additional live racing days and out-of-state handle. Year-to-date other revenue benefited from a short-term rental agreement related to the Super Bowl in Minneapolis; Q3 other revenue declined with lower paid attendance.
- Operating expenses increased 1.3% in Q3 and 3.3% year to date. Year-to-date salaries and benefits rose 4.2%, partly reflecting minimum-wage increases, previously vacant executive positions and added staff. Utilities and professional services also increased.
- Operating cash flow was $4.28m for the first nine months, down from $5.87m. Investing used $2.51m, mainly for building and equipment additions of $3.55m, partly offset by $1.04m of note collections. Financing used $0.29m, including $0.89m in dividends paid. Cash, cash equivalents and restricted cash totaled $13.50m at period-end.
- Cash and cash equivalents were $11.95m; restricted cash was $1.55m. Current assets were $17.18m versus current liabilities of $9.09m. Total liabilities were $12.71m, including $127,000 in capital lease obligations and $3.52m of deferred income taxes. The company reported no borrowings under its revolving credit line during Q3.
Material changes, outlook and risks
- The revolving credit facility was amended to provide an $8m line through September 30, 2019, with up to $2m of letters of credit; it is secured by receivables, inventory, equipment and general intangibles. Management said available cash, the facility and operating cash flow should cover regular operations and planned development expenses in 2018–2019. Significant additional real-estate development would likely require further financing.
- Canterbury contributed approximately 13 acres to the Doran Canterbury I joint venture. Because Doran had not secured financing and Canterbury could reclaim the land if financing was not obtained, the company recorded neither a joint-venture investment nor a gain at September 30. As of November 14, financing had still not been secured. Phase II is expected to follow Phase I; Canterbury’s planned contribution is approximately 10 acres for a 27.4% interest.
- A Shakopee redevelopment agreement requires infrastructure improvements with estimated eligible costs of $23.34m. Some reimbursements are expected from tax-increment revenues, but reimbursement is not guaranteed and depends on future property tax revenues. The company expects to use operating resources, its credit facility and potentially third-party financing.
- The cooperative marketing agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. The Community paid Canterbury $1.62m in marketing funds in the first nine months of 2018 and is committed to annual marketing payments of that amount through 2022. Canterbury also agreed not to promote or lobby for expanded gambling authority and to support the Community’s opposition to expansion. Management considers potential covenant repayments remote.
- Subsequent to quarter-end, the company agreed to sell approximately 1.7 acres for $564,000 and 19–21 acres for approximately $3.7m–$4.1m, and to buy approximately 2.6 acres for $1.0m; closings are expected in 2019, subject to customary conditions. The filing also states that a repurchase right on previously sold land expired October 6, 2018.
- No numerical earnings guidance was provided. Principal risks include attendance and wagering trends, competition, labor and operating costs, regulation and legislation, development costs and returns, reliance on the Doran partner for financing and execution, and uncertainty of TIF reimbursements. Management stated that no property-and-equipment impairment existed at September 30.
- Management identified a material weakness in internal control over financial reporting related to its initial, incorrect assessment of when to recognize a gain on the Doran land contribution. It concluded controls were not effective as of September 30 and planned to obtain additional technical accounting expertise. The adoption of new revenue and restricted-cash accounting standards had no material effect on revenue, net income or cash flows.
Important facts for investors to verify
- Progress and financing status of Doran Canterbury I, and whether contributed land is returned or the project proceeds.
- Actual infrastructure spending, financing needs and reimbursements under the TIF agreement.
- Whether card-casino revenue growth persists after accounting for the higher table-game revenue percentage and unusually high hold.
- Remediation of the material weakness and effectiveness of internal controls in subsequent filings.
- Closing and final terms of the announced land transactions, and liquidity after planned development expenditures.