Canterbury Park Holding Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Canterbury Park operates a Minnesota racetrack and unbanked Card Casino, with food and beverage, events, and real estate development activities. Horse racing and Card Casino operations are significantly regulated by the Minnesota Racing Commission.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net revenue | $56.95 million | $52.46 million | +8.6% |
| Operating income | $4.52 million | $7.14 million | -36.7% |
| Income before taxes | $4.57 million | $7.12 million | -35.8% |
| Income tax expense | $0.48 million | $2.92 million | |
| Net income | $4.09 million | $4.20 million | -2.5% |
| Diluted earnings per share | $0.93 | $0.97 | |
| Cash provided by operating activities | $7.09 million | $4.94 million | |
| Cash and cash equivalents at year-end | $8.89 million | $6.30 million |
Operating margin was approximately 7.9% of net revenue, versus 13.6% in 2016; net margin was approximately 7.2%, versus 8.0%. The comparison is affected by 2016 gains of $3.85 million on land sales and $1.46 million on insurance recoveries. Adjusted EBITDA, a non-GAAP measure, rose 58.7% to $6.91 million from $4.36 million, or 12.1% of revenue versus 8.3%. Reported EBITDA fell to $7.05 million from $9.69 million.
Revenue mix in 2017 was Card Casino 56.2%, pari-mutuel wagering 29.3%, and food and beverage 14.5%; development generated no revenue. Card Casino revenue increased 9.3%, led by 17.1% growth in table games, while poker revenue fell 4.0%. Pari-mutuel revenue increased 10.9%, including higher ADW source-market fees; food and beverage revenue rose 1.1%.
Operating expenses rose 15.7% to $52.43 million, faster than revenue. Excluding specified gains and asset-disposal items, management reported a 3.8% increase in expenses. Higher purse and Minnesota Breeders’ Fund expenses, payroll, marketing, and contracted services contributed to the increase.
Fourth-quarter results
Fourth-quarter net revenue was $12.00 million, compared with $11.55 million in 2016. Net income was $1.91 million, compared with $0.68 million. The 2017 quarter included a $1.345 million tax benefit from remeasuring deferred tax liabilities after U.S. tax reform.
Liquidity, capital and balance sheet
Operating cash flow was $7.09 million; capital additions to buildings and equipment were $3.78 million, implying approximately $3.30 million of operating cash flow after those additions. Cash increased $2.59 million during the year. Restricted cash was $3.14 million and is designated for obligations such as horsemen’s purses and Card Casino player and jackpot pools.
At December 31, 2017, total assets were $54.54 million, current assets $15.41 million, current liabilities $10.82 million, total liabilities $13.82 million, and shareholders’ equity $40.72 million. The company had no borrowings on its $6 million revolving credit line. The line’s amended maturity was September 30, 2018, and it is secured by specified company assets; the company reported compliance with its financial covenants. No funded debt or capital lease obligations were reported at year-end.
Notes receivable from the 2016 land sale totaled approximately $3.19 million, secured by the property and bearing 1.43% interest, with annual principal payments scheduled through 2020. Capital expenditures were primarily for building remodel projects. Cash dividends paid were approximately $0.96 million; the company declared $0.23 per share for 2017. In March 2018, it announced an increase in the quarterly dividend to $0.07 per share.
Material changes, outlook and risks
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% beginning in 2018. The company recorded a provisional $1.345 million fourth-quarter benefit from deferred-tax remeasurement; the filing notes amounts could change with further interpretation and guidance.
- Effective March 1, 2018, Card Casino collection revenue rates increased from up to 18% to 18.5%. Management estimated an additional $450,000–$600,000 of 2018 Card Casino revenue.
- Minnesota ADW legislation contributed approximately $881,000 of source-market revenue in 2017, compared with $144,000 in 2016. Management expected 2018 source-market fees to be similar to 2017.
- The agreement with the Shakopee Mdewakanton Sioux Community (SMSC) provides annual 2018–2022 payments of $7.38 million for horsemen’s purses and $1.62 million for Canterbury’s marketing. Purse payments go to horsemen and do not directly affect company financial statements; marketing payments are recorded as revenue with related expenses. The agreement may be terminated early under specified circumstances, and its term ends in 2022.
- Management continues to pursue commercial development of approximately 140 underutilized acres, but the filing gives no development timetable or projected returns. Development depends on approvals, financing, partners, tenants, construction costs, and market conditions.
- Key risks include intense competition from tribal casinos, other gaming and entertainment options, and online wagering; regulation and annual racing consents; declining long-term interest in horse racing; availability of horses and adequate fields; weather and racing-related injury exposure; wage and labor costs; cybersecurity; and dependence on key personnel and the SMSC agreement.
- Live racing totaled 67 days in 2017 versus 69 in 2016. The company relies on the horsepersons’ association’s waiver of Minnesota’s 125-day statutory minimum, with the current agreement requiring at least 65 scheduled racing days.
- Management said liquidity and operating cash flows should be sufficient for foreseeable regular operations. It reported no material pending litigation, and considered the conditional 1994 off-track betting earn-out and potential CMA covenant repayment remote. No payments were due under the $500,000 statutory bond in 2017.
Most important facts for investors to verify
- Whether 2018 Card Casino revenue and the estimated benefit from the higher collection rate materialize, and whether table-game growth offsets continued poker weakness.
- Whether the SMSC marketing and purse commitments remain in force through 2022, including any early-termination provisions and the post-2022 outlook.
- The actual cash-tax impact of tax reform and any changes to the provisional deferred-tax benefit.
- Collection of the approximately $3.19 million land-sale notes receivable and the status, cost, and approvals for development of the underutilized land.
- Liquidity after separating restricted cash from funds available for general use, and renewal or replacement of the revolving credit facility before its September 2018 maturity.
- Whether operating expense growth, capital spending, dividends, and minimum-wage increases remain supportable by recurring cash generation.
Audit note: Wipfli LLP issued an unqualified opinion on the consolidated financial statements. The auditor was not engaged to audit internal control over financial reporting; management concluded those controls were effective as of December 31, 2017.