Canterbury Park Holding Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. The company operates a Minnesota racetrack and unbanked card casino, with related food, beverage, and event businesses. A holding-company reorganization took effect June 30, 2016; the common stock began trading under CPHC on July 1.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net revenue | $52.46 million | $52.26 million | +0.4% |
| Operating income | $7.14 million | $4.61 million | +54.8% |
| Income before tax | $7.12 million | $4.62 million | +54.2% |
| Net income | $4.20 million | $2.73 million | +53.9% |
| Diluted EPS | $0.97 | $0.64 | +$0.33 |
| Operating cash flow | $4.94 million | $4.43 million | +$0.51 million |
- Card Casino revenue rose 0.8% to $29.25 million; pari-mutuel revenue fell 5.4% to $9.49 million; food and beverage revenue fell 1.3% to $7.85 million. Other revenue increased 10.7% to $6.01 million.
- Adjusted EBITDA, a non-GAAP measure excluding specified unusual gains, declined 19.5% to $4.36 million from $5.41 million; margin fell to 8.3% from 10.3%. Reported operating margin was approximately 13.6%, versus 8.8%, but included material land-sale and insurance gains.
- Capital expenditures were $4.43 million, leaving operating cash flow less additions to buildings and equipment of approximately $0.51 million. Cash and cash equivalents declined to $6.30 million from $8.27 million; restricted cash was $1.99 million.
- At year-end, current assets were $12.08 million and current liabilities $8.72 million. Total liabilities were $13.07 million, including $4.36 million of deferred income taxes. The capital lease was fully paid during 2016; no revolver borrowings were outstanding.
- A new secured revolving credit line provides up to $6 million and expires November 11, 2017. The company reported compliance with its financial covenants throughout 2016. Management said available cash, the credit line, and operating cash flows should cover foreseeable operating needs.
- Q4 2016 net revenue was $11.55 million and net income $0.68 million, compared with $10.80 million and $0.95 million, respectively, in Q4 2015.
Material changes and unusual items
- 2016 earnings included a $3.85 million gain on the sale of approximately 24 acres and $1.46 million of insurance-recovery gains. The insurance amount included an additional $873,000 receivable expected in 2017 after roof repairs. The 2015 comparison included $0.66 million of land-sale gains, $0.50 million of insurance gains, and a $0.35 million gain on disposal of assets.
- Excluding reductions from gains on asset sales and insurance recoveries, operating expenses increased 3.1%. Salaries and benefits rose 5.3%, reflecting minimum-wage increases and $279,000 of severance tied to eliminating three senior management positions.
- Pari-mutuel revenue was pressured by lower simulcast revenue, increased competition from online wagering, one fewer live-racing day, and a 2016 live-racing takeout reduction that management said did not meet expectations. The promotion will not continue in 2017.
- The company sold land for approximately $4.3 million, receiving about $1.1 million in cash and two secured promissory notes totaling approximately $3.2 million, bearing 1.43% interest and due through 2019. It also bought approximately 32 adjacent acres for $4.9 million.
- Shareholders received $0.35 per share in 2016 dividends, including a $0.25 special dividend. A regular quarterly dividend policy was announced in September 2016; future dividends remain at the board’s discretion.
Outlook, risks, and contingencies
- No quantified company-wide financial guidance is provided. Management’s stated strategy is to improve the racetrack as an entertainment destination and pursue compatible development of approximately 140 underutilized acres.
- The SMSC Cooperative Marketing Agreement runs through 2022 and provides scheduled annual marketing payments to the company of approximately $1.58 million in 2017 and $1.62 million in 2018–2022, alongside purse enhancements paid directly to horsemen. The SMSC may terminate without cause in specified circumstances; termination could materially affect the business. The agreement also restricts the company from lobbying for expanded gambling authority.
- Key risks include competition from tribal casinos, a nearby card room, and online wagering; extensive state regulation and annual consent requirements for simulcasting; declining interest in horse racing; attracting sufficient horses and trainers; minimum-wage and labor-cost increases; weather and equine disease; cybersecurity and payment-card risks; and uncertainty around real-estate development.
- Management considered certain covenant-repayment obligations under the CMA and a potential earn-out tied to future off-track betting remote; it also stated pending routine claims were not expected to materially affect results. No material legal proceedings were reported.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor opinion on internal control effectiveness.
Investor verification priorities
- Assess underlying operating trends apart from the $5.31 million of 2016 insurance and land-sale gains, particularly the decline in adjusted EBITDA.
- Review the land-sale notes’ repayment schedule, security, and collection performance, and confirm completion and receipt of the remaining insurance reimbursement.
- Verify renewal and terms of the $6 million revolving facility, including its November 2017 expiry and covenant requirements.
- Track card-casino performance, pari-mutuel handle, ADW source-market revenue, and the results of ending the reduced-takeout promotion.
- Monitor the SMSC agreement’s continued performance and termination provisions, as well as approvals for simulcasting and live-racing schedules.
- Evaluate development plans, required approvals, funding needs, and the board’s capacity to sustain dividends while meeting capital requirements.