Canterbury Park Holding Corporation — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. Canterbury Park operates a year-round Card Casino and simulcast wagering at its Shakopee, Minnesota racetrack; live racing is seasonal and runs May through September.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $12.220 million | $11.443 million | +6.8% |
| Operating income | $1.357 million | $0.862 million | +57.4% |
| Income before taxes | $1.369 million | $0.874 million | +56.7% |
| Net income | $0.990 million | $0.513 million | +92.9% |
| Diluted EPS | $0.22 | $0.12 | Up $0.10 |
| Adjusted EBITDA | $1.971 million | $1.508 million | +30.7% |
| Operating cash flow | $2.422 million | $3.107 million | Down $0.685 million |
| Capital additions | $1.226 million | $0.672 million | Up $0.554 million |
Operating margin was approximately 11.1%, versus 7.5%; net margin was approximately 8.1%, versus 4.5%. Adjusted EBITDA is a non-GAAP measure; the company excluded a $21,000 insurance recovery gain in Q1 2018.
Revenue mix and operating costs
- Card Casino revenue rose 7.4% to $8.277 million, mainly from increased table-game play; poker revenue declined while table-game revenue increased.
- Pari-mutuel revenue rose 2.3% to $1.541 million, partly reflecting a major racing day falling in Q1 2018 rather than Q2 2017.
- Food and beverage revenue fell 3.1% to $1.304 million, attributed to lower attendance at certain special events.
- Other revenue increased 23.9% to $1.098 million, primarily from a short-term rental agreement related to the Super Bowl in Minneapolis.
- Operating expenses increased 2.7% to $10.863 million. Higher salaries and benefits, purses and utilities were partly offset by lower other operating expenses.
Cash, liquidity and capital
At March 31, 2018, cash and cash equivalents were $9.910 million, restricted cash was $3.329 million, and current assets were $16.016 million against current liabilities of $11.306 million. The current ratio was approximately 1.42. The company reported no borrowings on its $6.0 million revolving credit facility; the facility was scheduled to mature September 30, 2018 and is secured by company assets. The filing reports no outstanding borrowings but does not separately characterize all liabilities as debt.
Operating cash flow declined year over year despite higher net income, principally reflecting a $1.140 million decrease in accrued wages and payroll taxes; Q1 2017 operating cash flow also benefited from increases in accounts payable and deferred revenue. Cash, cash equivalents and restricted cash increased by $1.213 million during Q1 2018. The company paid $0.265 million in dividends and declared $0.311 million; dividends declared per share were $0.07, compared with $0.05 in Q1 2017.
Material changes and developments
- Revenue and earnings improved, led by Card Casino growth and the unusual Super Bowl-related rental revenue. Management attributed stronger table-game play to promotions, a strong economy and higher jackpots.
- The company adopted revenue-recognition and restricted-cash accounting standards effective January 1, 2018. Revenue adoption had no material effect on revenue, net income or cash flows; the main presentation change was removal of the separate promotional-allowance line. Restricted-cash adoption changed the cash-flow presentation and prior-period comparatives.
- Capital additions, primarily for building remodel projects, rose to $1.226 million.
- After quarter-end, a subsidiary entered a joint venture with Doran Companies to develop Phase I of a luxury apartment project on adjacent land, planned to include approximately 300 units, a heated parking ramp and clubhouse.
Outlook, risks and contingencies
- No formal earnings or revenue guidance was provided. Management said available cash, the revolving line and operating cash generation should cover regular operations and near-term 2018 predevelopment costs; significant real estate development would likely require additional financing.
- The company expected to receive $1.620 million in CMA marketing payments in Q2 2018; it received no such payment in Q1 2018, compared with $1.581 million in Q1 2017. SMSC’s separate purse-enhancement payments go directly to horsemen and do not directly affect the company’s financial statements.
- The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. It includes conditional repayment covenants management considers remote, and restricts the company from promoting or lobbying for expanded gambling authority during the agreement term.
- Key stated risks include attendance and wagering trends, competition, labor and benefit cost increases, regulatory or legislative changes, purse-fund obligations, and costs or returns from land development, including the apartment joint venture. Minnesota’s 2018 minimum wage increase was cited as contributing to higher labor costs.
- Management considered potential legal claims immaterial and reported no material changes to previously disclosed risk factors. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Card Casino growth and the promotional factors cited by management continue, and how the seasonal live-racing calendar affects later quarters.
- Receipt and accounting of the expected $1.620 million Q2 CMA marketing payment, and the agreement’s remaining payment and covenant terms.
- The apartment joint venture’s ownership, funding commitments, development costs, schedule and expected returns, including any need for new financing.
- Whether the revolving credit facility was renewed or replaced before its September 30, 2018 maturity.
- Whether elevated capital spending and the Q1 decline in operating cash flow persist.