Canterbury Park Holding Corporation — Q2 2016 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2016, compared with 2015. Canterbury Park operates live and simulcast horse racing, an unbanked card casino, and food and beverage services in Minnesota. Live racing is seasonal, generally running May through September. A holding-company reorganization took effect June 30, 2016; the new company’s shares began trading on Nasdaq July 1 under ticker CPHC. Historical results reflect the predecessor’s operations.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $13.886 million | $14.848 million | $24.279 million | $24.729 million |
| Income from operations | $3.898 million | $0.969 million | $4.421 million | $1.631 million |
| Net income | $2.275 million | $0.572 million | $2.586 million | $0.960 million |
| Diluted EPS | $0.53 | $0.14 | $0.60 | $0.23 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.806 million | $3.325 million |
- Net revenue fell 6.5% in Q2 and 1.8% for the six-month period. Q2 pari-mutuel, casino, and food and beverage revenue declined 9.2%, 5.2%, and 11.7%, respectively.
- Reported operating income and net income benefited from a $3.991 million gain on the sale of approximately 24 acres. Excluding that gain, six-month Adjusted EBITDA was $1.625 million, down 42.0% from $2.803 million; its margin was 6.7%, versus 11.3%. Adjusted EBITDA is a non-GAAP measure.
- Six-month capital spending was $2.830 million. Financing cash outflow was $2.818 million, including $1.887 million of capital-lease principal payments and $1.072 million of dividends. Cash and cash equivalents declined to $5.433 million from $8.274 million at year-end.
- At June 30, current assets were $14.143 million, including $5.986 million of restricted cash; current liabilities were $13.274 million. Restricted cash is not freely available for general liquidity.
- The company had no borrowings on its $3 million revolving credit line, which was scheduled to expire September 30, 2016. The capital lease was paid in full in May; no capital-lease obligations remained at June 30. The company received a limited covenant waiver and reported compliance with its credit-agreement requirements.
Material changes and drivers
- Total wagering handle fell 5.2% for the six months. Management cited fewer live-racing days, the ongoing shift toward internet wagering, and the absence of a 2015 Triple Crown contender. A lower live-racing take-out rate contributed to a 21% decline in on-track live-handle pari-mutuel revenue in the quarter.
- Casino revenue decreased 5.2% in Q2 and 0.7% for six months, reflecting fewer live-racing days and a softer regional gaming market. Food and beverage revenue fell 11.7% and 6.2%, respectively, partly because a major concert was not held after the Festival Fields land sale.
- Six-month salaries and benefits increased 5.5%, primarily due to Minnesota minimum-wage increases and added catering and events staff. Other operating expenses rose 6.3%, including costs for a new human-capital system, professional fees, restructuring, and land-development work.
- The land sale generated approximately $4.3 million of consideration, including $3.191 million in secured promissory notes bearing 1.43% interest and maturing in May 2019. The filing reports a $3.991 million accounting gain.
- Accounts payable increased to $8.933 million from $2.711 million at year-end, contributing to operating cash flow despite lower earnings excluding the land gain.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management said available cash, the credit line, and operating funds should cover regular operations and 2016 predevelopment costs; additional financing may be needed if real-estate development proceeds.
- The company is evaluating development options for approximately 140 acres of land not needed for racetrack operations. Development costs, returns, and financing needs remain uncertain.
- Minnesota’s ADW legislation was signed in May 2016. It may allow the company to receive source-market fees from Minnesota online wagering, but could also shift customers to online wagering. Management had not yet estimated the financial impact.
- Minimum wage was scheduled to rise to $9.50 per hour on August 1, 2016, with inflation-linked increases beginning in 2018. Management warned that wage costs may pressure earnings; price increases or staffing reductions could also affect customer demand and service.
- The cooperative marketing agreement with the Shakopee Mdewakanton Sioux Community runs through 2022 and includes annual marketing payments to Canterbury Park of $1.318 million in 2017 and $1.350 million annually for 2018–2022, alongside separate purse-enhancement payments to horsemen. The company agreed not to lobby for expanded gambling authority during the agreement term. Management considered potential covenant-repayment obligations remote.
- Management cited risks including attendance and wagering trends, competition, labor costs, regulatory changes, and development costs or returns. It considered the potential off-track-betting earn-out obligation remote and pending legal matters not material.
Important facts for investors to verify
- How much of reported earnings and operating income is attributable to the one-time land-sale gain, and how recurring performance develops after excluding it.
- Whether wagering, casino, and food and beverage trends stabilize, including the effect of fewer live-racing days and the lower take-out rate.
- The post-quarter status and renewal or replacement of the $3 million revolving credit facility, which was due to expire September 30, 2016.
- Collection timing and credit quality of the $3.191 million land-sale notes, and the use or restrictions on land-sale proceeds.
- The financial impact of ADW regulation, scheduled wage increases, and any real-estate development plans or financing commitments.
- Continued compliance with credit covenants and the effects of the cooperative marketing agreement’s terms and payments.