Business context and reporting period
Canterbury Park Holding Corporation operates a Minnesota horse-racing and simulcast venue, an 80-table-limit unbanked Card Casino, and food and beverage and real-estate development activities. Live racing is seasonal, running May through September. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | $16.43 million, down 0.5% from $16.51 million | $28.02 million, down 2.5% from $28.73 million |
| Operating income | $1.30 million, versus $1.00 million | $1.28 million, versus $2.36 million |
| Net income | $0.96 million, versus $0.73 million; diluted EPS $0.21 versus $0.16 | $1.01 million, versus $1.72 million; diluted EPS $0.22 versus $0.38 |
| Adjusted EBITDA | $1.68 million, down 1.4%; 10.2% of revenue versus 10.3% | $2.39 million, down 34.8%; 8.5% of revenue versus 12.8% |
| Operating cash flow | Not separately reported for the quarter | $9.33 million, versus $10.93 million |
Quarterly operating margin was approximately 7.9% versus 6.1% a year earlier; six-month operating margin was approximately 4.6% versus 8.2%. Six-month capital expenditures were $10.51 million, compared with $2.87 million in 2018, primarily for the Card Casino remodel and development-related roadwork. Cash, cash equivalents and restricted cash totaled $11.79 million at June 30, 2019, compared with $21.02 million at year-end 2018. Unrestricted cash was $0.44 million; significant reported cash was restricted.
Total assets were $72.34 million and total liabilities $24.50 million at June 30. The company had $1.09 million drawn on its $8 million revolving line of credit, which matured September 30, 2019, and finance and operating lease obligations. Current assets of $14.81 million were below current liabilities of $19.29 million; current assets include restricted cash and other amounts not necessarily available for general use. The company reported a $6.75 million TIF receivable, with reimbursement dependent on future tax increments.
Material changes versus the prior comparable period
- Card Casino revenue rose 4.8% in the quarter, driven by table games following the remodeled and expanded casino’s March reopening; six-month revenue was nearly flat. Poker revenue declined.
- Pari-mutuel revenue fell 8.5% in the quarter and 6.9% for six months. Management cited the temporary shutdown of Santa Anita and a temporary loss of a high-volume wagering customer amid a content-provider dispute; the dispute was substantially resolved after quarter-end.
- Food and beverage revenue increased 6.0% in the quarter and 5.2% for six months, partly reflecting special events and the Trifecta Café and casino reopening. Other revenue declined 15.8% and 18.2%, respectively, amid lower RiverSouth advertising payments and the absence of a 2018 Super Bowl-related rental agreement.
- Six-month net income and adjusted EBITDA fell despite positive quarterly net-income growth. Management attributed the six-month adjusted EBITDA decline to lower revenue and higher operating expenses. Salaries and benefits rose 4.0%, including minimum-wage and casino-related labor costs; professional and contracted services rose 14.1%.
- Investing outflows increased substantially, while cash and restricted cash declined. The company drew on its line of credit during the period.
Outlook, commentary, risks and unusual items
No quantified earnings or revenue guidance is provided. Management said available unrestricted cash, line-of-credit capacity and operating cash generation should cover regular operations and planned 2019 development expenses; significant additional real-estate development would likely require additional financing.
The company is undertaking infrastructure improvements under a Shakopee redevelopment agreement, with estimated TIF-eligible costs of $23.34 million. Reimbursement is not guaranteed and depends on future property tax revenues. On July 30, 2019, a bank released $2.00 million from restricted cash for Shenandoah Drive construction; the company expected the remaining approximately $0.88 million by year-end.
The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. It provides annual marketing payments to the company of $1.62 million and purse-enhancement payments to horsemen of $7.38 million for 2020–2022. The agreement also limits the company’s advocacy regarding expanded gambling authority. Management considered potential covenant repayments remote.
Unusual six-month items included a $0.20 million gain on insurance recoveries related to flood damage and a $0.11 million loss on asset disposals, principally from the casino remodel. Adjusted EBITDA excludes these items. The company identified risks including attendance and wagering demand, competition, labor-cost increases, development returns and reliance on its joint-venture partner, possible disruption from construction, regulatory changes, and uncertain TIF reimbursements.
Management stated that disclosure controls were effective and that a previously identified material weakness concerning accounting for the Doran Canterbury I land transfer was remediated as of June 30, 2019, following engagement of a third-party adviser. The filing reports no material litigation and no changes to the previously disclosed risk factors.
Most important facts for investors to verify
- Reconcile the MD&A’s stated six-month revenue of $23.024 million with the financial statements, segment reconciliation and revenue discussion, all of which report $28.024 million; the MD&A also appears to mislabel the comparison period in that passage.
- Confirm renewal or replacement of the $8 million revolving credit facility, whose stated maturity was September 30, 2019, and assess funding needs for planned construction and development.
- Assess how much of reported cash is restricted or otherwise committed, and monitor the timing and collectability of TIF reimbursements and related project costs.
- Track whether the wagering-content dispute resolution, casino expansion and seasonal live-racing results sustain revenue and profitability, particularly given weaker six-month earnings and adjusted EBITDA.
- Review progress on the Doran apartment phases, related-party receivable, and the company’s accounting controls following remediation of the disclosed material weakness.