Canterbury Park Holding Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. The company operates a Minnesota racetrack and unbanked card casino, with food and beverage, events, and real estate development activities.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | $59.14 million | $56.95 million | +3.8% |
| Operating income | $7.65 million | $4.52 million | +69.1% |
| Income before taxes | $7.71 million | $4.57 million | +68.7% |
| Income tax expense | $1.99 million | $0.48 million | +$1.51 million |
| Net income | $5.72 million | $4.09 million | +39.8% |
| Diluted EPS | $1.26 | $0.93 | +$0.33 |
| Operating cash flow | $6.33 million | $8.23 million | −$1.90 million |
| Adjusted EBITDA (non-GAAP) | $7.94 million | $6.91 million | +14.9% |
Operating margin was approximately 12.9%, versus 7.9% in 2017; net margin was approximately 9.7%, versus 7.2%. Adjusted EBITDA margin increased to 13.4% from 12.1%. The large improvement in reported operating income and net income included a $2.24 million gain on transfer of land to a joint venture. Excluding disclosed unusual gains and losses, operating expenses increased 2.3% year over year. Adjusted EBITDA excludes specified unusual or non-recurring items and is not a GAAP measure.
Revenue composition and operating changes
- Card Casino revenue was $33.92 million, up 6.1%; table-games collection revenue rose 11.2%, while poker revenue fell 7.0% amid continuing industry weakness.
- Pari-mutuel revenue was $10.64 million, up 2.5%. Simulcast revenue and guest fees increased, while live-racing revenue declined 1.7%, with management citing weather and a change in racing weekdays.
- Food and beverage revenue was $8.02 million, up 1.0%. Other revenue was $6.56 million, down 1.4%, partly reflecting lower live-racing attendance.
- Management attributed about $1.1 million of the table-games increase to the MRC-approved March 2018 increase in the maximum collection percentage from 18% to 20%; stronger hold and play also contributed.
- Salaries and benefits rose 5.4%, including effects of minimum-wage increases and added staffing. Purse expense rose 4.7% with increased casino and pari-mutuel revenue.
Fourth-quarter results
For the quarter ended December 31, 2018, revenue was $12.04 million, compared with $12.00 million in Q4 2017. Net income was $2.37 million versus $1.91 million, and diluted EPS was $0.52 versus $0.43. Q4 2018 operating expenses were $8.78 million, versus $11.07 million a year earlier. The filing’s quarterly table does not separately explain the full year-over-year Q4 expense change; the $2.24 million land-transfer gain was recognized in 2018.
Cash, liquidity, debt, and development
- Cash, cash equivalents, and restricted cash totaled $11.20 million at year-end, down $0.82 million from $12.03 million. Operating cash flow of $6.33 million was offset by $6.63 million of investing outflows and $0.53 million of financing outflows.
- Investing cash use included $5.50 million in property and equipment additions and a $3.21 million related-party note receivable, partly offset by note collections and insurance proceeds. Dividends paid were $1.21 million.
- The company had no revolver borrowings at year-end and reported compliance with its financial covenants. Its secured revolving credit facility was increased to $8 million and matures September 30, 2019; up to $2 million of letters of credit may be issued under it.
- Year-end liabilities included $121,000 of capital lease obligations. Total liabilities were $14.69 million; stockholders’ equity was $46.73 million. The filing says operating resources, available credit, and cash generation should cover regular operations for the foreseeable future, but significant additional real estate development would likely require additional financing.
- The company contributed approximately 13 acres to Doran Canterbury I and recorded a $2.24 million gain after project financing was secured in December. It held a 27.4% equity interest at year-end. A $2.94 million promissory note to a related party bears 5% interest and is guaranteed by the borrower’s parent.
- The company recorded a $1.91 million TIF receivable for eligible infrastructure costs. Reimbursement depends on future tax revenues and is not guaranteed. Estimated eligible improvements total $23.34 million.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management anticipated a slight reduction in live-racing attendance and pari-mutuel wagering in 2019 due to fewer racing days, while expecting to outperform the industry on field size and live and simulcast handle.
- The SMSC Cooperative Marketing Agreement runs through 2022. For 2019–2022, annual payments are set at $7.38 million for purse enhancements paid to horsemen and $1.62 million for company marketing. The agreement can be terminated by SMSC in specified circumstances; continuation on similar terms after 2022 is uncertain. The company also agreed not to promote expanded gambling authority during the agreement.
- Effective January 1, 2019, the $6 million threshold for Card Casino purse contributions was eliminated, requiring 14% of gross Card Casino revenue to be allocated to purses. The thoroughbred/quarter-horse allocation also changed to 91%/9%.
- Key risks include competition from tribal casinos, other card rooms, and online wagering; regulatory and gaming-tax changes; declining interest in horse racing; weather and horse availability; labor and minimum-wage costs; and execution, funding, and reimbursement risks associated with real estate development and TIF improvements.
- The filing reports no material pending legal proceedings. It identifies a material weakness in internal control over financial reporting arising from the initial incorrect timing assessment for recognizing the joint-venture land-transfer gain. Management began remediation, engaged a third party for technical assistance, and said remediation was not complete as of the filing date. Disclosure controls were also deemed ineffective. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
- 2018 tax expense was higher than 2017; the 2017 comparison included a $1.35 million tax benefit from remeasuring deferred taxes under the Tax Cuts and Jobs Act. The company recorded a further $176,000 tax benefit from deferred-tax remeasurement in 2018.
Most important facts for investors to verify
- Whether the internal-control material weakness has been fully remediated, particularly for complex real estate and joint-venture accounting.
- Actual cash requirements, financing availability, and repayment terms for the TIF infrastructure commitments and development projects.
- Collectibility and terms of the $2.94 million related-party note, and progress and performance of the Doran apartment project.
- Whether the SMSC agreement remains in force and whether comparable purse and marketing support can be obtained after 2022.
- How the 2019 purse-allocation change, reduced racing schedule, competition, and minimum-wage increases affect margins and cash generation.
- Whether reported earnings growth is sustained by core operations rather than land-transfer gains and other unusual items.