Canterbury Park Holding Corp. — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. The company operates a Minnesota racetrack with year-round simulcast wagering and a 24/7 card casino; live racing runs May through September, making Q1 a pre-live-racing period. Food and beverage, events, and related services are additional revenue sources.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $11.44 million | $10.39 million | +10.1% |
| Operating income | $862,000 | $523,000 | +64.8% |
| Net income | $513,000 | $311,000 | +65.1% |
| Diluted EPS | $0.12 | $0.07 | — |
| EBITDA (non-GAAP) | $1.51 million | $1.10 million | +37.1% |
| Cash from operations | $2.09 million | $2.55 million | −18.0% |
- Revenue and operating performance: Card casino revenue rose 8.2% to $7.70 million; pari-mutuel revenue rose 9.8% to $1.53 million; food and beverage revenue increased 24.5% to $1.35 million, primarily due to more first-quarter events. Other revenue increased 7.7% to $887,000. Casino table-game revenue grew 18.1%, attributed to marketing and additional offerings, while poker revenue declined 5.4%.
- Margins and costs: Operating margin was approximately 7.5%, versus 5.0% in Q1 2016; net margin was approximately 4.5%, versus 3.0%. Operating expenses increased 7.2% to $10.58 million, including higher professional and contracted services, event promoter and recruiting costs, and casino equipment rentals. The effective tax rate was approximately 41% in both periods.
- Cash flow and investment: Operating cash flow was $2.09 million; capital expenditures were $672,000, mainly for building remodels. Cash and cash equivalents rose to $7.65 million from $6.30 million at year-end; restricted cash was an additional $3.01 million. The company paid $216,000 in dividends and declared $0.05 per share, compared with no dividend in Q1 2016.
- Liquidity and debt: Current assets were $14.16 million and current liabilities $10.46 million, giving working capital of about $3.69 million. The company reported no borrowings under its $6.0 million revolving credit facility, which expires November 11, 2017. No funded debt is shown on the balance sheet. The company states available cash, the credit line, and operating cash generation should cover regular operations and 2017 predevelopment expenses; significant real estate development would likely require additional financing.
Material changes, outlook, and risks
- Management attributed pari-mutuel growth partly to $216,000 of source-market fees paid by advance-deposit wagering companies under legislation effective November 2016. The increase in table games and food and beverage also supported revenue growth.
- Cash from operations declined year over year despite higher earnings, with the comparison affected by changes in restricted cash, receivables, payables, deferred revenue, and accrued liabilities. Q1 2017 included a $1.55 million increase in accounts payable and deferred revenue and a $1.02 million increase in restricted cash.
- No specific earnings or revenue guidance is provided. The company continues assessing development options for approximately 140 acres of underutilized land and may incur feasibility and predevelopment costs.
- Under its Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, the company received $1.58 million in marketing payments in Q1; $1.45 million of advanced payments remained deferred at quarter-end. The agreement runs through 2022 and provides annual 2018–2022 payments of $7.38 million for horsemen’s purse enhancements and $1.62 million for company marketing. The company also agreed not to promote or lobby for expanded gambling authority during the agreement term. Management considers potential covenant-repayment obligations remote.
- Risks cited include attendance and wagering fluctuations, competition, labor and benefit cost increases, purse-fund requirements, development costs and returns, marketing costs, and legislative or regulatory changes. Minimum-wage increases are expected to continue adversely affecting costs, although management has taken steps to mitigate the impact.
- The company reports no material changes to previously disclosed risk factors, no applicable legal proceedings, and effective disclosure controls. The possible off-track-betting earn-out obligation is considered remote by management.
Important facts for investors to verify
- Whether table-game growth and event-driven food and beverage gains persist, particularly as live racing resumes in May.
- The composition and sustainability of operating cash flow, including restricted-cash movements and the increase in deferred revenue and payables.
- Renewal or replacement of the $6.0 million credit facility before its November 2017 expiration.
- Development plans, expected predevelopment spending, and potential financing needs for any significant real estate project.
- Continued performance and covenant compliance under the marketing agreement, including the treatment of advance payments and its restrictions on gambling-expansion advocacy.