Business context and reporting period
Canterbury Park Holding Corporation operates a Minnesota racetrack with seasonal live horse racing and year-round simulcast wagering, an around-the-clock card casino, food and beverage services, and other events. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $16.51 million | $15.85 million | $28.73 million | $27.29 million |
| Operating income | $1.00 million | $1.19 million | $2.36 million | $2.05 million |
| Net income | $0.73 million | $0.72 million | $1.72 million | $1.23 million |
| Diluted EPS | $0.16 | $0.16 | $0.38 | $0.28 |
| Operating cash flow | Not reported separately | Not reported separately | $10.93 million | $9.80 million |
- Q2 revenue rose 4.2%, while operating income declined 16.1%; net income increased 1.2%. Operating margin was approximately 6.1%, compared with 7.5% a year earlier.
- For the first half, revenue increased 5.3%, operating income 14.8%, and net income 39.5%. Operating margin was approximately 8.2%, versus 7.5%.
- Adjusted EBITDA, a non-GAAP measure, was $1.70 million in Q2, down 3.8%; first-half adjusted EBITDA was $3.67 million, up 12.1%. Management attributed the quarterly decline to expenses growing faster than revenue and the first-half increase primarily to higher revenue.
- At June 30, cash and cash equivalents were $13.48 million, with another $7.54 million of restricted cash. Current assets were $23.90 million and current liabilities $17.71 million. The company reported no borrowings under its $6 million revolving credit facility; the facility was due to mature September 30, 2018.
- First-half capital additions to buildings and equipment were $2.87 million. The company paid $0.58 million in dividends and declared $0.14 per share for the six-month period. Total liabilities were $20.92 million, including $3.21 million of deferred income taxes; the filing reports no outstanding credit-line borrowings.
Material changes versus the prior comparable period
- Card casino revenue grew 4.5% in Q2 and 5.9% for the first half. Management cited an increase in the share of wagers retained by the casino—from 18% in 2017 to 18.5% in April and 20% in May and June 2018—as well as stronger table-game play.
- Other revenue increased 11.1% in Q2 and 15.1% for the first half, helped by advertising, a spring event rental, and a short-term first-quarter rental agreement related to the Minneapolis Super Bowl.
- Pari-mutuel revenue increased 1.4% in Q2 and 1.7% for the first half. Management cited simulcast and guest-fee gains, but noted inclement weather and lower advance-deposit-wagering revenue as offsets.
- Operating expenses increased 5.9% in Q2 and 4.5% for the first half. Salaries and benefits rose 7.6% and 6.8%, respectively, reflecting minimum-wage increases, previously unfilled executive positions, and added staff. Utilities expense also rose 13.2% in both periods.
- Q2 included a $99,934 loss on disposal of horse-racing equipment. First-half results also included a $21,064 gain on insurance recoveries. The company adopted revenue-recognition and restricted-cash accounting standards effective January 1, 2018; management said the revenue-standard impact was not material.
Outlook, commentary, risks and contingencies
- Management said available cash, the credit facility and operating cash generation should cover regular operations and near-term predevelopment expenses during 2018. It stated that significant real estate development would likely require additional financing. No formal earnings or revenue guidance is provided.
- In April 2018, the company formed a joint venture with Doran Companies to develop Phase I of an apartment project adjacent to the racetrack, planned for approximately 300 units, parking and a clubhouse.
- After quarter-end, the company entered into a Shakopee redevelopment agreement requiring estimated TIF-eligible infrastructure improvements costing $23.34 million. The city’s reimbursement to the company is not guaranteed and depends in part on future tax revenues. The company expects to use operating resources and its existing credit facility to fund the work; missed construction-start deadlines could allow the city to perform the work and assess its costs to the company.
- The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. For 2019–2022, the community is scheduled to pay $7.38 million annually to horsemen and $1.62 million annually to the company for marketing. Management considered covenant-repayment exposure remote. The agreement also restricts the company from promoting or lobbying for expanded gambling authority.
- Key disclosed risks include attendance and wagering trends, competition, labor and purse costs, regulatory or legislative changes (including sports betting), the success and cost of real estate development, and the uncertainty of TIF reimbursements. Management said pending claims were not expected to have a material effect; no legal proceedings were identified as applicable in Part II.
Most important facts for investors to verify
- Whether card-casino revenue gains from higher collection rates and table-game activity persist, and how they affect customer play.
- The September 30, 2018 maturity and renewal or replacement of the $6 million credit facility, and financing needs for the $23.34 million infrastructure program.
- Actual project costs, construction timing, and the amount and timing of TIF reimbursements, which are not guaranteed.
- Execution, financing and expected returns for the Doran apartment joint venture and other development plans.
- Trends in pari-mutuel wagering, attendance, labor costs and margins, including the seasonal live-racing business.