Canterbury Park Holding Corporation — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017, compared with the same periods in 2016. Canterbury Park operates live and simulcast horse racing, an 80-table-limit unbanked Card Casino, food and beverage services, and other events in Shakopee, Minnesota. Live racing is seasonal, generally running May through September.
Financial performance and liquidity
- Revenue: Q3 net revenue was $17.67 million, up 6.2%; nine-month net revenue was $44.96 million, up 10.0%. Card Casino revenue rose 8.9% in Q3 and 11.0% year to date, primarily on increased table-game play. Pari-mutuel revenue increased 8.8% and 11.7%, respectively. Food and beverage revenue fell 7.6% in Q3, partly due to fewer live racing days and lower concert attendance, but was up 2.1% year to date.
- Profit: Q3 operating income was $1.54 million versus $1.56 million; net income was $0.95 million versus $0.93 million. Nine-month operating income was $3.59 million versus $5.98 million, and net income was $2.18 million versus $3.51 million. Diluted EPS was $0.22 in Q3 and $0.50 year to date, versus $0.21 and $0.82, respectively, in 2016.
- Margins: Calculated operating margin on net revenue was approximately 8.7% in Q3 2017 versus 9.4% in Q3 2016, and 8.0% year to date versus 14.6%. The year-to-date comparison is affected by 2016 gains from a land sale and insurance recovery. The filing does not present a gross margin measure.
- Adjusted EBITDA: The company reported non-GAAP adjusted EBITDA of $2.18 million for Q3, up 33.2%, and $5.46 million year to date, up 67.3%. Adjusted EBITDA margins were 12.4% and 12.2%, respectively, compared with 9.9% and 8.0% in 2016. Prior-period adjustments exclude the 2016 insurance recovery and land-sale gain, as applicable.
- Cash flow and capital spending: Nine-month operating cash flow was $5.10 million, compared with $2.54 million. Investing cash outflow was $3.22 million, mainly for building remodel projects; financing cash outflow was $0.50 million, primarily dividends. Cash and cash equivalents rose to $7.69 million from $6.30 million at year-end 2016. Restricted cash was an additional $2.76 million.
- Debt and liquidity: The company reported no borrowings under its $6.0 million Bremer Bank revolving credit facility, extended through September 30, 2018. Total liabilities were $14.53 million, including $4.31 million of deferred income taxes; the filing reports no outstanding bank debt. Management said available cash, the credit line, and operating cash flows should fund regular operations and 2017 predevelopment costs, but significant real estate development would likely require additional financing.
- Other financial items: Nine-month capital additions were $3.22 million. Dividends declared were $0.06 per share in Q3 and $0.17 year to date. The company held $3.19 million of promissory notes from its 2016 land sale, bearing 1.43% interest; maturity was extended to May 2020, with annual payments totaling $1.094 million due until maturity.
Material changes versus the prior comparable period
- Revenue growth was led by Card Casino table games and pari-mutuel activity. Year-to-date pari-mutuel revenue benefited from $655,000 in ADW source-market fees following Minnesota legislation effective November 1, 2016, and higher live-racing take-out levels than in 2016.
- Reported year-to-date operating expenses increased 18.6%, but the 2016 comparison included a $3.99 million land-sale gain and a $0.59 million insurance recovery recorded as reductions of expense. Excluding those items, expenses increased 4.5%.
- Salary and benefit costs increased 4.3% year to date, partly reflecting Minnesota minimum-wage increases and higher incentive compensation. Advertising and marketing expense also increased.
- Year-to-date net income declined despite higher revenue, principally because 2016 included the land-sale and insurance gains. The 2016 land sale generated approximately $4.3 million in total consideration.
Outlook, commentary, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management is evaluating development options for approximately 140 acres of underutilized land and expects feasibility and predevelopment costs; substantial development could require external financing.
- The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. For each year from 2018 through 2022, the community is obligated to provide $7.38 million for horsemen’s purse enhancements and $1.62 million in marketing payments to Canterbury Park. The company recognized $1.30 million of CMA marketing revenue in the first nine months of 2017. CMA covenant-breach repayment risk was described by management as remote.
- The CMA also restricts the company from promoting or lobbying for expanded gambling authority in Minnesota and requires support for the community’s opposition to expansion during the agreement term.
- Management identified risks including attendance and wagering fluctuations, competition from other gaming and entertainment options, labor-cost increases, purse-fund obligations, marketing costs, regulatory or legislative changes, and development costs or returns. The company noted that minimum-wage increases have adversely affected costs and may continue to do so.
- Management said pending legal claims were not expected to materially affect financial position or results. A contingent payment tied to possible future off-track betting was considered remote. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether Card Casino growth and ADW-related pari-mutuel revenue continue, and how much growth is attributable to unusually high-volume bettors, game jackpots, and regulatory changes.
- Whether operating costs, especially labor, marketing, and racing-related expenses, grow faster than revenue.
- The availability and terms of financing if Canterbury Park advances significant development of its underutilized land.
- Cash available for operations after accounting for restricted cash, ongoing capital spending, dividends, and seasonal working-capital needs.
- The continuing economics and obligations of the CMA through 2022, including marketing-payment recognition, covenant terms, and its restrictions on advocacy for expanded gambling.
- The comparability of reported earnings and EBITDA across periods, particularly the effects of the 2016 land-sale and insurance-recovery gains.