Canterbury Park Holding Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Canterbury Park operates a Minnesota horse-racing track and simulcast wagering business, an 80-table-limit card casino, food and beverage and event operations, and real-estate development activities.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $18.60 million | $18.37 million | $46.62 million | $47.10 million |
| Operating income | $1.47 million | $2.03 million | $2.76 million | $4.39 million |
| Net income | $1.15 million | $1.63 million | $2.16 million | $3.35 million |
| Diluted EPS | $0.25 | $0.36 | $0.47 | $0.74 |
| Adjusted EBITDA | $2.27 million | $2.69 million | $4.66 million | $6.36 million |
- Revenue rose 1.3% in Q3, but fell 1.0% year to date. Operating margin was approximately 7.9% in Q3 versus 11.1%; nine-month margin was 5.9% versus 9.3%. Net margin was approximately 6.2% and 4.6%, respectively, compared with 8.9% and 7.1% in the prior periods.
- Q3 revenue changes: pari-mutuel declined 9.5%, Card Casino 0.9%; food and beverage increased 17.9% and other revenue 4.1%. For nine months, pari-mutuel and other revenue fell 8.0% and 8.4%, while food and beverage rose 11.1%; Card Casino revenue was nearly flat.
- Operating cash flow was $3.95 million for nine months, compared with $4.28 million. Capital additions were $12.70 million, driving investing cash outflow of $11.72 million. Financing provided $0.89 million; cash, cash equivalents and restricted cash fell $6.88 million to $4.32 million.
- At September 30, cash and equivalents were $1.27 million, restricted cash $3.05 million, and short-term investments $0.10 million. Current assets of $7.10 million were below current liabilities of $12.36 million. The company reported a $1.67 million line-of-credit balance, with an $8 million facility extended to September 30, 2020. Total liabilities were $16.94 million.
- Real-estate-related balances include a $7.92 million TIF receivable and $3.39 million related-party receivable. Total assets were $65.84 million and stockholders’ equity was $48.90 million.
Material changes and explanations
- Profitability weakened despite slightly higher Q3 revenue: operating expenses increased 4.8% in Q3 and 2.7% year to date. Salaries and benefits rose 8.2% in Q3 and 5.5% year to date, reflecting Minnesota minimum-wage increases, casino construction/reopening costs, and added positions.
- Q3 food and beverage gains benefited from a three-day music festival and the Trifecta Café and remodeled Card Casino, which opened in March. Pari-mutuel results were affected by four fewer live-racing days in Q3. Year-to-date wagering was also affected by Santa Anita’s temporary shutdown and a wagering-company disruption related to a content-provider dispute; the dispute was substantially resolved in Q3.
- Adjusted EBITDA declined 15.8% in Q3 and 26.8% for nine months, primarily due to higher operating expenses.
- Capital spending included the Card Casino remodel and development-related roadwork. The TIF receivable increased from $1.91 million at year-end; the filing reports a $6.01 million noncash transfer of future TIF-reimbursable costs from property and equipment. Reimbursement depends on future tax revenues and is not guaranteed.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said available cash, credit availability and operating cash generation should meet regular operating needs and planned 2019 development expenses. Additional significant real-estate development would likely require additional financing.
- The company is obligated under its Shakopee redevelopment agreement to fund infrastructure improvements; estimated TIF-eligible costs are $23.34 million, while actual reimbursement is contingent on future tax revenues. The company also has a 27.4% interest in the Doran Canterbury I apartment project and a related-party loan to Doran Family Holdings.
- The Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community runs through December 31, 2022. It provides annual marketing payments of $1.62 million to Canterbury Park and purse-enhancement payments to horsemen; the agreement restricts the company from promoting expanded gambling authority. Management considers potential covenant-repayment obligations remote.
- Key risks include attendance and wagering demand, competition, labor-cost increases, regulatory or legislative changes, development costs and returns, TIF recovery, reliance on the development partner, and possible customer disruption from construction. Management reported no material change to previously disclosed risk factors.
- Nine-month results included a $199,000 insurance-recovery gain related to flood damage and a $114,000 asset-disposal loss, primarily from the casino remodel. The company adopted lease accounting standards prospectively on January 1, 2019; management said adoption had no material financial-statement impact.
- On November 1, 2019, the company received $982,639 on a land-sale note, including $975,363 principal and $7,276 interest. The filing says the remaining difference between the note balance and payment will be recorded as a Q4 loss but does not state the loss amount.
Important facts for investors to verify
- Whether operating-cost growth and weaker pari-mutuel performance persist, and whether the recent food and beverage gains are repeatable.
- Cash needs and borrowing capacity given reduced cash balances, the $1.67 million line-of-credit borrowing, and continued development spending.
- Timing, eligible costs and recoverability of the TIF receivable, and any financing needed for required infrastructure work.
- Development progress, financing and performance of the Doran apartment projects, including collectability and repayment terms of related-party receivables.
- The amount of the Q4 loss on the land-sale note payment and the effect of remaining note collections on cash and earnings.