Business Context and Reporting Period
Churchill Downs Incorporated filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operates through Live and Historical Racing, TwinSpires, Gaming, and All Other segments. Results include the 2022 Kentucky Derby without the capacity restrictions imposed in 2021. United Tote was reclassified from All Other to TwinSpires for comparative presentation.
Financial Performance and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net revenue | $582.5 million | $515.1 million | $946.6 million | $839.4 million |
| Operating income | $199.7 million | $135.4 million | $247.1 million | $182.1 million |
| Operating margin | 34% | 26% | 26% | 22% |
| Net income | $339.3 million | $108.3 million | $381.4 million | $144.4 million |
| Diluted EPS | $8.79 | $2.76 | $9.85 | $3.66 |
| Adjusted EBITDA | $291.2 million | $233.3 million | $419.7 million | $343.9 million |
- Q2 revenue increased 13.1%, operating income increased 47.5%, and Adjusted EBITDA increased 24.8%. Six-month revenue increased 12.8%, operating income increased 35.7%, and Adjusted EBITDA increased 22.0%.
- Live and Historical Racing revenue increased $85.0 million in Q2 and $107.8 million for the six months, primarily from the unrestricted Kentucky Derby and continued growth at historical racing properties. Segment Adjusted EBITDA increased $65.5 million in Q2 and $75.1 million year to date.
- TwinSpires revenue declined $4.0 million in Q2 and $7.2 million year to date, while Adjusted EBITDA increased $9.3 million and $10.3 million, respectively, mainly because of lower online marketing and promotional spending following the planned exit from direct online Sports and Casino operations.
- Gaming revenue declined $1.7 million in Q2 but increased $23.6 million year to date. Q2 Adjusted EBITDA declined $13.0 million, and six-month Adjusted EBITDA declined $4.3 million, reflecting economic conditions, competition, and higher marketing and salary costs.
- Operating expenses increased $3.1 million in Q2 and $42.2 million year to date. Marketing expense declined $8.8 million in Q2 and $9.4 million year to date, while salaries, benefits, selling and administrative expense, and other operating costs increased.
- Net income benefited substantially from the $274.6 million pretax gain on the Calder land sale. Management identified a $193.6 million after-tax benefit from the sale in the Q2 and year-to-date comparability analysis.
Cash Flow, Liquidity, Capital Spending, and Debt
- Six-month operating cash flow was $380.8 million, compared with $334.3 million in 2021.
- Investing activities provided $104.6 million, including $279.0 million of net proceeds from the Calder land sale. Capital expenditures were $167.1 million, compared with $29.6 million in the prior-year period.
- Financing activities provided $1.0585 billion, including $1.2 billion of new borrowings associated with the 2030 Senior Notes. The company paid $25.7 million of dividends and repurchased $84.5 million of common stock.
- Cash and cash equivalents were $310.2 million at June 30, 2022. Restricted cash was $1.5893 billion, substantially representing proceeds from the Calder sale and the 2030 Notes held in escrow.
- Total debt was $3.1783 billion at June 30, 2022, compared with $1.9818 billion at December 31, 2021. Net debt, after issuance costs, was $3.1543 billion.
- The company had no Revolver borrowings and was compliant with applicable debt covenants. The Revolver commitment was increased to $1.2 billion and extended to 2027. An $800.0 million Delayed Draw Term Loan A facility was established for the proposed P2E acquisition but had not been drawn.
- Management expects operating cash flow over the next 12 months to fund operations and capital expenditures. Estimated 2022 project capital spending is $300 million to $350 million, subject to timing and execution.
Material Changes, Outlook, and Risks
- On February 24, 2022, the company announced its exit from direct online Sports and Casino operations while retaining retail Sports operations and seeking to monetize online market access licenses. A $4.9 million non-cash TwinSpires impairment was recorded in the first quarter.
- The company agreed to acquire substantially all of Peninsula Pacific Entertainment’s assets for total consideration of $2.485 billion. The proposed transaction includes Colonial Downs, Virginia historical racing venues, del Lago Resort & Casino, and Hard Rock Sioux City. Closing was expected before year-end 2022, subject to regulatory and other customary conditions.
- Failure to obtain certain regulatory approvals could result in termination of the P2E agreement and a regulatory termination fee of up to $137.5 million. The transaction also carries financing, integration, execution, and potential sale-leaseback risks.
- The company sold 115.7 acres near Calder for $291.0 million and received $279.0 million after transaction costs. Proceeds were placed with a qualified intermediary for planned Internal Revenue Code Section 1031 exchanges. Failure to complete qualifying replacement-property purchases within applicable deadlines could make the gain taxable and restrict access to the proceeds until released.
- The Arlington Property sale to the Chicago Bears for $197.2 million remained subject to closing conditions, with closing anticipated in the first quarter of 2023. Arlington ceased racing and simulcast operations at the end of 2021.
- Hurricane Ida recovery continued at Fair Grounds and related off-track betting facilities. The company incurred $2.3 million of recovery and maintenance costs during the first six months, had received $5.8 million of insurance recoveries through June 30, and reported an insurance receivable of $1.8 million.
- Key risks include consumer discretionary spending and inflation, competition, regulatory changes, COVID-19 developments, weather and casualty events, cybersecurity and technology failures, litigation, labor issues, insurance availability, and variable-rate interest exposure. A one-percentage-point increase in LIBOR was estimated to reduce annual net income and operating cash flow by approximately $4.8 million on outstanding Term Loans B and B-1.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing does not provide formal revenue or earnings guidance beyond the stated 2022 project capital expenditure estimate.
Important Facts for Investors to Verify
- Whether the P2E acquisition closed on the expected timeline, received all required regulatory approvals, and required drawing the $800.0 million delayed-draw facility or other financing.
- Whether the company completed the planned Section 1031 replacement-property transactions and the resulting cash-tax liability on the Calder gain.
- The sustainability of Kentucky Derby and historical racing performance after unusually favorable comparisons with 2021 capacity restrictions.
- The effect of exiting direct online Sports and Casino operations on TwinSpires revenue, profitability, asset values, and potential license monetization proceeds.
- Gaming trends at Harlow’s, Riverwalk, Fair Grounds, and other properties amid inflation, competition, and higher operating costs.
- Execution of the $300 million to $350 million 2022 project capital plan and its impact on leverage and interest expense.
- The timing and proceeds of the Arlington Property sale and the status of Hurricane Ida insurance recoveries.
- The company’s substantial debt increase, variable-rate exposure, covenant compliance, and liquidity after completing planned acquisitions and capital projects.