Churchill Downs Incorporated — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with the prior-year quarter. Churchill Downs operates through Live and Historical Racing, TwinSpires, Gaming, and All Other. The company owns racing and historical racing venues, TwinSpires online wagering and retail sportsbook operations, and casino gaming properties and equity investments.
The company reclassified United Tote from All Other to TwinSpires beginning in the first quarter of 2022, with prior-period results reclassified for comparability.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $364.1 million | $324.3 million | +$39.8 million, or approximately 12.3% |
| Operating income | $47.4 million | $46.7 million | +$0.7 million |
| Operating margin | 13% | 14% | Down approximately 1 percentage point |
| Net income | $42.1 million | $36.1 million | +$6.0 million |
| Diluted EPS | $1.08 | $0.91 | +$0.17 |
| Adjusted EBITDA | $128.5 million | $110.6 million | +$17.9 million, or approximately 16.2% |
| Operating cash flow | $135.2 million | $104.2 million | +$31.0 million |
| Capital expenditures | $55.5 million | $12.3 million | +$43.2 million |
Revenue by segment was $86.0 million for Live and Historical Racing, $100.3 million for TwinSpires, $177.3 million for Gaming, and $0.5 million for All Other. Gaming generated $91.1 million of Adjusted EBITDA, Live and Historical Racing generated $27.9 million, and TwinSpires generated $24.1 million.
Net income margin was approximately 11.6%, compared with approximately 11.1% in the prior-year quarter. The increase in net income included a $32.5 million equity contribution from unconsolidated affiliates, compared with $24.9 million in the prior-year period.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $294.5 million at March 31, 2022, with restricted cash of $65.5 million.
- Total debt was $1.980 billion, including $680.0 million of Term Loan B and Term Loan B-1 borrowings, $600.0 million of 2027 Senior Notes, and $700.0 million of 2028 Senior Notes. Net debt, after issuance costs and premiums or discounts, was $1.960 billion.
- The company had no borrowings under its $700.0 million revolving facility at quarter-end and was compliant with applicable debt covenants. Reported interest coverage was 6.92x against a minimum requirement of 2.5x; secured net leverage was 0.52x against a maximum requirement of 4.0x.
- Operating cash flow benefited from $56.3 million of increased deferred revenue, primarily advance sales related to Kentucky Oaks and Derby tickets and sponsorships, and $40.6 million of distributions from unconsolidated affiliates.
- Investing cash use increased to $62.8 million, primarily because of capital projects. Financing cash use was $68.0 million, including $25.7 million of dividends, $24.3 million of share repurchases, and $13.1 million of taxes paid on net share settlements.
- The company estimated $300 million to $350 million of project capital expenditures for 2022, subject to timing, delays, and payment conditions.
Material changes versus the prior comparable period
- Live and Historical Racing revenue increased $22.8 million, primarily because prior-year capacity restrictions affected Oak Grove and Derby City Gaming.
- Gaming revenue increased $25.3 million as capacity restrictions at several properties were no longer in place. Gaming Adjusted EBITDA increased $8.7 million.
- TwinSpires revenue declined $3.2 million. Horse Racing revenue decreased $6.5 million as some patrons returned to brick-and-mortar wagering, partly offset by a $3.3 million increase in Sports and Casino revenue. TwinSpires Adjusted EBITDA increased $1.0 million because of lower marketing and promotional spending.
- All Other revenue declined $5.1 million following the cessation of racing and simulcast operations at Arlington at the end of 2021.
- Operating expenses increased $39.1 million, including higher taxes and purses, salaries and benefits, selling, general and administrative costs, transaction expense, and other operating expenses. Insurance, food and beverage, and Kentucky Derby preparation costs also increased.
- Operating income growth was limited by $5.0 million of transaction expense, a $4.9 million non-cash impairment charge, and higher corporate and administrative expenses.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected operating cash flow over the following twelve months to be adequate to fund operations and capital expenditures. No consolidated revenue or earnings guidance was provided.
- The company announced plans to exit its direct online Sports and Casino business while retaining retail Sports operations and seeking to monetize online market access licenses. The decision resulted in a $4.9 million non-cash TwinSpires impairment charge.
- On February 18, 2022, the company agreed to acquire substantially all assets of Peninsula Pacific Entertainment for $2.485 billion, subject to regulatory and other closing conditions. Closing was expected by the end of 2022; termination for failure to obtain certain approvals could result in a regulatory termination fee of up to $137.5 million.
- The company agreed to acquire Chasers Poker Room in New Hampshire and expected total investment in the Salem development to be approximately $150 million. Closing was expected in the second quarter of 2022.
- On April 13, 2022, subsequent to quarter-end, the company increased its revolving facility from $700 million to $1.2 billion, added an $800 million delayed-draw Term Loan A facility due 2027, and placed $1.2 billion of 5.750% senior notes due 2030 into escrow.
- Hurricane Ida-related recovery and maintenance expenses were $2.3 million in the quarter. The company had received $3.0 million of insurance recoveries and reported a $4.6 million insurance recovery receivable; management did not expect losses to exceed applicable insurance recoveries.
- Key risks include COVID-19 and other public health events, discretionary consumer spending, competition, regulatory approvals and changes, gaming and racing technology, cyber-security, litigation, insurance recoveries, labor issues, interest rates, and debt covenant restrictions.
- The company faces litigation involving historical racing machines in Kentucky, Louisiana horsemen’s purse claims, and Bob Baffert’s suspension from company-owned racetracks. Management stated that it intends to defend the matters vigorously and believes it has meritorious defenses.
Most important facts for investors to verify
- Whether the P2E acquisition closes on schedule, receives all required regulatory approvals, and is financed without materially increasing leverage.
- The final use and availability of the April 2022 financing facilities and the terms of the $1.2 billion 2030 senior notes.
- Progress and economics of the TwinSpires direct online Sports and Casino exit, including monetization of market access licenses.
- Whether the planned $300 million to $350 million of 2022 project capital spending remains within budget and produces expected returns.
- Sustainability of Gaming and Live and Historical Racing growth after the comparison benefit from prior-year capacity restrictions fades.
- Trends in TwinSpires Horse Racing handle and the effect of reduced online wagering activity.
- Insurance recoveries and remaining operating disruption related to Hurricane Ida.
- Potential financial or operational effects of regulatory proceedings, litigation, and changes in gaming and racing laws.