Business Context and Reporting Period
Churchill Downs Incorporated filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company operates through Live and Historical Racing, TwinSpires, Gaming, and All Other businesses, including the Kentucky Derby, historical racing machines, online wagering, sportsbooks, iGaming, and casino properties.
Year-over-year comparisons are significantly affected by COVID-19-related property closures and restrictions in the 2020 period. The 147th Kentucky Oaks and Derby occurred in the second quarter of 2021 with capacity restrictions, whereas the 146th events occurred in the third quarter of 2020.
Financial Results and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net revenue | $515.1 million | $185.1 million | $839.4 million | $438.0 million |
| Operating income (loss) | $135.4 million | $(0.4) million | $182.1 million | $(12.0) million |
| Operating margin | 26% | — | 22% | (3)% |
| Net income from continuing operations | $108.3 million | $(23.6) million | $144.4 million | $(46.2) million |
| Net income attributable to Churchill Downs | $108.3 million | $(118.8) million | $144.4 million | $(142.2) million |
| Diluted earnings per share | $2.76 | $(3.00) | $3.66 | $(3.59) |
| Adjusted EBITDA | $233.3 million | $30.1 million | $343.9 million | $85.4 million |
- Q2 revenue increased $330.0 million, or approximately 178%, while six-month revenue increased $401.4 million, or approximately 92%.
- Q2 Adjusted EBITDA increased $203.2 million; six-month Adjusted EBITDA increased $258.5 million. Adjusted EBITDA is a non-GAAP measure and is not a substitute for operating cash flow or operating income.
- Q2 segment Adjusted EBITDA was $98.4 million for Live and Historical Racing, $23.1 million for TwinSpires, and $119.8 million for Gaming. TwinSpires declined $15.6 million because of higher marketing and promotional spending.
- Equity income from unconsolidated affiliates was $36.4 million in Q2 and $61.3 million for the six months, compared with losses of $11.1 million and $14.4 million, respectively, in the prior-year periods.
- Interest expense was $22.0 million in Q2 and $41.4 million for the six months, compared with $20.3 million and $39.6 million in the prior-year periods.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Six-month operating cash flow was $210.3 million, compared with $76.9 million in the prior-year period.
- Investing cash flow was $(30.5) million, including $13.7 million of maintenance capital expenditures and $15.9 million of capital project expenditures. Total capital expenditures were $29.6 million.
- Cash provided by financing activities was $110.6 million. The company paid $24.8 million of dividends and repurchased $193.9 million of common stock, including a $193.9 million private repurchase of one million shares from an affiliate of The Duchossois Group.
- Cash and cash equivalents were $342.2 million at June 30, 2021, compared with $67.4 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $411.4 million.
- Total debt was $1.985 billion at June 30, 2021, compared with $1.638 billion at December 31, 2020. Net debt was $1.963 billion, compared with $1.618 billion.
- Debt increased primarily because of a new $300.0 million Term Loan B-1 due 2028 and $200.0 million of additional 4.75% Senior Notes due 2028. The Revolver balance was reduced to zero.
- Management stated that operating cash flow over the following twelve months was expected to be adequate to fund operations and capital expenditures. The filing does not provide formal revenue or earnings guidance.
Material Changes Versus the Prior Comparable Period
- Live and Historical Racing revenue increased $160.2 million in Q2 and $195.8 million for the six months, driven by the Kentucky Oaks and Derby, the Oak Grove and Newport openings, and the prior-year suspension of operations.
- Gaming revenue increased $148.7 million in Q2 and $155.3 million for the six months, primarily because all Gaming properties had been temporarily suspended in the prior-year periods.
- TwinSpires revenue increased $14.2 million in Q2 and $44.9 million for the six months. Horse Racing handle increased $50.9 million, or 8.9%, in Q2 and $164.2 million, or 18.3%, for the six months.
- Marketing and advertising expense increased $20.3 million in Q2 and $22.6 million for the six months, largely reflecting TwinSpires expansion and promotional activity.
- The company recorded an $11.2 million non-cash impairment charge in Q2 related to Churchill Downs Racetrack assets following changes to capital plans and planned asset usage. No goodwill impairment was identified in the 2021 annual impairment testing.
- The 2020 comparable period included a $95.2 million Q2 and $96.1 million six-month after-tax loss from discontinued operations related to the Big Fish Games litigation settlement. Churchill Downs paid its $124.0 million settlement contribution on March 25, 2021.
- Shareholders’ equity declined to $317.4 million from $367.1 million, primarily because of share repurchases and taxes paid on stock awards, partly offset by current-year net income.
Outlook, Risks, Contingencies, and Unusual Items
- COVID-19, including variant strains, remained a significant uncertainty. Future restrictions, closures, attendance limitations, consumer behavior, and economic conditions could affect racing, gaming, and wagering activity.
- The company operates in highly regulated jurisdictions and faces risks from changes in gaming, sports betting, historical racing, racing, tax, and licensing requirements. The filing discusses potentially significant legislative developments in Florida, Louisiana, and Maryland.
- Florida legislation could affect Calder’s operations, sports betting opportunities, and potential alternative uses of excess land, including a possible sale; management was still evaluating the impact.
- Litigation includes claims concerning historical racing machines in Kentucky, a proposed class action related to Medina Spirit’s Kentucky Derby entry and potential disqualification, and continuing appeals concerning Louisiana horsemen’s purse claims. Management believes it has meritorious defenses in the identified matters.
- The company was not required to meet financial covenants under the COVID-19-related covenant relief period at June 30, 2021, but stated that it was compliant with all applicable covenants.
- A one-percentage-point increase in variable interest rates would reduce net income and operating cash flow by approximately $4.9 million, assuming variable-rate debt balances remained constant.
- The company recorded $36.4 million of equity income from unconsolidated affiliates in Q2, including results from Rivers Casino Des Plaines and Miami Valley Gaming. Affiliate results, legal reserves, and interest-rate swap valuations may create period-to-period volatility.
Important Facts for Investors to Verify
- Whether post-pandemic operating performance remains strong after normalizing for 2020 closures, 2021 capacity restrictions, and the timing of the Kentucky Derby.
- Whether TwinSpires can convert revenue growth and expanded sports and casino operations into improved profitability after higher marketing and promotional spending.
- The sustainability of Gaming performance and distributions from unconsolidated affiliates.
- Debt repayment capacity, variable-rate exposure, covenant requirements after the relief period, and scheduled maturities of the Term Loan B, 2027 Senior Notes, and 2028 Senior Notes.
- The financial and operating effects of Florida, Louisiana, and Maryland gaming and sports betting legislation.
- The resolution and potential exposure from pending litigation, including Kentucky historical racing machine claims and the Medina Spirit-related class action.
- The impact of the $11.2 million Churchill Downs Racetrack impairment and any further changes to planned capital projects.