Churchill Downs Incorporated — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020. Churchill Downs operates through Churchill Downs, Online Wagering, Gaming, and All Other segments. Results were heavily affected by COVID-19 closures, capacity restrictions, reduced racing and sports content, and the postponement of the Kentucky Oaks and Derby from May to September 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $185.1 million | $477.4 million | $438.0 million | $742.8 million |
| Operating income (loss) | $(0.4) million | $156.4 million | $(12.0) million | $184.4 million |
| Operating margin | Approximately 0% | 33% | Approximately (3%) | 25% |
| Net income (loss) attributable to CDI | $(118.8) million | $107.1 million | $(142.2) million | $118.7 million |
| Diluted EPS | $(3.00) | $2.63 | $(3.59) | $2.92 |
| Adjusted EBITDA | $30.1 million | $215.0 million | $85.4 million | $289.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $76.9 million | $214.3 million |
- Q2 revenue declined $292.3 million, or approximately 61%, while six-month revenue declined $304.8 million, or approximately 41%.
- Online Wagering revenue increased $25.6 million in Q2 and $29.9 million year to date, supported by TwinSpires. TwinSpires handle increased 21.6% in Q2 and 16.3% year to date, despite reduced racing content.
- Q2 Adjusted EBITDA was $4.5 million for Churchill Downs, $38.8 million for Online Wagering, and $(2.0) million for Gaming. Six-month amounts were $6.4 million, $53.8 million, and $47.0 million, respectively.
- Capital expenditures were $131.3 million year to date, including $118.1 million of capital project expenditures.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $649.2 million at June 30, 2020, compared with $96.2 million at December 31, 2019; cash, cash equivalents, and restricted cash totaled $699.0 million.
- Total debt was $2.1846 billion, up $692.6 million from year-end 2019. Debt included $694.6 million drawn on the revolving facility, a $390.0 million Term Loan B, $600.0 million of 2027 Senior Notes, and $500.0 million of 2028 Senior Notes.
- Interest expense was $20.3 million in Q2 and $39.6 million year to date, compared with $19.4 million and $33.1 million in the comparable periods.
- The April 2020 credit amendment waived the secured net leverage and interest coverage covenants through delivery of the fiscal quarter ending June 30, 2021 compliance certificate, subject to exceptions. The company must maintain at least $150.0 million of liquidity during the relief period and reported compliance with applicable covenants at June 30, 2020.
- Management stated that projected operating cash flow, available liquidity, debt repayments, and revised capital spending are expected to fund operations and commitments for well beyond the next twelve months.
Material changes versus the prior comparable period
- Churchill Downs segment revenue fell $162.9 million in Q2, primarily because the Kentucky Oaks and Derby were postponed and Derby City Gaming was temporarily closed.
- Gaming revenue fell $140.5 million in Q2 because all Gaming properties were temporarily suspended; Gaming Adjusted EBITDA declined $78.1 million to a $2.0 million loss.
- Online Wagering revenue increased $25.6 million and Adjusted EBITDA increased $16.6 million, primarily from higher TwinSpires handle and revenue per active player.
- Six-month operating results included a $17.5 million noncash impairment of Presque Isle gaming rights and trademark assets.
- Equity in loss of unconsolidated affiliates was $11.1 million in Q2 and $14.4 million year to date, compared with equity income of $9.5 million and $13.6 million in the prior-year periods.
- Operating cash flow decreased $137.4 million year to date, while financing cash flow increased to $611.4 million, primarily because of the Revolver borrowing.
Guidance, outlook, risks, and unusual items
- Most properties temporarily closed in March and began reopening in May and June with patron and gaming-capacity restrictions. Calder subsequently closed again on July 2, 2020 because of a Miami-Dade emergency order; Oxford reopened July 9, 2020.
- The 2020 Kentucky Oaks and Derby were rescheduled to September 4–5, with limited spectators approved. Management expected third-quarter results to be materially affected by the rescheduling, closures, and operating restrictions.
- The company furloughed employees, reduced salaries for non-furloughed salaried employees, reduced planned capital expenditures, and prioritized projects with the highest near-term returns.
- The company recorded a $124.0 million pre-tax liability for the proposed Kater and Thimmegowda class-action settlement, producing a $95.2 million Q2 loss from discontinued operations after tax. Final court approval remained required; the settlement fund totals $155.0 million, with Aristocrat responsible for $31.0 million.
- Key risks include renewed closures, prolonged capacity limits, weaker consumer discretionary spending, reduced event attendance, regulatory changes, debt and interest-rate exposure, cybersecurity and system failures, litigation, and execution risk on construction and expansion projects.
- Turfway Park development was expected to require total project capital of $200.0 million, with the new facility targeted for opening in the fourth quarter of 2021. A Turfway extension was targeted for the fourth quarter of 2020.
Important facts for investors to verify
- Whether the Kater and Thimmegowda settlement received final court approval and whether the $124.0 million payment was made as contemplated.
- The pace of post-reopening recovery, including property capacity limits, any renewed closures, and attendance at the rescheduled Kentucky Derby week.
- Available Revolver capacity, subsequent debt repayments or borrowings, liquidity covenant compliance, and interest-rate sensitivity.
- Actual third-quarter results relative to the management expectation of material COVID-19 and Derby timing impacts.
- Progress, remaining funding requirements, and opening dates for the Oak Grove and Turfway Park projects.
- Performance of TwinSpires as racing content, active players, sports betting activity, and customer behavior normalize.