Churchill Downs Incorporated — Q3 2020 Form 10-Q Summary
Business context and reporting period
Churchill Downs Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates through Churchill Downs, Online Wagering, Gaming, and All Other activities. Results were materially affected by COVID-19-related closures, capacity restrictions, suspended amenities, and the rescheduling of the Kentucky Oaks and Derby from the second quarter to September 4–5, 2020, without spectators.
All properties had reopened by September 30, 2020, but remained subject to varying patron, operating-hour, and gaming-capacity restrictions. Oak Grove opened simulcast and historical racing machine operations in September, while Newport Racing & Gaming opened on October 2, 2020.
Financial metrics
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Net revenue | $337.8 million | $306.3 million | +$31.5 million | $775.8 million | $1,049.1 million | -$273.3 million |
| Operating income | $49.5 million | $27.8 million | +$21.7 million | $37.5 million | $212.2 million | -$174.7 million |
| Operating margin | 14.7% | 9.1% | +5.6 pts | 4.8% | 20.2% | -15.4 pts |
| Net income attributable to CDI | $43.2 million | $14.8 million | +$28.4 million | $(99.0) million | $133.5 million | -$232.5 million |
| Diluted EPS | $1.08 | $0.36 | +$0.72 | $(2.50) | $3.28 | -$5.78 |
| Adjusted EBITDA | $121.9 million | $88.0 million | +$33.9 million | $207.3 million | $377.6 million | -$170.3 million |
| Adjusted EBITDA margin | 36.1% | 28.7% | +7.4 pts | 26.7% | 36.0% | -9.3 pts |
Online Wagering revenue increased to $125.9 million from $70.2 million in Q3, primarily on a 68.8% increase in TwinSpires handle. Gaming revenue declined to $134.8 million from $178.3 million because of closures and capacity limitations. Churchill Downs revenue increased to $60.8 million from $31.4 million, primarily because the Derby and Oaks occurred in the third quarter rather than the second quarter.
For the nine-month period, Online Wagering was the only major segment with revenue growth, increasing to $314.4 million from $228.9 million. Churchill Downs revenue declined to $107.6 million from $234.6 million, and Gaming revenue declined to $319.7 million from $524.7 million.
Cash flow, debt, and liquidity
| Metric | 9M 2020 | 9M 2019 |
|---|---|---|
| Cash provided by operating activities | $137.3 million | $260.2 million |
| Cash used in investing activities | $(212.8) million | $(690.6) million |
| Cash provided by financing activities | $612.6 million | $490.9 million |
| Capital expenditures | $210.1 million | $91.0 million |
| Cash, cash equivalents, and restricted cash at period-end | $679.6 million | $233.8 million |
Cash and cash equivalents were $622.0 million at September 30, 2020, compared with $96.2 million at December 31, 2019. The increase primarily reflected $675.4 million borrowed under the revolving credit facility in March 2020.
Total debt was $2.184 billion at September 30, 2020, versus $1.492 billion at December 31, 2019. Debt consisted principally of a $389.0 million Term Loan B, $694.6 million drawn on the Revolver, $600.0 million of 2027 Senior Notes, and $500.0 million of 2028 Senior Notes. Interest expense increased to $59.3 million for the nine months from $52.0 million.
The amended credit agreement suspended the secured net leverage and interest coverage covenants through delivery of the fiscal quarter ending June 30, 2021 compliance certificate, subject to specified conditions. The company must maintain minimum liquidity of $150.0 million during the relief period and reported compliance with applicable covenants at September 30, 2020. Management stated that available cash should fund operations, commitments, and prioritized growth projects well beyond the next twelve months.
Material changes versus the prior comparable period
- Q3 revenue increased 10.3%, but nine-month revenue declined 26.0% because of the pandemic-related shutdowns and reduced attendance.
- Q3 operating income and Adjusted EBITDA improved because of stronger Online Wagering, the rescheduled Derby and Oaks, and equity-investment performance. Nine-month operating income and Adjusted EBITDA declined substantially.
- Presque Isle gaming rights and trademark impairment charges totaled $17.5 million in the first quarter; no comparable impairment was recorded in 2019.
- The company recorded a $124.0 million pre-tax obligation related to the Kater and Thimmegowda litigation settlements, producing a $96.1 million nine-month loss from discontinued operations, net of tax.
- Operating cash flow fell by $122.9 million, while financing cash flow increased because of additional borrowings.
- Capital expenditures rose to $210.1 million, primarily due to Oak Grove and other growth projects, despite reductions in planned spending caused by COVID-19.
Guidance, outlook, risks, contingencies, and unusual items
The company did not provide quantitative financial guidance. Management stated that the timing of removal of operating restrictions cannot be determined and that COVID-19 could continue to affect attendance, wagering, property operations, consumer spending, and liquidity.
- The proposed $155.0 million class-action settlement remained subject to final court approval as of the filing date. CDI’s portion was $124.0 million, with the final approval hearing scheduled for February 11, 2021 and anticipated payment in the first quarter of 2021.
- The Kentucky Supreme Court reversed a prior ruling concerning certain Encore/Exacta historical racing machines. The company stated that it does not use that system, but the decision could affect Kentucky historical racing machine operations. The company temporarily paused the Turfway Park HRM and grandstand construction project following the ruling.
- Variable-rate debt exposure was significant: the company reported $1.084 billion outstanding under its Credit Agreement. A one-percentage-point increase in variable rates would reduce net income and operating cash flow by approximately $8.1 million, assuming a constant balance.
- COVID-19 risks include renewed closures, capacity restrictions, reduced consumer demand, labor and supply-chain disruption, cybersecurity and business-continuity risks, and potential pressure on liquidity.
- The company declared a $0.622 per-share annual dividend payable January 6, 2021, subject to the applicable record date.
- Other risks include gaming and racing regulation, legalization and competition in online sports betting and iGaming, litigation, weather, insurance, horsemen agreements, cyber risk, and execution risk on new venues and capital projects.
Important facts for investors to verify
- Whether COVID-19 restrictions, property closures, and customer attendance recovered or worsened after September 30, 2020.
- The final approval, payment timing, and cash impact of the $124.0 million CDI litigation settlement.
- Revolver utilization, variable-rate exposure, covenant relief terms, and compliance with the $150.0 million minimum liquidity requirement.
- The financial performance and return profile of Oak Grove, Newport, Turfway Park, and the planned HRM and grandstand projects.
- The legal and regulatory consequences of the Kentucky Supreme Court ruling on historical racing machines.
- Whether TwinSpires’ increased handle and Online Wagering growth can offset continued weakness or restrictions in Gaming and live racing.
- The company’s ability to fund capital expenditures, debt service, dividends, and other commitments from operating cash flow after settlement payments and without additional borrowing.