Churchill Downs Incorporated: Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Quarter ended March 31, 2013; results are unaudited. Churchill Downs operates racing, casino gaming, online wagering and other investments. Results are seasonal: racing revenue is concentrated in the second quarter around the Kentucky Derby and Kentucky Oaks, while gaming revenue historically is stronger in the first quarter.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenue | $148.1 million | $138.2 million | +7% |
| Operating income | $3.0 million | $3.7 million | -20% |
| Operating margin | 2% | 3% | Down 1 percentage point |
| Earnings from continuing operations | $1.1 million | $1.4 million | -22% |
| Net earnings | $1.1 million | $1.4 million | -22% |
| Diluted EPS | $0.06 | $0.08 | Down $0.02 |
| Adjusted EBITDA | $17.9 million | $17.3 million | +3% |
| Cash flow from operations | $46.7 million | $55.1 million | -15% |
| Free cash flow | $43.0 million | $50.2 million | -14% |
| Capital expenditures | $13.7 million | $9.1 million | +$4.6 million |
Gaming revenue increased 21% to $72.1 million, principally due to the Riverwalk Casino acquisition. Racing revenue declined 8% to $27.8 million, and Online revenue declined 3% to $42.9 million. Interest expense increased 21% to $1.5 million because of higher debt used to finance Riverwalk.
At March 31, 2013, cash and cash equivalents were $39.3 million, restricted cash was $33.7 million, and total assets were $1.10 billion. Current maturities of long-term debt were $187.3 million; the filing also reports $187.3 million outstanding under the variable-rate revolving credit facility. Available borrowing capacity was approximately $181 million under the existing facility. Total liabilities were $443.0 million and shareholders’ equity was $654.1 million.
Material Changes Versus the Prior Comparable Period
- Riverwalk, acquired in October 2012, contributed approximately $14.1 million of gaming revenue and $4.5 million of EBITDA in Q1 2013.
- Racing Operations revenue declined primarily because Arlington received 18 fewer host days and Fair Grounds had 29 fewer turf races due to unfavorable weather. Racing handle decreased 8.9%.
- Online handle declined 2.6%; Illinois handle decreased $13.4 million after TwinSpires stopped accepting Illinois wagers on January 18, 2013 following the expiration of authorizing legislation.
- Calder Casino revenue declined 6% because of South Florida competitive pressure. Harlow’s revenue declined 3%, with management citing lower customer discretionary spending, delayed tax refunds and higher payroll taxes.
- Operating expenses increased 8%, including higher depreciation and amortization, gaming taxes, Riverwalk operating costs and selling, general and administrative expenses. Prior-year insurance recoveries were also higher.
- Income tax expense decreased to $0.3 million from $1.0 million, and the effective tax rate declined to 23% from 42%, primarily due to purchased state tax credits and recognition of a state tax refund.
- Operating cash flow declined partly because Q1 2012 benefited from insurance proceeds and other favorable timing items. The company repaid $22.4 million of current debt maturities during the quarter.
Outlook, Transactions, Risks and Unusual Items
Management stated that cash flows from operations are expected to be adequate for business operations and capital expenditures over the next twelve months. No formal revenue or earnings guidance was provided. Management characterized the company’s financial position as strong and reported compliance with existing debt covenants.
- Oxford Casino: The company agreed to acquire Oxford Casino in Maine for approximately $160 million, expected to close in Q4 2013 subject to regulatory approvals and a Maine gaming license. Failure to satisfy certain conditions could result in an $8 million termination fee. The acquisition is expected to be financed with revolving-credit borrowings.
- Credit facility: A proposed amendment, subject to regulatory approval, would increase commitments from $375 million to $500 million, with an accordion feature of up to $225 million. It would mature five years after effectiveness and impose interest coverage and leverage covenants.
- Share repurchases: On April 23, 2013, the board authorized repurchases of up to $100 million through December 31, 2015, funded with cash and borrowings. No purchases are required under the program.
- Miami Valley Gaming: The company invested $3.5 million in the Ohio joint venture during the quarter and expected to fund approximately $25.1 million of additional 2013 contributions. The facility was expected to open in Q1 2014.
- Insurance recovery: The company recognized $0.4 million of net insurance recoveries related to the April 2012 Kentucky hailstorm, compared with $1.5 million of recoveries in Q1 2012 related to Harlow’s wind damage.
- Regulatory and litigation risks: Material uncertainties include Illinois ADW authorization, Florida overlapping race dates, Kentucky historical racing machines, proposed gaming and online wagering legislation, Texas pari-mutuel wagering restrictions, California exchange wagering, pending Kentucky Downs litigation, Illinois tax litigation, and other disclosed legal proceedings.
- Interest-rate risk: A one-percentage-point increase in LIBOR, assuming constant debt, would reduce annual earnings and operating cash flow by approximately $1.2 million.
Important Facts for Investors to Verify
- Whether the Oxford Casino acquisition receives all required regulatory approvals, closes as expected and increases leverage as planned.
- The final terms and effective date of the amended credit facility, including borrowing capacity, interest rates, collateral and covenant headroom.
- Whether Illinois restores ADW authorization and the effect of lost Illinois wagering on TwinSpires revenue and EBITDA.
- Racing host-day allocations, weather effects and second-quarter Kentucky Derby performance, given the company’s pronounced seasonality.
- Riverwalk’s sustained operating performance and integration costs, as well as competitive trends at Calder and Harlow’s.
- Funding requirements and opening progress for Miami Valley Gaming and other planned capital projects.
- Outcomes of the Illinois tax dispute and pending litigation, including the $2.9 million protest payment and the Kentucky Downs matter.