Churchill Downs Inc. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Churchill Downs Inc. operates as a multi-jurisdictional owner of pari-mutuel wagering properties and gaming businesses. The company operates four primary segments: Racing Operations (including Churchill Downs, Arlington Park, Calder, and Fair Grounds), Online Business (TwinSpires, BRIS), Gaming (Calder Casino, Fair Grounds Slots), and Other Investments. The first quarter is typically a low-revenue period for the company, as the majority of annual operating income is generated in the second quarter during the Kentucky Derby.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenues | $75.05 million | $73.74 million |
| Operating Loss | $(16.23) million | $(8.99) million |
| Net Loss | $(8.67) million | $(4.83) million |
| Diluted Loss Per Share | $(0.64) | $(0.36) |
| Net Cash from Operating Activities | $21.27 million | $27.99 million |
| Net Cash Used in Investing Activities | $(19.51) million | $(4.19) million |
| Cash and Cash Equivalents (End of Period) | $17.36 million | $16.82 million |
| Total Debt (Current + Long-term) | $104.37 million | $95.17 million |
Note: Debt figures include current note payable to related party ($24.04M), long-term debt ($80.33M), and convertible note payable ($14.67M).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 2% to $75.05 million, driven primarily by the opening of Calder Casino in January 2010, which generated $8.1 million in gaming revenue. This offset a 16% decline in net pari-mutuel revenues due to a 14% drop in total handle across the industry.
- Operating Loss Expansion: The operating loss widened to $16.23 million (from $8.99 million) due to significant pre-opening expenses ($7.1 million) and depreciation ($2.6 million increase) associated with Calder Casino, alongside higher legal fees related to the Youbet merger.
- Segment Performance:
- Racing Operations: EBITDA declined to a loss of $12.86 million, impacted by fewer live race days and the absence of $4.3 million in source market fee revenues recognized at Arlington Park in the prior year.
- Gaming: Revenues surged 47% to $26.33 million, though EBITDA declined 26% due to pre-opening costs at the new Calder facility.
- Online Business: Revenues grew 8% and EBITDA improved 7% due to increased wagering volume at TwinSpires and equity earnings from HRTV.
- Tax Benefit: The company recognized an $8.23 million income tax benefit (vs. $3.48 million in 2009), including a $1.6 million benefit from a reduction in estimated interest expense related to an IRS audit adjustment regarding Personal Seat Licenses (PSLs).
Guidance, Outlook, and Risks
- Youbet Merger: The company is proceeding with the acquisition of Youbet.com, Inc. for approximately $137 million (stock and cash). The transaction is expected to close in the second quarter of 2010, pending Department of Justice antitrust review. The company plans to borrow approximately $43.6 million to fund the cash portion.
- Capital Expenditures: Significant capital spending ($18.96 million in Q1) was directed toward the completion of Calder Casino and lighting upgrades at Churchill Downs. Total spend on Calder Casino reached $75.3 million as of March 31, 2010.
- Liquidity: The company maintains $187 million in borrowing capacity under its revolving credit facility. Management anticipates cash flows will be adequate to fund operations and the Youbet merger.
- Legal Proceedings:
- Youbet Litigation: Class action lawsuits regarding the merger were filed in California and Delaware. The company entered into a memorandum of understanding to settle these cases in principle, subject to court approval and merger consummation.
- THG Lawsuit: A consent judgment was reached regarding antitrust claims with the Thoroughbred Horsemen's Group, resolving the dispute with specified damages for future violations.
- Regulatory Risks: The company faces uncertainty regarding the Unlawful Internet Gambling Enforcement Act (UIGEA) effective date (delayed to June 1, 2010) and potential legislative changes in Florida (SB 622) and Kentucky regarding expanded gaming.
Investor Verification Checklist
- Verify the final closing date and terms of the Youbet.com merger, including any adjustments to the stock/cash ratio based on the closing stock price.
- Monitor the Department of Justice antitrust review status, as this is a key condition for the Youbet transaction.
- Track the performance of Calder Casino post-opening to determine if pre-opening costs were temporary and if the facility achieves projected EBITDA margins.
- Review the outcome of the IRS mediation regarding PSL accounting to confirm the final tax liability and any future cash outflows.
- Assess the impact of the Illinois Horse Racing Equity Trust Fund litigation on expected purse funding for Arlington Park.