Churchill Downs Inc. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine months ended on that date. Churchill Downs Inc. is a multi-jurisdictional owner and operator of pari-mutuel wagering properties, including Churchill Downs, Arlington Park, Calder Race Course, and Fair Grounds. The company also operates gaming facilities (slots and video poker) and an online advance deposit wagering (ADW) business known as TwinSpires. The reporting period was significantly impacted by disputes with horsemen's groups regarding revenue sharing, which limited the distribution of racing signals, and by the economic downturn affecting discretionary spending.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Revenues | $99.6 million | $344.6 million |
| Operating Profit | $4.3 million | $58.0 million |
| Net Earnings | $2.5 million | $32.6 million |
| Diluted EPS | $0.18 | $2.33 |
| Operating Cash Flow (9mo) | $74.6 million | |
| Long-Term Debt | $36.0 million (as of Sep 30, 2008) | |
| Cash and Equivalents | $13.3 million (as of Sep 30, 2008) | |
| EBITDA (9mo) | $77.9 million |
Material Changes vs. Prior Period
- Revenue Trends: For the nine months ended September 30, 2008, net revenues increased 7% to $344.6 million compared to $321.7 million in the prior year. This growth was driven by the On-line Business (up 242%) and Gaming (up 86%) segments. However, Racing Operations revenues declined 7% due to signal distribution disputes and fewer live race days.
- Profitability: Net earnings from continuing operations increased 47% to $32.6 million for the nine-month period, compared to $22.2 million in 2007. This significant increase was largely due to a one-time $17.2 million insurance recovery related to Hurricane Katrina damages at Fair Grounds.
- Segment Performance:
- Racing Operations: EBITDA increased 19% year-over-year for the nine months, primarily due to the insurance recovery, though underlying pari-mutuel handle declined 6%.
- On-line Business: EBITDA turned positive ($4.4 million) from a loss of $1.5 million in the prior year, driven by the integration of ATAB and BRIS acquisitions.
- Gaming: EBITDA increased 84% due to the temporary slot facility at Fair Grounds.
- Balance Sheet: Total liabilities decreased 20% to $205.2 million, driven by a $32.0 million reduction in long-term debt. Shareholders' equity increased 10% to $403.9 million.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The nine-month results include $17.2 million in insurance recoveries for Hurricane Katrina, which was the final payment on those claims. Additionally, the company recognized a $1.0 million reversal of compensation expense related to performance share awards deemed unlikely to be achieved.
- Legal and Operational Risks: The company is engaged in significant litigation with the Thoroughbred Horsemen's Group (THG) and various state horsemen's associations. These groups have withheld consent to export racing signals to ADW businesses (including TwinSpires) and import signals to certain tracks, citing demands for higher revenue sharing. This dispute materially reduced revenues at Calder and Churchill Downs during the period.
- Outlook: Management anticipates that discretionary spending will not improve until economic trends reverse. The company expects to open a permanent slot facility at Fair Grounds in late 2008. While the company has reached agreements with Florida horsemen to resume some signal distribution, disputes regarding ADW revenue sharing remain unresolved.
- Liquidity: The company maintains $75.2 million in borrowing capacity under its revolving credit facility. Management believes cash flows from operations will be adequate to fund operations and capital expenditures.
Key Facts for Investor Verification
- Insurance Recovery Impact: Verify the sustainability of earnings by excluding the $17.2 million one-time insurance recovery from the nine-month net earnings.
- Signal Distribution Disputes: Monitor the status of the THG lawsuit and the specific consents withheld by horsemen's groups, as these directly impact the revenue potential of the Racing and On-line segments.
- Hoosier Park Contingency: Note that the company has not recognized up to $15 million in contingent consideration from the sale of Hoosier Park because collectibility is not yet reasonably assured.
- Debt Reduction: Confirm the continued ability to service debt and the utilization of the $75.2 million credit facility given the economic environment.
- Slot Facility Expansion: Track the opening and performance of the permanent slot facility at Fair Grounds, expected in late 2008, as a key driver for future Gaming segment growth.