Churchill Downs Inc. 10-Q Summary (Period Ended September 30, 2006)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine months ended on that date. Churchill Downs Inc. operates pari-mutuel wagering on live and simulcast horse racing, as well as alternative gaming (video poker) in Louisiana. The company owns and operates Churchill Downs, Arlington Park, Calder Race Course, Hoosier Park, and Louisiana Operations (Fair Grounds). The reporting period includes the sale of Ellis Park Race Course (RCA) on September 28, 2006, which is classified as a discontinued operation.
Key Financial Metrics
| Metric | 9 Months 2006 | 9 Months 2005 | 3 Months 2006 | 3 Months 2005 |
|---|---|---|---|---|
| Net Revenues | $324.7 million | $315.1 million | $106.4 million | $101.7 million |
| Operating Income | $46.6 million | $29.1 million | $5.0 million | $4.6 million |
| Net Earnings (Continuing Ops) | $26.9 million | $17.2 million | $2.7 million | $3.2 million |
| Net Earnings (Total) | $31.8 million | $81.9 million | $8.7 million | $71.6 million |
| Diluted EPS (Continuing Ops) | $1.97 | $1.27 | $0.20 | $0.23 |
| Diluted EPS (Total) | $2.33 | $6.07 | $0.64 | $5.30 |
| Cash from Operations | $46.7 million | $32.5 million | N/A | N/A |
| Long-Term Debt | $19.2 million | $33.8 million | N/A | N/A |
| Cash & Equivalents | $24.9 million | $22.3 million | N/A | N/A |
Note: Total Net Earnings for 2005 were significantly inflated by a $69.9 million gain on the sale of Hollywood Park (discontinued operations). Total Net Earnings for 2006 include a $4.2 million gain on the sale of Ellis Park.
Material Changes vs. Prior Period
- Revenue Growth: Nine-month net revenues increased 3% ($9.6 million) driven by higher revenues at Churchill Downs (Kentucky Derby week) and Louisiana Operations (video poker and simulcast), partially offset by declines at Arlington Park and CDSN due to fewer live racing days.
- Operating Income Surge: Operating income for the nine months increased 60% ($17.5 million). This was primarily due to $13.0 million in net insurance recoveries related to Hurricane Katrina and Wilma, compared to $1.4 million in the prior year.
- Discontinued Operations: The prior year's total earnings were heavily influenced by the sale of Hollywood Park. The current year's discontinued operations reflect the sale of Ellis Park and ongoing operations of that facility prior to sale.
- Balance Sheet: Total assets increased 3% to $529.7 million, driven by higher restricted cash balances. Total liabilities decreased 10% to $176.6 million, largely due to the repayment of long-term debt.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates that cash flows from operations will be adequate to fund business operations and capital expenditures over the next twelve months. The company is actively pursuing alternative gaming legislation in Kentucky and Florida, though outcomes remain uncertain.
Key Risks and Contingencies:
- Regulatory/Legislative: Significant uncertainty exists regarding the World Trade Organization (WTO) ruling on internet wagering and the potential impact of the U.S. Department of Justice's interpretation of the Wire Act. Changes in state laws regarding "host track" designations (Illinois) and riverboat subsidies (Indiana) could materially impact revenues.
- Alternative Gaming: The company faces uncertainty regarding the approval of slot machines in Miami-Dade County, Florida, and the passage of casino gaming legislation in Kentucky.
- Natural Disasters: While insurance recoveries have been significant, the company notes that the ultimate impact of Hurricanes Katrina and Wilma on operations and insurance proceeds is still being finalized.
- Accounting Changes: The company adopted SFAS No. 123(R) for share-based compensation in 2006, resulting in increased expenses compared to prior periods. FIN 48 (Accounting for Uncertainty in Income Taxes) is effective January 1, 2007, with impact currently undetermined.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time gains from the sale of Hollywood Park (2005) and Ellis Park (2006).
- Insurance Recoveries: Confirm the finality of insurance claims related to Hurricane Katrina and Wilma, as these significantly boosted 2006 operating income.
- Regulatory Exposure: Assess the potential financial impact of the DOJ's stance on interstate internet wagering and the WTO ruling on the company's simulcast and in-home wagering revenue streams.
- Segment Performance: Review the decline in Arlington Park revenues and the dependency on "host track" designations in Illinois.
- Capital Allocation: Monitor the company's strategy for alternative gaming expansion in Florida and Kentucky, including associated costs and legislative hurdles.