Churchill Downs Inc. 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. Churchill Downs Inc. operates pari-mutuel wagering on live Thoroughbred, Quarter Horse, and Standardbred racing, as well as simulcast signals. Key assets include Churchill Downs (home of the Kentucky Derby), Hollywood Park, Arlington Park, Calder Race Course, and Hoosier Park. The company's results are highly seasonal, with the majority of live racing occurring in the second, third, and fourth quarters.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 | Three Months Ended Sep 30, 2003 | Three Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Net Revenues | $331.8 million | $329.2 million | $117.5 million | $125.6 million |
| Operating Income | $44.0 million | $39.6 million | $13.6 million | $15.7 million |
| Net Earnings | $24.4 million | $19.0 million | $7.9 million | $7.9 million |
| Diluted EPS | $1.82 | $1.42 | $0.59 | $0.59 |
| Operating Cash Flow | $47.2 million | $32.8 million | N/A | N/A |
| EBITDA | $59.9 million | $53.0 million | $18.8 million | $20.1 million |
| Total Debt (Long-term + Current) | $114.9 million | $124.4 million | N/A | N/A |
| Cash and Equivalents | $17.5 million | $15.6 million | N/A | N/A |
Note: All figures in millions unless otherwise noted. Data derived from Condensed Consolidated Statements of Net Earnings, Cash Flows, and Balance Sheets.
Material Changes vs. Prior Period
- Revenue Growth (9 Months): Net revenues increased $2.6 million (0.8%) year-over-year. Growth was driven by record wagering at the Kentucky Derby and Oaks, additional live racing days at Arlington Park, and increased interstate simulcasting activity via the Churchill Downs Simulcast Network (CDSN).
- Profitability: Net earnings increased $5.4 million (28.6%) for the nine-month period, primarily due to revenue growth and a $2.2 million reduction in interest expense resulting from a lower interest rate environment and debt paydowns.
- Segment Performance:
- Hoosier Park: Revenues and EBITDA declined significantly due to regulatory changes in Indiana requiring the riverboat admissions subsidy to be split with a competitor (Indiana Downs), reducing subsidy revenue by approximately $5 million in 2003.
- Arlington Park: Revenues increased $7.9 million due to 18 additional live racing days and appointment as the Illinois host track during the off-season.
- Hollywood Park: Revenues decreased $2.7 million in the third quarter due to lower attendance and wagering.
- Balance Sheet: Long-term debt decreased by $8.4 million compared to year-end 2002. Accounts receivable increased $11.0 million compared to September 2002, largely due to timing of subsidy payments and real estate tax receivables.
Guidance, Outlook, and Risks
- Capital Expenditures: The company is executing a "Master Plan" renovation at Churchill Downs. Approximately $15.6 million was spent in the first nine months of 2003. Total planned capital expenditures for 2003 are approximately $53.2 million. Renovations are expected to impair attendance and wagering results during the Fall Meet at Churchill Downs, with the clubhouse remaining closed until 2005.
- Debt Refinancing: In April 2003, the company refinanced its credit facilities, replacing a $250 million revolving line with a new $200 million revolving line and $100 million in variable rate senior notes. Interest rates are tied to LIBOR plus a spread.
- Regulatory Risks:
- Indiana: A court proceeding is pending regarding the allocation of 2002 riverboat subsidies. An adverse ruling could reduce Hoosier Park revenues by $0.7 million.
- Illinois: Litigation is ongoing regarding the recapture of purse account amounts. A bill filed in the Illinois legislature could eliminate statutory rights to recapture these amounts.
- Legal Contingency: Calder Race Course is a defendant in a lawsuit regarding a jockey injury. A jury found the company 85% liable, but damages are undetermined. The company has $16.0 million in insurance coverage available.
- Market Risk: The company has $108.0 million in variable rate debt. A 1% increase in LIBOR would reduce annual pre-tax earnings by $1.1 million, partially mitigated by interest rate swaps covering $60.0 million of the debt.
Investor Verification Checklist
- Regulatory Impact on Hoosier Park: Verify the final outcome of the Indiana court proceedings regarding riverboat subsidies and the long-term impact of the 50/50 split on future profitability.
- Illinois Litigation: Monitor the status of the lawsuit challenging purse account recapture and the legislative status of bills affecting Illinois racetrack revenues.
- Capital Project Timeline: Assess the impact of the Churchill Downs "Master Plan" renovations on attendance and revenue during the 2003 Fall Meet and the 2004 Kentucky Derby/Oaks.
- Legal Exposure: Track the determination of damages in the Linda Hughes vs. Calder Race Course lawsuit to ensure it remains within the $16.0 million insurance coverage limit.
- Debt Covenants: Confirm continued compliance with financial covenants (fixed charge and leverage ratios) under the new $200 million revolving credit facility and senior notes.