Business Context and Reporting Period
Churchill Downs Incorporated operates through Live and Historical Racing, TwinSpires, and Gaming segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
- Completed the $248.2 million acquisition of Exacta Systems on August 22, 2023.
- Kentucky retail sports betting began September 7, 2023, and online sports betting began September 28, 2023; these operations are included in TwinSpires.
- Effective May 22, 2023, the company completed a two-for-one stock split.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net revenue | $572.5 million | $383.1 million | $1,900.5 million | $1,329.7 million |
| Operating income | $112.3 million | $63.0 million | $457.8 million | $310.1 million |
| Operating margin | 20% | 16% | 24% | 23% |
| Net income | $61.0 million | $57.0 million | $359.7 million | $438.4 million |
| Diluted earnings per share | $0.79 | $0.74 | $4.69 | $5.68 |
| Adjusted EBITDA | $218.2 million | $163.2 million | $804.8 million | $582.9 million |
| Operating cash flow | Not separately provided | Not separately provided | $498.8 million | $424.5 million |
Q3 revenue increased 49.4%, operating income increased 78.3%, and Adjusted EBITDA increased 33.7%. Nine-month revenue increased 42.9%, operating income increased 47.6%, and Adjusted EBITDA increased 38.1%.
- Segment revenue, Q3: Live and Historical Racing $219.5 million, TwinSpires $108.5 million, and Gaming $244.3 million.
- Segment Adjusted EBITDA, Q3: Live and Historical Racing $80.9 million, TwinSpires $33.9 million, and Gaming $122.3 million.
- Segment revenue, nine months: Live and Historical Racing $818.9 million, TwinSpires $340.7 million, and Gaming $740.2 million.
- Segment Adjusted EBITDA, nine months: Live and Historical Racing $386.5 million, TwinSpires $97.2 million, and Gaming $375.2 million.
Liquidity, Cash Flow, Debt, and Capital Investment
- Cash and cash equivalents were $129.9 million at September 30, 2023, compared with $129.8 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $193.2 million at September 30, 2023.
- Nine-month operating cash flow was $498.8 million. Investing cash flow was negative $549.5 million, primarily reflecting $445.7 million of project capital expenditures and $241.3 million for the Exacta acquisition, partly offset by $195.7 million of Arlington sale proceeds.
- Total debt was $4.763 billion at September 30, 2023, compared with $4.639 billion at year-end 2022. Net debt, after current maturities and issuance costs, was $4.655 billion.
- The company had $118.7 million outstanding on its $1.2 billion Revolver, $1.251 billion outstanding under its Term Loan A, and $292.5 million under its Term Loan B-1. The company also had $600.0 million of 2031 Senior Notes issued at a 6.750% coupon.
- Interest expense increased to $67.9 million in Q3 and $197.8 million for the nine months, compared with $36.2 million and $92.6 million, respectively, in the prior-year periods.
- Management stated that operating cash flow and available credit capacity are expected to be adequate for operations and capital expenditures over the next twelve months.
Material Changes Versus Prior Comparable Period
- Revenue and Adjusted EBITDA benefited substantially from the 2022 Peninsula Pacific Entertainment acquisition, particularly the Virginia, New York, and Iowa properties, as well as the Ellis Park and Chasers acquisitions and the opening of Turfway Park.
- Live and Historical Racing revenue increased $127.2 million in Q3 and $379.7 million for the nine months. Gaming revenue increased $60.9 million in Q3 and $195.2 million for the nine months.
- TwinSpires revenue increased $2.3 million in Q3 but decreased $2.6 million for the nine months, reflecting the Exacta acquisition and B2B growth partly offset by the exit from direct online Sports and Casino operations.
- Q3 net income increased only $4.0 million despite higher operating income, primarily because of a $31.7 million increase in net interest expense and lower equity income from unconsolidated affiliates.
- Nine-month net income decreased $78.7 million, primarily because the prior-year period included a larger gain on asset sales. The 2023 period also included a $24.5 million non-cash Presque Isle impairment charge.
- Shareholders’ equity increased to $888.7 million from $551.5 million at year-end 2022, while the company repurchased $37.3 million of common stock during Q3. Approximately $232.9 million remained available under the repurchase authorization at September 30, 2023.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide consolidated revenue or earnings guidance.
- Management expected full-year 2023 project capital investments of approximately $575 million to $675 million; $445.7 million had been spent through September 30, 2023. Planned projects include Churchill Downs’ Paddock Project, Derby City Gaming Downtown, Ellis Park, Terre Haute Casino Resort, a New Hampshire HRM facility, and the Dumfries, Virginia HRM venue.
- The company recognized a $24.5 million non-cash impairment charge for Presque Isle gaming rights and trademark assets due to competition, inflationary pressures, and revised performance expectations.
- The company sold the Arlington property for $197.2 million, receiving $195.7 million of net proceeds and recognizing a $114.0 million gain. The proceeds were used to reduce Revolver borrowings.
- Interest-rate exposure is significant: $1.7 billion was outstanding under the variable-rate Credit Agreement, and management estimated that a one-percentage-point increase in SOFR would reduce net income and operating cash flow by approximately $12.1 million.
- Key risks include discretionary consumer spending, inflation, competition, regulatory and legislative changes, gaming and racing licenses, cyber and technology disruptions, labor availability, acquisition integration, construction costs and delays, litigation, debt covenants, refinancing and credit-market conditions, and higher interest rates.
- Ordinary-course litigation is ongoing. The company stated that any excess exposure above accrued amounts is not expected to be material, although outcomes and potential losses may be uncertain.
- The company expected the pending sale of 49% of United Tote to NYRA Content Management Solutions to close during the fourth quarter of 2023, subject to customary conditions and regulatory approvals.
Important Facts for Investors to Verify
- Whether the acquired P2E and Exacta operations sustain expected revenue synergies and Adjusted EBITDA growth.
- The pace and total cost of planned 2023 capital projects, including whether spending exceeds the $575 million to $675 million estimate.
- Debt reduction capacity, covenant compliance, refinancing needs, and sensitivity to SOFR and other interest-rate changes.
- Presque Isle’s operating performance and whether additional impairment indicators emerge.
- The regulatory, financial, and operating impact of Kentucky retail and online sports betting.
- Completion and terms of the United Tote transaction and any related accounting effects.
- The comparability of reported earnings, given the Arlington gain, prior-year asset-sale gains, acquisitions, impairments, and other non-GAAP adjustments.