Churchill Downs Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The financial statements are unaudited and results are seasonal, particularly in Racing Operations. The company operates Racing, Gaming, Online Business and Other Investments segments.
Financial performance and position
| Metric | Three months ended Sept. 30, 2013 | Change vs. 2012 | Nine months ended Sept. 30, 2013 | Change vs. 2012 |
|---|---|---|---|---|
| Net revenues | $185.6 million | +13% | $617.5 million | +8% |
| Operating income | $10.2 million | +30% | $95.3 million | +2% |
| Operating margin | 5.5% | 4.7% prior year | 15.4% approximately | 16% prior year |
| Earnings from continuing operations | $9.2 million | +53% | $60.5 million | +8% |
| Net earnings | $9.2 million | +55% | $60.6 million | +8% |
| Diluted earnings per share | $0.52 | Up from $0.34 | $3.39 | Up from $3.20 |
| Adjusted EBITDA | $31.8 million | +31% | $156.7 million | +13% |
Segment trends: Third-quarter Gaming revenue increased 61% to $79.8 million, primarily from Riverwalk and the July 2013 acquisition of Oxford Casino. Online revenue increased 6% to $48.5 million. Racing revenue declined 19% to $50.7 million, principally because of lost Calder hosting revenue, fewer Calder race days and fewer total live racing days. Nine-month Gaming revenue increased 37% to $218.8 million, while Racing revenue declined 7% to $235.9 million and Online revenue increased 1% to $144.0 million.
Cash flow and liquidity: Nine-month cash provided by operating activities was $114.4 million, compared with $102.1 million in the prior-year period. Capital expenditures were $29.9 million, producing reported free cash flow of $100.6 million after $13.8 million of maintenance capital expenditures. Investing cash use was $220.9 million, including $154.9 million for Oxford, $27.0 million contributed to the Miami Valley Gaming joint venture and $29.9 million of property and equipment additions. Financing activities provided $113.1 million, largely reflecting net borrowings.
Cash and cash equivalents were $43.8 million at September 30, 2013, with restricted cash of $40.0 million. Total assets were $1.288 billion, compared with $1.114 billion at December 31, 2012. Total debt was $324.8 million, compared with $209.7 million of current maturities at year-end 2012; the reclassification reflects the amended credit facility. Management reported $168 million of available borrowing capacity and compliance with all debt covenants.
Material changes versus the prior comparable period
- Oxford Casino was acquired on July 17, 2013 for approximately $168.6 million, financed through the revolving credit facility. Oxford contributed $17.7 million of third-quarter revenue and $4.0 million of pretax continuing-operations earnings.
- Riverwalk Casino, acquired in October 2012, contributed $12.6 million of third-quarter revenue and $40.9 million for the nine-month period.
- The May 2013 amended credit facility increased total commitments from $375 million to $500 million, with an accordion feature for up to an additional $225 million, and matures May 17, 2018.
- Racing Operations were pressured by an 8.5% nine-month decline in pari-mutuel handle, 18 fewer Arlington host days, loss of Florida hosting revenue and 29 fewer Fair Grounds turf races due to weather. Calder revenue declined approximately $19.7 million for the nine months.
- Online handle increased 2.1% for the nine months, but Illinois wagering interruptions reduced handle by approximately $25.6 million. TwinSpires resumed Illinois wagering June 7, 2013, but stopped accepting Texas wagers September 25, 2013 after an adverse court ruling.
- Adjusted EBITDA benefited from acquisitions and online growth, but comparability was affected by $4.5 million of HRE Trust Fund proceeds, lower insurance recoveries, $15.6 million of share-based compensation expense and $1.2 million of Miami Valley Gaming pre-opening costs.
- The company authorized a $100 million stock repurchase program, but made no purchases under that program during the first nine months. It repurchased 25,941 shares in September solely to satisfy tax withholding obligations on restricted stock awards.
Outlook, risks, contingencies and unusual items
Management stated that operating cash flow is expected to be adequate for business operations and capital expenditures over the next twelve months. Miami Valley Gaming was expected to open its Ohio racing and video lottery facility in December 2013; the company expected to fund approximately $72.2 million of contributions during 2013 and may have additional obligations under the joint venture.
Key risks include gaming and racing competition, seasonal operating results, changes in wagering and gaming laws, licensing requirements, horsemen agreements, regulatory allocation of race and host days, integration and performance of acquisitions, variable-rate debt, online security, litigation and potential changes in state or federal Internet gaming regulation. A one-percentage-point increase in LIBOR, assuming constant debt, was estimated to reduce annual earnings and operating cash flow by approximately $2.1 million.
Material legal and regulatory matters include the Illinois tax apportionment dispute involving a $2.9 million protest payment, pending Kentucky Downs litigation concerning the company’s put right, the appeal of the Texas wagering decision, and litigation involving Illinois racetracks and horsemen. The company stated that it did not expect these matters to have a material adverse effect, but several remained unresolved.
Other unusual items included $4.2 million of third-quarter HRE Trust Fund proceeds, $4.5 million for the nine-month period, and $0.4 million of insurance recoveries related to the 2012 Kentucky hailstorm. The filing states that no goodwill or indefinite-lived intangible asset impairment was required in the March 2013 annual testing.
Important facts for investors to verify
- Oxford’s post-acquisition revenue, margins, cash generation and integration performance.
- Debt balances, borrowing capacity, variable-rate exposure and continued compliance with leverage and interest-coverage covenants.
- The durability of Gaming growth after separating acquisition contributions from organic performance.
- The financial impact of Calder’s overlapping Florida race dates and Arlington’s future host-day allocations.
- The effect of Texas wagering restrictions and future Illinois ADW legislation on Online Business handle and revenue.
- Funding requirements, opening status and operating performance of Miami Valley Gaming.
- Resolution and potential financial exposure from the Illinois tax, Kentucky Downs, Texas wagering and Illinois racetrack litigation.
- The amount and timing of remaining share-based compensation expense, reported at $15.6 million incurred year-to-date with $15.6 million of unrecognized New Company LTIP expense at September 30, 2013.