Churchill Downs Incorporated — Q2 2012 Form 10-Q Summary
Business context and reporting period
Churchill Downs Incorporated operates racing, casino gaming, online wagering and related businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. Results are highly seasonal because most live-racing revenue occurs in the second quarter around the Kentucky Derby and Kentucky Oaks. The company conducted 122 live racing days in the quarter, versus 105 in the prior-year quarter, and 178 days year to date, versus 167.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | $270.8 million, up 8% | $409.0 million, up 7% |
| Operating income | $82.2 million, up 22% | $85.9 million, up 33% |
| Operating margin | 30%, versus 27% | 21%, versus 17% |
| Earnings from continuing operations | $48.6 million, up 21% | $49.9 million, up 36% |
| Diluted earnings per share from continuing operations | $2.77, versus $2.36 | $2.86, versus $2.18 |
| EBITDA | $95.3 million, up 12% | $112.6 million, up 17% |
| Net cash from operating activities | Not separately provided | $96.1 million, versus $104.8 million |
Quarterly segment revenue increased in Racing Operations to $160.4 million, Gaming to $51.4 million, Online Business to $52.7 million and Other to $6.3 million. Six-month revenue was $190.6 million, $110.7 million, $96.7 million and $10.9 million, respectively. Online wagering handle increased 13% for the quarter and 14% year to date; total racing handle increased 7% and 3%, respectively.
At June 30, 2012, cash and cash equivalents were $31.8 million and restricted cash was $53.6 million. Long-term debt was $63.0 million, down from $127.6 million at December 31, 2011. The company reported $305 million of borrowing capacity under its revolving credit facilities and compliance with debt covenants. Total assets were $959.4 million, total liabilities were $313.8 million and shareholders’ equity was $645.6 million.
Six-month investing cash outflows were $28.0 million, including $16.5 million of capital expenditures, the $6.7 million Bluff acquisition and $5.4 million contributed to the Ohio joint venture. Financing cash outflows were $63.6 million, including $64.6 million of net debt repayments and $10.1 million of dividends. Reported free cash flow, defined by the company as operating cash flow less maintenance capital expenditures, was $85.8 million.
Material changes versus the prior comparable period
- Racing benefited from 17 additional second-quarter live racing days, strong Kentucky Derby and Oaks week performance, and higher admissions, sponsorship and pari-mutuel revenue.
- Online revenue and EBITDA grew with higher wagering handle and new customer accounts, partly offset by higher content costs.
- Gaming revenue benefited from Harlow’s operating for the full comparable period in 2012; Harlow’s had been closed for 25 days in the 2011 period because of Mississippi River flooding. Calder Casino revenue declined because of increased South Florida competition.
- Insurance recoveries related to Harlow’s flood and wind damage increased operating income by $5.0 million in the quarter and $6.5 million year to date, net of losses. These recoveries make year-over-year EBITDA comparisons less representative of recurring performance.
- Interest expense declined substantially because of lower average debt and the absence of certain 2011 convertible-note-related charges. The prior-year period also included a $2.7 million gain associated with conversion of a related-party convertible note.
- The company acquired Bluff Media for $6.7 million, including estimated contingent consideration of $2.3 million, and invested in the Miami Valley Gaming & Racing joint venture in Ohio.
- Accounts payable increased with the spring racing meets and customer-funded online wagering balances. Deferred revenue declined by $24.2 million as Kentucky Derby and Oaks-related revenue was recognized.
Outlook, commentary, risks and unusual items
Management stated that operating cash flows over the following 12 months were expected to fund business operations and capital expenditures. No formal revenue or earnings guidance was provided in the filing. Management described the financial position as strong and reported no liquidity access limitations.
Key risks include economic conditions and discretionary consumer spending, competition from casinos, lotteries and other wagering options, changes in racing and gaming laws, licensing and regulatory requirements, horsemen agreements, online wagering security, litigation, insurance recoveries, natural disasters and execution of acquisitions and expansion projects.
Regulatory developments requiring monitoring include potential Illinois racetrack gaming and online wagering legislation, Ohio video lottery terminal development and related litigation, Kentucky historical racing machine litigation, changes to Kentucky race-day medication rules, and evolving federal and state internet-gaming laws. The planned Ohio facility remained subject to regulatory approvals, legal challenges and other closing conditions.
The April 2012 Kentucky hailstorm damaged Churchill Downs facilities; the related insurance claim remained under review, and no material impairment had been recorded. The company reported no required goodwill or indefinite-lived intangible asset impairment adjustment. Hialeah’s lawsuit was dismissed with prejudice, while the Balmoral, Maywood and Illinois Harness Horsemen’s Association litigation remained in discovery, with plaintiffs alleging damages of at least $3.6 million or alternatively $0.8 million.
Important facts for investors to verify
- Separate recurring operating performance from the $6.5 million year-to-date net insurance recoveries and the prior-year tax and convertible-note items.
- Assess whether Racing Operations growth is sustainable after adjusting for the additional live racing days and Kentucky Derby and Oaks timing.
- Monitor Calder Casino’s competitive pressures and the performance and renovation costs of Harlow’s.
- Review the terms, funding obligations and regulatory status of the Ohio Miami Valley Gaming & Racing joint venture.
- Evaluate the contingent consideration and strategic rationale for the Bluff Media acquisition, including its dependence on potential internet-poker legislation.
- Track regulatory and legal developments affecting Illinois gaming and ADW operations, Kentucky historical racing machines, Ohio VLTs and online gaming.
- Confirm debt repayment capacity, variable-rate exposure and the reported $305 million of remaining revolving borrowing capacity.
- Note that interim results are seasonal and unaudited and may not be indicative of full-year performance.