Churchill Downs Inc. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. Churchill Downs Inc. operates in four segments: Racing Operations, Online Business, Gaming, and Other Investments. The quarter included 62 live racing days, an increase from 55 in the prior year. The company recently acquired Harlow's Casino Resort & Hotel (December 2010) and Youbet.com (June 2010), which significantly impacted revenue composition.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Revenues | $131.6 million | $85.2 million |
| Operating Loss | $(2.9) million | $(15.8) million |
| Net Loss | $(3.2) million | $(8.7) million |
| Loss Per Share (Diluted) | $(0.19) | $(0.64) |
| EBITDA | $11.2 million | $(5.0) million |
| Cash from Operations | $60.5 million | $21.3 million |
| Free Cash Flow | $55.9 million | $17.7 million |
| Long-Term Debt | $222.9 million | $265.1 million (Dec 2010) |
| Cash & Equivalents | $27.3 million | $26.9 million (Dec 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 54% ($46.4 million) driven by the Gaming and Online segments. Gaming revenues rose 76% due to the inclusion of Harlow's and a full quarter of operations at Calder Casino. Online Business revenues doubled (100%) following the Youbet acquisition.
- Profitability Improvement: The operating loss narrowed significantly by 82% ($12.9 million improvement) despite higher operating expenses. EBITDA swung from a loss of $5.0 million to a profit of $11.2 million.
- Expense Increases: Total operating expenses rose 33% to $134.4 million. Increases were attributed to depreciation ($4.0 million increase), gaming taxes ($3.0 million increase), and other direct expenses ($22.1 million increase) related to new acquisitions.
- Debt Reduction: Long-term debt decreased by $42.2 million compared to the prior quarter, funded by operating cash flows and an $8.5 million federal income tax refund.
Outlook, Risks, and Contingencies
- Natural Disasters: Harlow's Casino Resort temporarily closed on May 6, 2011, due to Mississippi River flooding. The hotel sustained damage (approx. 61 rooms) but the casino remained operational. The company has filed a $1.0 million insurance claim. The ultimate financial impact is undetermined.
- Legal Proceedings:
- Illinois Riverboat Subsidy: $42.4 million received from the Horse Racing Equity Trust Fund is held in escrow pending litigation regarding the constitutionality of the funding acts. A Seventh Circuit Court of Appeals hearing is scheduled for May 10, 2011.
- Hoosier Park: A settlement agreement approved by the Bankruptcy Court provides for an $8.5 million cash payment to satisfy outstanding notes and contingent consideration.
- Other Litigation: Active lawsuits include claims by Hialeah Race Course (unfair competition) and Balmoral/Maywood (breach of co-branding agreement/trade secrets). The FQHTA lawsuit against Calder was dismissed with prejudice.
- Regulatory Environment: The company is monitoring legislation in Kentucky regarding Historical Racing Machines (HRMs) and interstate compacts, as well as potential slot machine expansions in Illinois.
Investor Verification Checklist
- Harlow's Flood Impact: Verify the extent of property damage and the timeline for full reopening of the hotel and casino operations.
- Illinois Subsidy Escrow: Monitor the outcome of the Seventh Circuit Court of Appeals hearing (May 10, 2011) regarding the $42.4 million escrowed funds.
- Acquisition Integration: Assess the sustained performance of Youbet and Harlow's in subsequent quarters to confirm revenue synergies.
- Debt Covenants: Review the company's ability to maintain liquidity given the $222.9 million outstanding debt and variable interest rate exposure (LIBOR).
- Legal Settlements: Track the status of the Hoosier Park settlement payment and the resolution of the Balmoral/Maywood lawsuit.