Churchill Downs Inc. 10-Q Summary (Period Ended September 30, 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine months ended on that date. Churchill Downs Inc. is a multi-jurisdictional owner and operator of pari-mutuel wagering properties and gaming businesses. The company operates through four segments: Racing Operations, Online Business, Gaming, and Other Investments. The reporting period includes the impact of the June 2010 acquisition of Youbet.com and the dissolution of the Churchill Downs Entertainment Group (CDE), which is classified as a discontinued operation.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Revenues | $135.7 million | $411.3 million |
| Operating Income | $3.3 million | $35.8 million |
| Net Earnings (Loss) | $(0.7) million | $18.2 million |
| Diluted EPS (Net) | $(0.04) | $1.20 |
| EBITDA | $17.1 million | $72.4 million |
| Cash from Operating Activities | N/A | $55.3 million |
| Long-Term Debt | $109.5 million | $109.5 million |
| Total Assets | $849.9 million | $849.9 million |
Note: Net earnings for the three months ended September 30, 2010, reflect a net loss of $4.4 million from discontinued operations (CDE dissolution).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 35% ($34.8 million) for the quarter and 16% ($56.6 million) for the nine months compared to the prior year. This growth was driven primarily by the acquisition of Youbet.com and the opening of Calder Casino in January 2010.
- Segment Performance:
- Online Business: Revenues surged due to Youbet integration, contributing $19.5 million in the quarter.
- Gaming: Revenues increased 96% in the quarter due to Calder Casino operations.
- Racing Operations: Revenues declined 7% in the quarter and 6% for the nine months, attributed to fewer live race days and competitive pressures from New Jersey gaming-subsidized purses.
- Discontinued Operations: The company recorded a net loss of $4.4 million for the quarter and $5.6 million for the nine months related to the dissolution of CDE.
- Balance Sheet: Total assets increased 17% year-over-year, largely due to $68.0 million in goodwill and $22.5 million in intangible assets from the Youbet acquisition.
Guidance, Outlook, and Risks
- Acquisitions: The company announced a definitive agreement to acquire Harlow's Casino Resort & Hotel in Mississippi for approximately $138.0 million, expected to close in Q4 2010 or Q1 2011.
- Capital Structure: On November 1, 2010, the company amended its revolving credit facility, increasing the commitment from $275 million to $375 million and reducing pricing schedules.
- Regulatory Risks:
- Illinois: Legislation (SB 3146) to allow electronic gaming at racetracks is pending; the company received $14.6 million in riverboat subsidies held in escrow pending legal challenges.
- Florida: Legal challenges regarding slot machine operations at quarter horse facilities near Calder are ongoing.
- California: Approval of exchange betting may negatively impact pari-mutuel operations.
- Legal Proceedings: Class action lawsuits regarding the Youbet acquisition have reached a settlement agreement subject to court approval; the company expects no significant loss from this settlement.
- Outlook: Management anticipates cash flows from operations will be adequate to fund operations and capital expenditures, though the economic environment remains a risk to discretionary spending.
Investor Verification Checklist
- Harlow's Acquisition: Verify the closing timeline and regulatory approval status for the $138 million Mississippi casino purchase.
- Illinois Subsidy: Monitor the status of the $14.6 million escrowed riverboat subsidy and the outcome of the legal challenges regarding Public Act 94-804.
- Discontinued Operations: Confirm the final costs associated with the dissolution of CDE and the impact on future earnings.
- Debt Covenants: Review compliance with the amended credit facility covenants, specifically the interest coverage ratio (3.5:1) and leverage ratio (3.25:1).
- Regulatory Changes: Track legislative developments in Illinois (SB 3146) and Florida regarding expanded gaming rights that could alter the competitive landscape.