Churchill Downs Inc. 10-Q Summary (Period Ended June 30, 2010)
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Churchill Downs Inc. for the period ended June 30, 2010. The Company is a leading multi-jurisdictional owner and operator of pari-mutuel wagering properties, including Churchill Downs (home of the Kentucky Derby), Arlington Park, Calder Race Course, and Fair Grounds. It also operates gaming facilities (Calder Casino, Fair Grounds Slots) and online wagering businesses (TwinSpires, Youbet.com). The second quarter is typically the Company's most profitable due to the Kentucky Derby.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Revenues | $275.6 million | $253.8 million |
| Operating Income | $31.0 million | $42.1 million |
| Net Earnings | $18.9 million | $26.0 million |
| Diluted EPS (Continuing Ops) | $1.33 | $1.84 |
| EBITDA | $53.8 million | $57.7 million |
| Cash from Operating Activities | $57.9 million | $65.2 million |
| Long-Term Debt | $113.5 million | $71.1 million |
| Total Assets | $873.0 million | $725.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 9% year-over-year, driven primarily by the opening of Calder Casino in January 2010 (generating $19.9 million in gaming revenue) and the acquisition of Youbet.com in June 2010.
- Profitability Decline: Despite revenue growth, Operating Income decreased 26% and Net Earnings decreased 27%. This was caused by significant pre-opening and integration costs associated with Calder Casino and Youbet, increased depreciation/amortization, and higher interest expense.
- Segment Performance:
- Gaming: Revenues surged 64% due to Calder Casino operations.
- Online Business: Revenues increased 27% due to Youbet acquisition and TwinSpires growth.
- Racing Operations: Revenues declined 5% due to fewer live race days and competitive pressures at Arlington Park and Fair Grounds.
- Balance Sheet: Total assets increased 20% largely due to $68 million in goodwill and $22.5 million in intangible assets from the Youbet acquisition. Long-term debt increased by $42.4 million to fund the acquisition and capital projects.
Guidance, Outlook, and Risks
- Acquisition Integration: The Company completed the $131.8 million acquisition of Youbet.com on June 2, 2010. Management expects this to drive growth in the online wagering segment. A $1.3 million software impairment was recognized at TwinSpires related to this integration.
- Legislative Risks:
- Ohio: Potential approval of video lottery terminals at Ohio racetracks could negatively impact Churchill Downs by attracting horses and reducing purses.
- Florida: Legal challenges regarding slot machine licenses at Hialeah Race Course and Calder's permit status remain pending.
- Illinois: Legislation (SB 3146) to allow electronic gaming at Illinois racetracks is pending; passage could benefit Arlington Park.
- Legal Proceedings: Class action lawsuits regarding the Youbet acquisition were settled in principle in July 2010, with no significant expected loss to the Company. A lawsuit by Cloverleaf Enterprises regarding simulcast agreements is ongoing.
- Tax Matters: The Company settled an IRS audit regarding Personal Seat License (PSL) income recognition, resulting in a $1.6 million tax benefit in the current period but increased taxable income for 2007 and 2008.
- Liquidity: The Company maintains $154.4 million in borrowing capacity under its revolving credit facility and expects cash flows to be adequate for operations and capital expenditures.
Investor Verification Checklist
- Verify the integration progress and revenue contribution of the Youbet.com acquisition in subsequent quarters.
- Monitor the status of the Illinois SB 3146 legislation and its potential impact on Arlington Park's revenue model.
- Track the outcome of the Florida legal challenges regarding Calder's racing permit and Hialeah's slot machine authorization.
- Assess the impact of Ohio's potential video lottery terminal expansion on Churchill Downs' field sizes and purses.
- Review the Company's ability to manage increased debt levels and interest expenses following the Youbet acquisition and Calder Casino expansion.