Churchill Downs Inc. - Q3 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Churchill Downs Inc. is a multi-jurisdictional owner and operator of pari-mutuel wagering properties and gaming businesses. The company operates four primary segments: Racing Operations (including Churchill Downs, Arlington Park, Calder, and Fair Grounds), Online Business (TwinSpires), Gaming (slot and video poker operations), and Other Investments. The company's results are significantly influenced by its racing calendar, with the majority of annual operating income typically generated in the second quarter.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Revenues | $100.9 million | $354.7 million |
| Operating Income | $2.5 million | $44.6 million |
| Net (Loss) Earnings | $(2.3) million | $23.7 million |
| Diluted EPS (Continuing Ops) | $(0.09) | $1.75 |
| Cash from Operating Activities | N/A | $62.9 million |
| Cash and Cash Equivalents | $16.6 million | $16.6 million |
| Total Debt (Current + Long-term) | $33.0 million | $33.0 million |
| EBITDA (Total) | $9.7 million | $67.4 million |
Material Changes vs. Prior Period
- Revenue: Net revenues increased 1% ($1.3 million) for the quarter and 3% ($10.0 million) for the nine months compared to the prior year. Growth was driven by the Online Business segment (+34% quarterly) and Gaming segment (+22% quarterly), offset by declines in Racing Operations due to economic weakness.
- Profitability: Operating income decreased 43% for the quarter and 23% for the nine months. The nine-month decline was significantly impacted by the absence of $17.2 million in insurance recoveries related to Hurricane Katrina that were recorded in the prior year.
- Net Earnings: The company reported a net loss of $2.3 million for the quarter, compared to net earnings of $2.5 million in the prior year quarter. This was primarily due to a $3.6 million increase in income tax provision related to an IRS audit adjustment.
- Handle: Total pari-mutuel handle declined 3% for the quarter and 4% for the nine months, reflecting broader industry trends and economic conditions.
Guidance, Outlook, and Risks
- IRS Audit Contingency: The IRS proposed an adjustment regarding the taxation of personal seat license proceeds from 2005-2006. If upheld, this could result in a negative cash impact of up to $7.9 million plus approximately $2.3 million in accrued interest. The company recorded a $7.9 million deferred tax asset and payable and $2.3 million in tax expense in Q3 2009.
- Legal Settlements: The company settled a lawsuit with the Kentucky Horsemen's Benevolent and Protective Association (KHBPA) for $1.5 million, to be paid over three years. This amount was recorded as purse expense in Q3 2009.
- Capital Expenditures: Construction on the Calder Casino (1,200+ slots) is underway with an expected opening in early 2010. As of September 30, 2009, $21.8 million had been spent, with an additional $63.2 million anticipated to complete the project.
- Liquidity: The company has $80.0 million of borrowing capacity remaining under its revolving credit facility, which matures in September 2010. Management believes cash flows and borrowings will be adequate for the next 12 months.
- Economic Outlook: Management anticipates continued weakness in discretionary spending and the overall economy, which negatively impacts pari-mutuel wagering and gaming revenues.
Key Facts for Investor Verification
- Tax Liability: Verify the status of the IRS audit regarding personal seat licenses and the potential $10.2 million total cash impact ($7.9M tax + $2.3M interest).
- Calder Casino Progress: Monitor the timeline and capital expenditure requirements for the Calder Casino opening scheduled for early 2010.
- Online Business Growth: Assess the sustainability of the 34% revenue growth in the Online Business segment (TwinSpires) amidst economic headwinds.
- Debt Maturity: Confirm the company's ability to refinance or extend its $120 million revolving credit facility maturing in September 2010.
- Illinois Gaming Legislation: Track the outcome of litigation regarding the Horse Racing Equity Trust Fund, which could impact future purse funding for Arlington Park.