Churchill Downs Inc. 10-Q Summary: Quarter Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for Churchill Downs Inc., 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 and BRIS), Gaming (slot and video poker operations), and Other Investments. The reporting period includes the Kentucky Derby, a key revenue driver for the company.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Revenues | $180.0 million | $253.8 million |
| Operating Income | $51.1 million | $42.1 million |
| Net Earnings | $30.9 million | $26.0 million |
| Diluted EPS | $2.20 | $1.86 |
| Operating Cash Flow (6mo) | $65.2 million | |
| Total Assets | $617.2 million | |
| Total Liabilities | $195.6 million | |
| Shareholders' Equity | $421.6 million | |
| Long-Term Debt | $0 (Repaid during period) | |
| Cash and Equivalents | $14.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 0.4% for the quarter and 3.6% for the six-month period compared to 2008. This growth was driven by the Online Business segment (up 35% QoQ) and Gaming segment (up 31% QoQ), offsetting declines in Racing Operations.
- Profitability: Net earnings from continuing operations increased 5% for the quarter but declined 15% for the six-month period. The six-month decline was significantly impacted by a $17.2 million insurance recovery related to Hurricane Katrina recognized in the prior year (2008), which is not present in the current period.
- Debt Reduction: The company repaid all amounts borrowed in 2007 to fund acquisitions and reduced long-term debt to zero as of June 30, 2009. Borrowings on the revolving credit facility were net repaid by $43.1 million during the six-month period.
- Segment Performance:
- Racing Operations: EBITDA declined 6% for the quarter and 33% for the six months, largely due to lower corporate hospitality revenues during Kentucky Derby week and fewer live race days.
- Online Business: EBITDA surged 237% for the quarter and 291% for the six months, driven by increased wagering volume and active users on TwinSpires.
- Gaming: EBITDA increased 2% for the quarter and 22% for the six months, benefiting from the permanent slot facility at Fair Grounds.
Outlook, Risks, and Contingencies
- Economic Environment: Management anticipates continued weakness in the U.S. economy and discretionary spending, which negatively impacts pari-mutuel handle. Total industry handle declined 10% in the first six months of 2009.
- Regulatory and Legislative Risks:
- Ohio: Potential authorization of video lottery terminals at Ohio racetracks could increase competition for Churchill Downs.
- Kentucky: Legislation to allow video lottery terminals (VLTs) at Kentucky racetracks was defeated in the Senate during a special session but remains a priority for 2010.
- Florida: Pending legislation could reduce tax rates for slot facilities if a tribal compact is ratified.
- Illinois: Ongoing litigation regarding the Horse Racing Equity Trust Fund involves approximately $76.5 million in funds held in protest accounts; the company has not recorded these as assets due to uncertainty.
- Legal Proceedings: The company is involved in an antitrust lawsuit against the Thoroughbred Horsemen's Group (THG) regarding simulcast signal distribution. Additionally, a lawsuit filed by Cloverleaf Enterprises (Rosecroft Raceway) alleges breach of simulcast agreements, seeking $10 million in damages.
- Liquidity: The company maintains $113 million in borrowing capacity under a revolving credit facility maturing in September 2010. Management believes cash flows and credit facilities are adequate for operations and capital expenditures for the next 12 months.
Investor Verification Checklist
- Debt Status: Verify the complete repayment of the $43.1 million long-term debt and the current utilization of the revolving credit facility.
- Illinois Litigation: Monitor the status of the Horse Racing Equity Trust Fund litigation and the potential impact of the $10.3 million allocation to Arlington Park.
- Regulatory Changes: Track legislative developments in Kentucky and Ohio regarding expanded gaming (VLTs) and their potential competitive impact on Churchill Downs.
- Online Growth Sustainability: Assess whether the significant growth in the Online Business segment (TwinSpires) can be sustained amidst broader economic downturns.
- Capital Expenditures: Review progress and costs associated with the construction of the Calder Casino, scheduled to open in early 2010.