Churchill Downs Inc. 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2007. Churchill Downs Inc. operates pari-mutuel wagering on live Thoroughbred horse racing and simulcast signals, alongside alternative gaming (slots and video poker) in Louisiana. The company owns and operates Churchill Downs Racetrack, Arlington Park, Calder Race Course, and Fair Grounds Race Course. The reporting period includes the impact of the June 2007 acquisition of AmericaTab, BRIS, and TSN, and the September 2007 launch of temporary slot operations at Fair Grounds.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Revenues | $103.9 million | $321.7 million |
| Operating Profit | $4.6 million | $38.8 million |
| Net Earnings (Continuing Ops) | $1.1 million | $22.2 million |
| Net Earnings (Total) | $0.8 million | $22.0 million |
| Diluted EPS (Total) | $0.06 | $1.58 |
| Cash from Operating Activities | N/A | $55.3 million |
| Long-Term Debt | $55.0 million | $55.0 million |
| Cash and Equivalents | $15.6 million | $15.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7% ($6.9 million) for the quarter and 9% ($25.3 million) for the nine months compared to the prior year. Growth was driven by the acquisition of ATAB/BRIS, the launch of TwinSpires.com, and increased live racing days at Fair Grounds (Louisiana Operations).
- Profit Decline: Despite revenue growth, net earnings from continuing operations decreased 60% for the quarter and 20% for the nine months. This was primarily due to increased operating expenses from new ventures, higher interest expense from acquisition financing, and a significant increase in the effective tax rate (from 45% to 60% for the quarter).
- Discontinued Operations: The company sold its interest in Hoosier Park in March 2007. Consequently, discontinued operations resulted in a net loss of $0.3 million for the quarter and $0.2 million for the nine months, compared to net earnings of $5.9 million and $4.1 million in the prior year periods, which included gains on the sale of RCA (Ellis Park).
- Balance Sheet: Total assets increased to $599.3 million, driven by $53.5 million in goodwill and $25.0 million in intangible assets from the ATAB/BRIS acquisition. Long-term debt increased to $55.0 million to fund this acquisition.
Outlook, Risks, and Management Commentary
- Acquisition Integration: Management is integrating ATAB, BRIS, and TSN to expand account wagering and data services. Risks include the inability to achieve projected synergies or revenue gains.
- Regulatory Environment:
- Florida: A referendum on slot machines in Miami-Dade County is scheduled for January 2008. The company anticipates spending $3–5 million to support this initiative. A Florida Supreme Court ruling in September 2007 allowed year-round simulcasting at pari-mutuel facilities.
- Louisiana: Temporary slot operations began at Fair Grounds in September 2007. A permanent facility is under construction, scheduled for completion in late 2008. New tax legislation (SB 190) effective July 2008 is expected to favorably impact video poker results.
- Illinois: Litigation regarding the constitutionality of the Horse Racing Equity Trust Fund is ongoing. The outcome could materially impact Arlington Park's results.
- Legal Proceedings: A pending appeal challenges the legality of slot machines at Fair Grounds based on the New Orleans City Charter. While the company believes it will prevail, an adverse ruling would have a material adverse impact.
- Liquidity: The company maintains a $120 million revolving credit facility (reduced from $200 million in May 2007). Management anticipates cash flows from operations will be adequate to fund operations and capital expenditures for the next twelve months.
Investor Verification Checklist
- Verify the timeline and regulatory approval status for the permanent slot facility at Fair Grounds (Louisiana) and the outcome of the January 2008 Miami-Dade slot referendum (Florida).
- Monitor the litigation regarding the Horse Racing Equity Trust Fund in Illinois and its potential impact on Arlington Park's purse funding.
- Assess the integration progress and revenue contribution of the ATAB, BRIS, and TSN acquisitions against the $80 million purchase price.
- Review the impact of the increased effective tax rate (60% in Q3 2007) on future profitability, specifically regarding the deductibility of legislative initiative costs.
- Confirm the status of the pending appeal regarding the legality of slot operations at Fair Grounds Race Course.