Churchill Downs Inc. Q1 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007. Churchill Downs Inc. operates pari-mutuel wagering on live Thoroughbred horse racing and simulcast signals across five primary segments: Churchill Downs Racetrack, Arlington Park, Calder Race Course, Louisiana Operations (Fair Grounds and Video Services Inc.), and other investments. The first quarter is historically a low-revenue period for the Company, with the majority of annual operating income typically generated in the second quarter during the Kentucky Derby.
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Revenues | $47,842 | $36,093 |
| Operating Loss | $(14,124) | $(16,403) |
| Net Loss | $(8,191) | $(10,273) |
| Diluted Net Loss Per Share | $(0.61) | $(0.79) |
| Cash from Operating Activities | $19,732 | $10,401 |
| Cash from Investing Activities | $(20,341) | $(9,953) |
| Cash from Financing Activities | $164 | $(8,277) |
| Long-term Debt | $13,919 | $13,393 |
| Cash and Cash Equivalents | $27,627 | $14,659 |
Note: The Company reported a gross loss of $(5,083) for the quarter, resulting in a gross margin of -11%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 33% ($11.7 million) primarily due to 45 additional live racing days at Fair Grounds in Louisiana compared to Q1 2006. In Q1 2006, Fair Grounds operations were disrupted by Hurricane Katrina, resulting in only 14 live racing days for the quarter.
- Segment Performance: Louisiana Operations revenues surged 74% to $29.7 million. Conversely, Calder Race Course revenues declined 47% due to the cessation of simulcast operations following a stay by the Florida Supreme Court.
- Discontinued Operations: The Company completed the sale of its 62% interest in Hoosier Park, L.P. on March 30, 2007. Results for Hoosier Park and the previously sold Ellis Park are classified as discontinued operations, contributing a net earnings of $239,000 for the quarter.
- Expense Management: Total expenses increased 18% driven by the return of live racing in Louisiana. However, corporate SG&A expenses decreased by $1.3 million due to reduced payroll costs and the absence of CEO replacement costs incurred in the prior year.
Guidance, Outlook, and Risks
- New Ventures: On May 2, 2007, the Company launched twinspires.com, an account wagering platform. Additionally, the Company formed a 50% joint venture with Magna Entertainment Corporation (MEC) called TrackNet Media Group, LLC, and acquired a 50% interest in HRTV, LLC, a horse racing television channel.
- Regulatory Environment:
- Florida: Slot machine legislation is pending. A referendum in Miami-Dade County (where Calder is located) failed in 2005, though slots were approved in Broward County. The Company anticipates costs of $3–$5 million if a statewide referendum is pursued in 2007.
- Illinois: Arlington Park continues to receive "purse recapture" payments, though legislation to eliminate this right has been proposed. The Company is also seeking authority for alternative gaming (slots) at the track.
- Louisiana: Fair Grounds has received regulatory approval to operate up to 700 slot machines. A temporary venue for 250 machines is awaiting final City Council ordinance approval.
- WTO Dispute: The World Trade Organization ruled against U.S. restrictions on internet gambling. The U.S. Trade Representative initiated a process to withdraw GATS commitments regarding gambling, which could impact interstate simulcast wagering.
- Capital Structure: On May 2, 2007, the Company amended its credit facility, reducing the maximum commitment from $200 million to $120 million and lowering interest rates. The facility includes a $100 million cap on investments for Florida gaming facilities.
Investor Verification Checklist
- Seasonality Impact: Verify that Q1 results are not indicative of full-year performance due to the concentration of racing days in Q2 (Kentucky Derby).
- Florida Slot Legislation: Monitor the status of the Miami-Dade County referendum and potential costs associated with a statewide ballot initiative.
- Illinois Funding: Track the litigation regarding the constitutionality of the Horse Racing Equity Trust fund, which impacts Arlington Park's purse funding.
- Discontinued Operations: Confirm the final accounting treatment and cash proceeds from the sale of Hoosier Park.
- WTO Implications: Assess the potential impact of the U.S. withdrawal of GATS gambling commitments on the Company's interstate simulcast and account wagering business.