Churchill Downs Inc. 10-Q Summary: Period Ended September 30, 2002
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, and the nine-month period ended on that date. Churchill Downs Inc. operates pari-mutuel wagering on live Thoroughbred, Quarter Horse, and Standardbred horse racing, as well as simulcast signals. Key assets include Churchill Downs (home of the Kentucky Derby), Hollywood Park, Arlington Park, Calder Race Course, and Hoosier Park. The company's results are highly seasonal, with the majority of live racing occurring in the second, third, and fourth quarters.
Key Financial Metrics
| Metric | Nine Months 2002 | Nine Months 2001 | Three Months 2002 | Three Months 2001 |
|---|---|---|---|---|
| Net Revenues | $329.2 million | $316.2 million | $125.6 million | $121.2 million |
| Operating Income | $39.6 million | $39.9 million | $15.7 million | $14.8 million |
| Net Earnings | $19.0 million | $18.0 million | $7.9 million | $7.1 million |
| Diluted EPS | $1.42 | $1.37 | $0.59 | $0.54 |
| Operating Cash Flow | $30.6 million | $42.9 million | N/A | N/A |
| Long-Term Debt | $123.9 million | $134.1 million | N/A | N/A |
| Cash & Equivalents | $15.6 million | $14.4 million | N/A | N/A |
Liquidity: The company maintains a $250 million revolving credit facility with $116.9 million outstanding as of September 30, 2002. The facility matures in 2004.
Material Changes vs. Prior Period
- Revenue Growth: Nine-month revenues increased 4.1% ($13.0 million) driven by expanded live race meets at Calder Race Course (16 additional days) and Arlington Park (6 additional days), plus record wagering on Kentucky Derby and Oaks days.
- Expense Increases: Operating expenses rose $10.8 million, primarily due to increased business insurance costs across all racetracks and incremental security costs for the Kentucky Derby. Hollywood Park saw expense reductions due to outsourcing food services.
- Accounting Change: Adoption of SFAS No. 142 eliminated goodwill amortization, reducing expenses by approximately $1.1 million for the nine-month period compared to 2001.
- Debt Reduction: Long-term debt decreased by $8.9 million from year-end 2001 due to the application of positive cash flows to repay borrowings.
- Interest Expense: Interest expense declined significantly ($2.9 million for nine months) due to lower interest rates and debt reduction.
Outlook, Risks, and Unusual Items
- Wagering Integrity Controversy: Following a controversy regarding a Breeders' Cup wager, the company established the NTRA Wagering Technology Group to ensure system security. Effective November 13, 2002, wagering at most facilities will halt one minute before post time to prevent odds manipulation. Regulators in Illinois and Canada have suspended certain exotic wagers pending reviews; management cannot currently determine the financial impact.
- Capital Expenditures: The company is executing a Master Plan renovation at Kentucky Operations. Phase 1 (started Dec 2001) is expected to cost $26.6 million and complete in Fall 2003. Phase 2 is scheduled to begin in July 2003 with an estimated cost of $95.0 million.
- Market Risks: The company faces risks from gaming competition (casinos, lotteries), changes in racing laws, and interest rate fluctuations. A 1% increase in LIBOR would reduce annual pre-tax earnings by $1.2 million, partially offset by interest rate swaps.
- Guidance: No specific numerical guidance was provided for the full year, though management expects sufficient resources to meet requirements for the next 12 months.
Investor Verification Checklist
- Wagering Impact: Monitor the outcome of regulatory reviews in Illinois and Canada regarding suspended exotic wagers and the potential revenue impact.
- Capital Spending: Verify the progress and cost overruns of the Kentucky Downs Master Plan renovation, particularly the upcoming Phase 2.
- Debt Covenants: Confirm continued compliance with financial covenants (fixed charge, interest coverage, net worth) on the $250 million credit facility maturing in 2004.
- Insurance Costs: Assess whether the elevated business insurance expenses cited in 2002 represent a permanent increase in the cost structure.
- Seasonality: Recognize that Q3 results are not indicative of full-year performance due to the heavy concentration of racing days in Q2 (Derby) and Q4.