Churchill Downs Incorporated — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Churchill Downs operates through Live and Historical Racing, TwinSpires, Gaming, and All Other. The company owns racing, historical racing, casino, retail sportsbook, and online horse-racing wagering businesses.
During 2022, the company exited its direct online sports and casino business, completed acquisitions of Chasers Poker Room and Ellis Park, opened the Turfway Park historical racing facility, and continued preparations for the proposed $2.75 billion Peninsula Pacific Entertainment transaction.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Change | 9M 2022 | 9M 2021 | Change |
|---|---|---|---|---|---|---|
| Net revenue | $383.1 million | $393.0 million | ($9.9 million) | $1,329.7 million | $1,232.4 million | $97.3 million |
| Operating income | $63.0 million | $67.6 million | ($4.6 million) | $310.1 million | $249.7 million | $60.4 million |
| Operating margin | 16% | 17% | (1 point) | 23% | 20% | 3 points |
| Net income | $57.0 million | $61.4 million | ($4.4 million) | $438.4 million | $205.8 million | $232.6 million |
| Diluted EPS | $1.49 | $1.57 | ($0.08) | $11.36 | $5.23 | $6.13 |
| Adjusted EBITDA | $163.2 million | $156.1 million | $7.1 million | $582.9 million | $500.0 million | $82.9 million |
Adjusted EBITDA is a non-GAAP measure and includes the company’s share of EBITDA from equity investments while excluding, among other items, transaction costs, stock compensation, impairments, pre-opening costs, and the Calder land-sale gain.
- Q3 revenue declined primarily because Arlington ceased racing and simulcast operations, TwinSpires reduced its online Sports and Casino activity, and certain Mississippi and Pennsylvania gaming properties faced economic and competitive pressure.
- Nine-month revenue benefited from a full-capacity 2022 Kentucky Derby, continued growth at historical racing properties, and the absence of prior-year COVID-19 capacity restrictions and Hurricane Ida shutdowns.
- Q3 Adjusted EBITDA growth was led by TwinSpires cost reductions and Live and Historical Racing growth. Gaming Adjusted EBITDA was broadly stable and included $4.1 million of Hurricane Ida business-interruption insurance proceeds.
- Interest expense increased to $36.2 million in Q3 and $92.6 million for nine months, versus $21.7 million and $63.1 million, respectively, reflecting higher debt balances.
Cash flow, liquidity, capital spending, and debt
- Operating cash flow was $424.5 million for the first nine months of 2022, up from $391.0 million in the prior-year period.
- Investing cash flow was a use of $107.0 million, including $37.1 million of maintenance capital expenditures, $226.6 million of project expenditures, $81.7 million for acquisitions, and $33.3 million for gaming rights. These uses were partly offset by $279.0 million of Calder land-sale proceeds.
- Financing cash flow was $1,020.1 million, principally reflecting $1,220.0 million of borrowings, partly offset by $143.5 million of share repurchases and $25.7 million of dividends.
- Cash and cash equivalents were $110.6 million at September 30, 2022, compared with $291.3 million at December 31, 2021. Restricted cash was $1,582.6 million, primarily related to escrowed 2030 Senior Notes proceeds and Calder sale proceeds held for potential Section 1031 exchanges.
- Total debt was $3,196.5 million, or $3,173.8 million net of issuance costs, compared with $1,981.8 million and $1,961.0 million, respectively, at year-end 2021. The increase primarily reflects $1.2 billion of 2030 Senior Notes issued to finance the proposed P2E transaction.
- Debt consisted principally of $600.0 million of 2027 Senior Notes, $700.0 million of 2028 Senior Notes, $1.2 billion of 2030 Senior Notes, $381.0 million of Term Loan B, $295.5 million of Term Loan B-1, and $20.0 million drawn on the Revolver.
- The company had a $1.2 billion Revolver, of which $20.0 million was drawn, and an undrawn $800.0 million Delayed Draw Term Loan A commitment. Management stated that all applicable debt covenants were satisfied at September 30, 2022.
- Management estimated 2022 project capital expenditures of $325.0 million to $350.0 million, subject to timing, delays, and payment fluctuations.
Material changes versus the prior comparable period
- Live and Historical Racing revenue increased $12.6 million in Q3 and $120.4 million for nine months, primarily from historical racing growth and the unrestricted 2022 Kentucky Derby.
- TwinSpires revenue decreased $1.3 million in Q3 and $8.5 million for nine months because of the exit from direct online Sports and Casino and reduced online horse-racing wagering. Adjusted EBITDA increased as marketing and promotional spending declined.
- Gaming revenue decreased $1.9 million in Q3 but increased $21.7 million for nine months. Gaming Adjusted EBITDA decreased $3.4 million for nine months, primarily due to weaker wholly owned property results, partly offset by equity investments.
- All Other revenue declined $19.3 million in Q3 and $36.3 million for nine months, mainly because Arlington stopped racing and simulcast operations at the end of 2021.
- The company recognized a $274.6 million pretax gain on the Calder land sale, resulting in a significant nine-month net-income increase. The gain was excluded from Adjusted EBITDA.
- Capital expenditures increased to $263.7 million for nine months from $52.1 million, while debt increased by approximately $1.2 billion.
Guidance, outlook, risks, contingencies, and unusual items
- The P2E transaction was expected to close before year-end 2022, subject to customary conditions and New York State Gaming Commission approval. If required regulatory approvals were not obtained, the company could owe a regulatory termination fee of up to $137.5 million.
- The Calder sale proceeds were being held by a qualified intermediary for potential Section 1031 exchanges. Failure to complete qualifying replacement-property purchases within applicable deadlines could make the related gain taxable and limit immediate access to the proceeds. The company recorded $78.0 million of current income taxes payable related to the sale.
- The company expects to invest approximately $150.0 million in the Chasers development, including amounts paid to sellers, and approximately $75.0 million in Henderson and Daviess Counties in connection with Ellis Park, in addition to the Ellis Park purchase price.
- Hurricane Ida recovery continued at Fair Grounds and related off-track betting facilities. The company incurred $2.3 million of recovery and maintenance costs during the first nine months, received $8.0 million from insurers, and recorded a $1.0 million insurance recovery receivable. Management did not expect losses to exceed applicable insurance recoveries.
- The company recorded a $4.9 million non-cash impairment charge in Q1 2022 related to assets associated with the direct online Sports and Casino exit. No Q3 impairment charge was recorded.
- Variable-rate debt creates interest-rate risk. Management estimated that a one-percentage-point increase in LIBOR would reduce annual net income and operating cash flow by $4.8 million on the Term Loans B and B-1; a one-percentage-point increase in SOFR would reduce them by $0.1 million on the drawn Revolver and $5.7 million if the Delayed Draw Term Loan A were fully drawn.
- Other principal risks include gaming regulation, regulatory approvals, economic conditions and inflation, discretionary consumer spending, competition, cybersecurity and technology failures, litigation, labor issues, weather and casualty events, insurance availability, debt covenants, and execution of acquisitions and development projects.
- On October 25, 2022, the board declared an annual cash dividend of $0.714 per share, payable January 6, 2023.
Most important facts for investors to verify
- Whether the P2E transaction closed on expected terms and how the transaction affected debt, interest expense, operating results, and liquidity.
- Whether the Calder proceeds were fully deployed in qualifying Section 1031 replacement-property transactions and the ultimate cash-tax consequences.
- The sustainability of historical racing and Kentucky Derby-driven growth after unusually favorable comparable conditions.
- The performance of Mississippi and Pennsylvania gaming properties amid economic and competitive pressure.
- The financial effect of exiting direct online Sports and Casino, including potential monetization of market-access licenses.
- Progress, cost, and returns from the Turfway Park, Chasers, Ellis Park, Queen of Terre Haute, and other capital projects.
- Debt-service capacity and exposure to higher variable interest rates following the substantial increase in borrowings.