Churchill Downs Incorporated: Q1 2023 Form 10-Q Summary
Business context and reporting period
Churchill Downs Incorporated reported unaudited results for the three months ended March 31, 2023. Operations are organized into Live and Historical Racing, TwinSpires, Gaming, and All Other. Results include the November 2022 acquisition of substantially all Peninsula Pacific Entertainment assets, including Colonial Downs, Virginia historical racing venues, del Lago Resort & Casino, and Hard Rock Sioux City.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $559.5 million | $364.1 million | +$195.4 million |
| Operating income | $119.9 million | $47.4 million | +$72.5 million |
| Operating margin | 21% | 13% | +8 percentage points |
| Net income | $155.7 million | $42.1 million | +$113.6 million |
| Diluted EPS | $4.09 | $1.08 | +$3.01 |
| Adjusted EBITDA | $222.9 million | $128.5 million | +$94.4 million |
| Operating cash flow | $215.9 million | $135.2 million | +$80.7 million |
- Live and Historical Racing revenue was $214.4 million, up $128.4 million, primarily from P2E properties, Turfway Park, Ellis Park, Chasers, and Oak Grove.
- TwinSpires revenue was $94.8 million, down $5.5 million, largely reflecting lower online horse-racing wagering and the exit from most direct online Sports and Casino operations.
- Gaming revenue was $250.0 million, up $72.7 million, primarily due to the P2E properties in New York and Iowa.
- Adjusted EBITDA increased across Live and Historical Racing to $82.1 million, TwinSpires to $29.4 million, and Gaming to $129.5 million. All Other Adjusted EBITDA declined to negative $18.1 million.
- Capital expenditures were $134.7 million, including $122.9 million of capital project expenditures and $11.8 million of maintenance expenditures.
- Cash and cash equivalents were $173.9 million at March 31, 2023; cash, cash equivalents, and restricted cash totaled $237.4 million.
Debt, liquidity, and capital resources
- Total debt was $4.457 billion at March 31, 2023, compared with $4.639 billion at December 31, 2022. Net debt, after current maturities and issuance costs, was $4.351 billion.
- The Revolver balance declined from $664.1 million at year-end to zero after the company increased its Term Loan A by $500 million and used proceeds, together with Arlington sale proceeds, to repay the Revolver.
- The credit facility included a $1.2 billion Revolver, a $1.3 billion Term Loan A due 2027, a $400 million Term Loan B due 2024, and a $300 million Term Loan B-1 due 2028. The company also had $2.5 billion of senior notes maturing between 2027 and 2030.
- Interest expense increased to $64.7 million from $21.3 million, reflecting higher debt balances and borrowing costs associated with the P2E acquisition.
- Management stated that expected operating cash flow over the following twelve months would be adequate to fund operations and capital expenditures.
- Management expected 2023 project capital expenditures of approximately $575 million to $675 million, subject to project timing, delays, and payment schedules.
Material changes versus the prior comparable period
- Revenue growth was primarily acquisition-driven, with P2E contributing significant new racing and gaming operations. The company also benefited from Turfway Park, Ellis Park, Chasers, and Oak Grove growth.
- Operating expenses increased $122.9 million to $439.6 million, mainly from acquired operations, higher salaries and benefits, marketing, depreciation, and other operating expenses.
- Transaction expense declined to a net benefit of $0.2 million from $5.0 million, and the prior-year $4.9 million asset impairment did not recur.
- Net income included a $114.0 million pretax gain, or approximately $86.2 million after tax, from the February 2023 sale of the Arlington property to the Chicago Bears. The sale generated $195.7 million of net proceeds.
- Excluding the Arlington gain and other comparability items, management reported a $28.6 million increase in net income, with operating performance and equity income partly offset by approximately $31.9 million of after-tax higher interest expense.
- Cash flow from investing activities was positive $54.5 million versus negative $62.8 million, primarily because of Arlington sale proceeds. Financing cash outflows increased to $237.7 million due largely to debt repayment.
Guidance, outlook, commentary, and risks
- The filing does not provide quarterly earnings guidance. Management provided an estimated 2023 project capital expenditure range of $575 million to $675 million.
- The company completed a $600 million offering of 6.750% senior unsecured notes due 2031 on April 25, 2023. Proceeds were to repay part of the Term Loan B due 2024, fund transaction expenses, and support working capital and general corporate purposes.
- The company expected to complete the transition of financing references from LIBOR to SOFR by June 30, 2023 and did not expect a material financial statement impact.
- A one-percentage-point increase in LIBOR or SOFR, assuming constant variable-rate debt, was estimated to reduce net income and operating cash flow by approximately $14.2 million.
- Key risks include discretionary consumer spending, inflation, competition, regulatory and legislative changes, wagering and gaming demand, cybersecurity and technology disruptions, labor conditions, acquisition integration, construction costs and delays, interest rates, debt covenant compliance, and litigation.
- The company was defending litigation brought by Bob Baffert and Bob Baffert Racing Stables. The court dismissed most claims, denied a preliminary injunction, and the remaining due-process claim was subject to the company’s summary judgment motion.
- Management stated that there had been no material changes to the risk factors disclosed in the 2022 Form 10-K. Disclosure controls and procedures were deemed effective.
- The board approved a two-for-one stock split on April 25, 2023, with distribution expected May 19, 2023 and split-adjusted trading expected to begin May 22, 2023.
Most important facts for investors to verify
- Verify the sustainability of acquisition-driven revenue and Adjusted EBITDA growth, particularly at the Virginia, New York, and Iowa properties.
- Assess leverage, upcoming maturities, variable-rate exposure, and the effect of the 2031 notes issuance and Term Loan B repayment on interest expense.
- Monitor execution and funding of the $575 million to $675 million 2023 capital program, including the Churchill Downs, Virginia, Kentucky, Indiana, and New Hampshire projects.
- Separate recurring operating performance from the nonrecurring Arlington gain and other Adjusted EBITDA adjustments.
- Evaluate TwinSpires trends following the exit from most direct online Sports and Casino operations and the shift toward retail and market-access activities.
- Review the final purchase accounting for P2E and any changes to acquired goodwill, intangible assets, deferred taxes, or other valuation estimates.
- Track regulatory developments, sports-betting implementation in Kentucky, litigation outcomes, and the pending United Tote and Exacta transactions.