Churchill Downs Incorporated — Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021. Financial statements are unaudited. Churchill Downs operates through Live and Historical Racing, TwinSpires, Gaming, and All Other activities. All properties were reopened by March 31, 2021, although operating restrictions remained because of COVID-19.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $324.3 million | $252.9 million | +$71.4 million |
| Operating income (loss) | $46.7 million | $(11.6) million | +$58.3 million |
| Operating margin | 14% | (5)% | +19 percentage points |
| Net income attributable to Churchill Downs | $36.1 million | $(23.4) million | +$59.5 million |
| Diluted EPS | $0.91 | $(0.59) | +$1.50 |
| Adjusted EBITDA | $110.6 million | $55.3 million | +$55.3 million |
- Revenue by segment: Live and Historical Racing $63.2 million, TwinSpires $99.7 million, Gaming $152.0 million, and All Other $9.4 million.
- Adjusted EBITDA by segment: Live and Historical Racing $18.3 million, TwinSpires $22.5 million, Gaming $82.4 million, and All Other $(12.6) million.
- Live and Historical Racing benefited from Oak Grove, which opened its historical racing machine facility in September 2020, Newport, which opened in October 2020, and stronger Derby City Gaming results.
- TwinSpires horse-racing handle increased $113.3 million, or 34.3%, reflecting continued migration from retail to online wagering. Sports and Casino revenue also increased following expansion into Michigan and Tennessee.
- Gaming revenue and profitability improved as properties operated for more of the quarter and benefited from operating efficiencies and stronger equity-investment results.
Cash flow, liquidity, and capital structure
- Cash flow from operating activities was $(19.8) million, compared with $43.5 million in Q1 2020. The decline primarily reflected the $124.0 million payment for the Kater and Thimmegowda litigation settlements.
- Capital expenditures were $12.3 million, including $4.7 million of maintenance expenditures and $7.6 million of project expenditures.
- Cash flow from financing activities was $106.8 million. The company raised debt, repurchased $193.9 million of common stock, paid $24.8 million of dividends, and incurred $12.6 million of taxes related to net share settlement of stock awards.
- Cash and cash equivalents were $147.7 million at March 31, 2021, compared with $67.4 million at December 31, 2020. Including restricted cash, total cash was $195.7 million.
- Total debt was $1.987 billion at March 31, 2021, compared with $1.638 billion at year-end 2020. Debt, net of current maturities and issuance costs, was $1.964 billion.
- Debt included the $300.0 million Term Loan B-1 due 2028 and $700.0 million of 2028 Senior Notes after a $200.0 million incremental offering. The new debt proceeds were used partly to repay the Revolver and for general corporate purposes.
- The company reported compliance with applicable debt covenants, although financial-covenant testing relief remained in effect through delivery of the second-quarter 2021 financial statements and compliance certificate, subject to exceptions.
- A one-percentage-point increase in variable interest rates would reduce net income and operating cash flow by approximately $4.8 million, assuming constant variable-rate debt balances.
Material changes versus the prior comparable period
- Results rebounded from the COVID-19-related closures and restrictions that affected March 2020. The first quarter of 2021 had no comparable intangible-asset impairment, whereas Q1 2020 included a $17.5 million impairment.
- Equity in income from unconsolidated affiliates increased to $24.9 million from a $3.3 million loss, primarily reflecting improved results and favorable changes in Rivers Des Plaines interest-rate swap valuations.
- Operating expenses increased $13.1 million to $277.6 million. Content expense, taxes and purses, depreciation, marketing, and SG&A increased, while salaries and benefits and impairment expense declined.
- Shareholders’ equity fell to $202.2 million from $367.1 million, mainly because of the $193.9 million share repurchase and $12.6 million of share-settlement taxes, partly offset by quarterly earnings.
- On February 1, 2021, the company repurchased 1.0 million shares from an affiliate of The Duchossois Group for $193.9 million, or $193.94 per share. Approximately $147.1 million remained under the separate repurchase program at March 31, 2021.
- The company revised segment presentation by moving Oak Grove, Turfway Park, and Newport into Live and Historical Racing and moving retail sports betting results into TwinSpires. Prior-period segment information was reclassified accordingly.
Outlook, risks, contingencies, and unusual items
- The filing does not provide specific quantitative revenue, earnings, or EBITDA guidance.
- Management continued to identify COVID-19, operating restrictions, consumer discretionary spending, competition, regulatory changes, technology and cybersecurity failures, labor issues, debt covenants, interest rates, and litigation as material risks.
- The $124.0 million contribution to the approved Kater and Thimmegowda settlement was paid on March 25, 2021. The settlement resolved the company’s related indemnification exposure to Aristocrat under the Big Fish Games sale agreement.
- Litigation remains outstanding, including an appeal involving Kentucky historical racing machines, a proposed Kentucky HRM patron-loss class action, and an appeal related to the Louisiana horsemen’s purse settlement.
- The company stated that the Kentucky HRM ruling involved an Exacta system it does not use and does not believe further rulings will impair its ability to operate Kentucky HRM facilities.
- The filing contains inconsistent shorthand in the MD&A describing the Term Loan B-1 and Revolver spreads as “2 basis points” or “2 points”; the debt footnote identifies the Term Loan B-1 spread as LIBOR plus 200 basis points and the Revolver as LIBOR plus 175 basis points.
Important facts for investors to verify
- Whether COVID-19 restrictions, consumer behavior, and property capacity limits continue to affect Gaming and racing results.
- The sustainability of TwinSpires’ 34.3% year-over-year handle growth and the profitability trajectory of Sports and Casino, which incurred higher marketing and promotional costs.
- Debt repayment requirements, variable-rate exposure, covenant-relief expiration, and the company’s ability to reduce leverage following the new debt issuance.
- The cash-flow impact of litigation settlements, dividends, share repurchases, capital expenditures, and other restricted payments.
- The outcome and potential operating impact of Kentucky HRM litigation and the remaining Louisiana and Kentucky legal proceedings.
- The comparability of results given the segment reorganization, new Oak Grove and Newport facilities, COVID-19-related prior-year closures, and the nonrecurrence of the 2020 impairment.