CHDN

Churchill Downs Inc. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Churchill Downs Inc. operates as a multi-jurisdictional owner of pari-mutuel wagering properties (including Churchill Downs, Arlington Park, Calder, and Fair Grounds) and gaming facilities. The company operates in four segments: Racing Operations, On-line Business (TwinSpires), Gaming, and Other Investments. The first quarter is historically a low-revenue period as the majority of live racing and the Kentucky Derby occur in the second quarter.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12% ($8.0 million) driven by the permanent slot facility at Fair Grounds (opened late 2008) and a one-time receipt of $4.3 million in source market fees from the NTRA for Arlington Park.
• Operating Loss: The company reported an operating loss of $9.0 million compared to income of $2.6 million in Q1 2008. This decline is primarily due to the absence of $17.2 million in insurance recoveries recorded in Q1 2008 related to Hurricane Katrina damages at Fair Grounds.
• Segment Performance:
  • Racing Operations: EBITDA turned negative ($-10.7 million) from positive ($4.6 million) due to the lack of insurance recoveries and a 6% decline in total pari-mutuel handle attributed to the weak U.S. economy.
  • Gaming: EBITDA increased 42% to $6.7 million due to the expanded slot operations at Fair Grounds.
  • On-line Business: EBITDA increased significantly to $3.7 million (from $0.7 million) driven by growth in TwinSpires wagering and active users.
• Liquidity: The company reduced long-term debt by $11.1 million through repayments on its revolving credit facility. Cash provided by operating activities decreased 37% year-over-year, largely due to the non-recurring insurance proceeds in the prior year.

Outlook, Risks, and Contingencies

• Economic Outlook: Management anticipates continued weakness in discretionary spending due to the global economic downturn and credit market disruptions. The company expects pari-mutuel handle to remain under pressure.
• Regulatory Developments:
  • Florida: Calder submitted an application to operate 1,225 slot machines. Approval is pending a three-month review process.
  • Kentucky: Legislation for video lottery terminals (HB 158) was not voted on in the 2009 session but may be considered in a special summer session.
• Legal Proceedings: The company is involved in an antitrust lawsuit against the Thoroughbred Horsemen's Group (THG) regarding interstate simulcast distribution. The court denied the defendants' motion to dismiss the majority of claims in March 2009, and defendants have filed a motion to appeal. A counterclaim by the Kentucky Horsemen's Benevolent and Protective Association (KHBPA) regarding purse payments remains pending.
• Contingent Consideration: The company has not recognized up to $15 million in contingent payments from the sale of its interest in Hoosier Park because collectibility is not yet reasonably assured.
• Industry Risk: The bankruptcy of Magna Entertainment Corp. (MEC), a key industry partner and co-owner of HRTV and TrackNet, poses potential risks to operations and signal distribution.

Investor Verification Checklist

• Verify the sustainability of Gaming segment growth now that the permanent Fair Grounds slot facility is fully operational.
• Monitor the status of the THG antitrust lawsuit and the KHBPA counterclaim for potential financial impact.
• Assess the impact of the economic downturn on Q2 2009 revenues, particularly for the Kentucky Derby, which is the primary revenue driver for the year.
• Review the progress of the Calder slot machine application and potential tax rate changes in Florida.
• Confirm the company's ability to refinance its revolving credit facility maturing in September 2010 given current credit market conditions.