Churchill Downs Incorporated — Q3 2011 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2011. Churchill Downs operates racing, gaming, online wagering and related technology businesses. Results are seasonal and significantly affected by the racing calendar; the company conducted 111 live racing days in the third quarter and 278 days year to date, unchanged from 2010.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenue | $166.3 million | $147.5 million | $547.6 million | $448.1 million |
| Operating income | $10.1 million | $3.3 million | $74.7 million | $35.8 million |
| Operating margin | 6% | 2% | 14% | 8% |
| Earnings from continuing operations | $19.7 million | $3.7 million | $56.5 million | $23.8 million |
| Net earnings | $19.8 million | $(0.7) million | $56.7 million | $18.2 million |
| Diluted EPS | $1.17 | $(0.04) | $3.35 | $1.20 |
| EBITDA | $43.0 million | $17.1 million | $139.2 million | $72.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $131.6 million | $55.3 million |
| Free cash flow | Not separately provided | Not separately provided | $119.7 million | $44.9 million |
Revenue growth was led by Gaming, up 50% in Q3 and 54% year to date, and Online, up 7% in Q3 and 43% year to date. Racing revenue declined 1% in both periods. Q3 miscellaneous income included $19.3 million from the release of restrictions on Horse Racing Equity Trust Fund proceeds.
At September 30, 2011, cash and cash equivalents were $26.9 million, restricted cash was $50.5 million, and total assets were $956.9 million. Long-term debt was $156.3 million; management separately reported $156.0 million outstanding under its revolving credit facility and $212 million of remaining borrowing capacity. Total liabilities were $371.1 million and shareholders’ equity was $585.8 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased $18.8 million, primarily from the December 2010 acquisition of Harlow’s Casino, stronger Calder Casino performance and Online growth.
- Nine-month revenue increased $99.5 million, reflecting the Harlow’s and Youbet acquisitions, a full-period contribution from Calder Casino and growth in United Tote.
- Q3 EBITDA increased $25.9 million, including a $19.3 million HRE Trust Fund benefit. Nine-month EBITDA increased $66.7 million.
- Racing Operations remained pressured by industry weakness: company racing handle declined 3.8% year to date, while U.S. thoroughbred industry handle declined 7.6%.
- Operating cash flow increased $76.3 million year over year, partly because of HRE Trust Fund proceeds, improved operating performance and tax refunds. Capital expenditures declined to $16.8 million from $56.5 million.
- Debt declined $108.8 million through repayments funded by operating cash flow, HRE Trust Fund proceeds and tax refunds. The related-party convertible note was extinguished through issuance of 452,603 common shares.
- Total assets declined 6% while total liabilities declined 27%; equity increased 16% from year-end 2010.
Outlook, Commentary, Risks and Unusual Items
Management stated that operating cash flow over the next twelve months is expected to be adequate to fund operations and capital expenditures. The company reported compliance with its revolving-credit covenants and no limitation on access to its revolving facility. No specific revenue, earnings or EBITDA guidance was provided.
- The HRE Trust Fund restrictions were lifted in August 2011. The company received $45.4 million, including $26.1 million designated for Arlington Park purses; $19.3 million was recognized as miscellaneous income.
- Harlow’s was temporarily closed for 25 days because of Mississippi River flooding. The company recorded $8.4 million of property damage and $1.1 million of repair expenditures, with an insurance recovery receivable and $3.5 million of partial insurance proceeds.
- A June tornado damaged Churchill Downs and caused one canceled racing day. The company received $1.0 million of partial insurance proceeds and recorded $0.6 million of recoveries in excess of losses during Q3.
- The company received $5.1 million in October 2011 on the Hoosier Park note and $3.4 million in contingent consideration, with the latter expected to be recognized in discontinued operations in Q4 2011.
- Major risks include weak consumer spending and racing handle, gaming and racing competition, regulatory and licensing changes, online security and wagering-law developments, natural disasters and insurance recoveries, litigation, horsemen agreements and interest-rate exposure. A one-percentage-point increase in LIBOR would reduce annual pretax earnings by approximately $1.6 million, assuming debt remains constant.
- Pending litigation includes the Hialeah Race Course lawsuit, which seeks unspecified damages, and litigation by Balmoral, Maywood and the Illinois Harness Horsemen’s Association alleging contract breaches and trade-secret violations, with claimed damages of at least $3.6 million or alternatively $0.8 million. The preliminary injunction in the latter matter was denied.
Investor Verification Checklist
- Separate recurring operating performance from the $19.3 million HRE Trust Fund income, insurance recoveries and other unusual items.
- Assess the contribution and ongoing profitability of Harlow’s and the full-period impact of Youbet and United Tote.
- Reconcile reported long-term debt, revolving-facility borrowings, cash, restricted cash and available borrowing capacity.
- Monitor racing-handle declines, gaming competition, regulatory developments and the effect of future purse funding.
- Review the status and potential exposure of the Hialeah and Illinois wagering litigation.
- Confirm the Q4 2011 recognition of the $3.4 million Hoosier Park contingent-consideration gain.
- Consider seasonality when extrapolating third-quarter or nine-month results to the full year.