Churchill Downs Incorporated: Q2 2023 Form 10-Q Summary
Business context and reporting period
Churchill Downs Incorporated operates through Live and Historical Racing, TwinSpires, and Gaming segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Results include the acquired Peninsula Pacific Entertainment properties for the first full comparable period in 2023. All share and per-share amounts reflect the two-for-one stock split effective May 22, 2023.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $768.5 million | $582.5 million | $1,328.0 million | $946.6 million |
| Operating income | $225.6 million | $199.7 million | $345.5 million | $247.1 million |
| Operating margin | 29% | 34% | 26% | 26% |
| Net income | $143.0 million | $339.3 million | $298.7 million | $381.4 million |
| Diluted EPS | $1.86 | $4.39 | $3.90 | $4.92 |
| Adjusted EBITDA | $363.7 million | $291.2 million | $586.6 million | $419.7 million |
| Cash flow from operations | Not separately provided | Not separately provided | $402.6 million | $380.8 million |
Q2 revenue increased 32%, while six-month revenue increased 40%. Q2 Adjusted EBITDA increased 25% and six-month Adjusted EBITDA increased 40%. Net income and EPS declined primarily because 2022 included a $274.6 million gain on the sale of assets, including the Calder property. Management stated that, excluding major nonrecurring items and higher interest expense, underlying net income increased $21.8 million in Q2 and $50.4 million for the six-month period.
Segment performance
- Live and Historical Racing: Q2 revenue rose to $385.0 million from $260.9 million and Adjusted EBITDA increased to $223.5 million from $163.9 million. Growth reflected the Virginia properties acquired from P2E, a record Derby Week, Ellis Park and Chasers, and the opening of Turfway Park.
- TwinSpires: Q2 revenue was $137.4 million versus $136.8 million, while Adjusted EBITDA was unchanged at $33.9 million. Six-month revenue declined to $232.2 million from $237.1 million, primarily due to the exit from the direct online Sports and Casino business.
- Gaming: Q2 revenue increased to $245.9 million from $184.3 million and Adjusted EBITDA rose to $123.4 million from $106.8 million, primarily from the P2E properties in New York and Iowa. Six-month Adjusted EBITDA increased to $252.9 million from $197.9 million.
Liquidity, cash flow, debt, and capital spending
- Cash and cash equivalents were $374.0 million at June 30, 2023, compared with $129.8 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $441.1 million.
- Operating cash flow was $402.6 million for the first six months, up $21.8 million year over year. Investing cash flow was negative $119.0 million, reflecting $312.4 million of capital expenditures and $195.7 million of asset-sale proceeds. Financing cash flow was negative $47.7 million.
- Total debt was $4.661 billion at June 30, 2023, compared with $4.639 billion at year-end 2022. Net debt, after current maturities and issuance costs, was $4.551 billion. Interest expense increased to $65.2 million in Q2 and $129.9 million for the first six months.
- The company had no Revolver balance at quarter-end and retained a $1.2 billion revolving commitment. Variable-rate debt was approximately $1.6 billion; management estimated that a one-percentage-point increase in SOFR would reduce annual net income and operating cash flow by approximately $11.3 million.
- Management expects approximately $575 million to $675 million of project capital investment for 2023, including the Churchill Downs Paddock Project, Derby City Gaming Downtown, projects in Kentucky, Indiana, New Hampshire, and Virginia.
Material changes, unusual items, and outlook
- On February 15, 2023, the company sold the Arlington property for $197.2 million, receiving $195.7 million of net proceeds and recognizing a $114.0 million gain. Proceeds were used in part to reduce Revolver borrowings.
- On April 25, 2023, the company issued $600.0 million of 6.750% senior unsecured notes due 2031. Proceeds were used partly to repay the Term Loan B due 2024 and for general corporate purposes. The company also increased its Term Loan A due 2027 by $500.0 million earlier in the year.
- The company recorded a $24.5 million non-cash impairment charge in Q2 for Presque Isle gaming rights and trademark assets. Management cited increased competition, inflationary pressures, and weaker performance and outlook. No impairment was recognized for Presque Isle goodwill.
- The Lady Luck Casino Nemacolin management agreement expired on June 26, 2023 and was not renewed; substantially all related assets were sold for an immaterial amount.
- Kentucky legislation authorized regulated sports betting through licensed racetracks and approved providers. Retail sports betting was scheduled to begin September 7, 2023, with online sports betting scheduled for September 28, 2023.
- The company expected the sale of 49% of United Tote to close during 2023, subject to customary conditions and regulatory approvals. It also expected the $250.0 million Exacta Systems acquisition to close during 2023, subject to customary adjustments and conditions.
- Principal risks include discretionary consumer spending, inflation, competition, regulatory changes, interest-rate increases, cybersecurity and technology failures, labor issues, execution of acquisitions and development projects, debt covenants, and litigation. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the acquired P2E properties and planned developments sustain the reported revenue and Adjusted EBITDA growth after integration and ramp-up effects.
- The pace and total cost of the $575 million to $675 million 2023 project-capital program, including potential delays or overruns.
- Debt reduction capacity and sensitivity to higher SOFR rates, given approximately $4.661 billion of total debt and increased interest expense.
- Presque Isle operating trends and whether additional impairment testing or charges could be required.
- Final terms and closing status of the United Tote and Exacta transactions.
- Execution and financial contribution of Kentucky retail and online sports betting following the scheduled 2023 launches.
- Reconciliation of Adjusted EBITDA to GAAP results, as Adjusted EBITDA excludes impairments, gains on asset sales, stock compensation, transaction costs, and other items and may not be comparable with similarly named measures used by other companies.