Churchill Downs Incorporated — Q3 2012 Form 10-Q Summary
Business Context and Reporting Period
Churchill Downs Incorporated operates racing, casino gaming, online wagering and related businesses across four segments: Racing Operations, Gaming, Online Business and Other Investments. The filing covers the unaudited three and nine months ended September 30, 2012. Results are seasonal and materially affected by the racing calendar, including Kentucky Derby and Oaks week. The company conducted 112 live racing days in the third quarter versus 111 in the prior-year quarter, and 290 days year to date versus 278.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $164.9 million | $166.3 million | $573.9 million | $547.6 million |
| Operating income | $7.8 million | $10.1 million | $93.7 million | $74.7 million |
| Operating margin | 5% | 6% | 16% | 14% |
| Earnings from continuing operations | $6.0 million | $19.7 million | $55.9 million | $56.5 million |
| Diluted EPS from continuing operations | $0.34 | $1.16 | $3.20 | $3.34 |
| Total EBITDA | $21.3 million | $43.0 million | $133.9 million | $139.2 million |
| Net cash from operating activities | Not separately presented | Not separately presented | $102.1 million | $131.4 million |
Q3 revenue declined 1%, while nine-month revenue increased 5%. Nine-month revenue growth was led by Online Business revenue, up 14% to $142.3 million, and Racing Operations revenue, up 3% to $253.5 million. Gaming revenue was essentially flat at $160.2 million.
Q3 revenue declines reflected lower Racing Operations revenue of $3.9 million and Gaming revenue of $2.4 million, partially offset by a $3.6 million increase in Online Business revenue. Online pari-mutuel handle increased 11% in the quarter and 13% year to date. Total company pari-mutuel handle increased 3% year to date but declined 2% in the quarter.
Q3 operating income declined 23% and EBITDA declined 51%, primarily because the prior-year quarter included approximately $19.3 million of income related to the release of restrictions on Illinois Horse Racing Equity Trust Fund proceeds. Nine-month EBITDA declined 4%, despite higher revenue, largely because of the same prior-year benefit and higher corporate and Online Business costs.
As of September 30, 2012, cash and cash equivalents were $30.0 million, restricted cash was $45.0 million, total assets were $939.2 million, total liabilities were $284.8 million and shareholders’ equity was $654.4 million. Long-term debt was $70.0 million, down from $127.6 million at December 31, 2011.
Nine-month capital expenditures were $25.5 million, including $13.2 million of maintenance capital expenditures. Reported free cash flow, defined by the company as operating cash flow less maintenance capital expenditures, was $88.9 million versus $119.6 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Online Business revenue increased 14% year to date, supported by a 13% increase in handle and customer growth.
- Racing Operations revenue increased 3% year to date, benefiting from 12 additional live racing days and strong Kentucky Oaks and Derby week performance.
- Calder Casino revenue declined $3.7 million year to date because of increased regional competition from a new Miami casino.
- Harlow’s Casino revenue increased $3.3 million year to date because Harlow’s was closed for 25 days during the prior-year period following Mississippi River flooding.
- Gaming EBITDA increased $8.4 million year to date, including $6.5 million of net insurance recoveries related to prior Harlow’s losses.
- Racing EBITDA declined $12.0 million year to date, primarily because of the prior-year Illinois trust fund benefit and other prior-year favorable items.
- Interest expense decreased to $3.1 million from $7.5 million year to date, reflecting lower average debt balances and the absence of certain prior-year costs.
- The company acquired Bluff Media for $6.7 million in cash plus estimated contingent consideration of $2.3 million and invested $6.5 million in the Miami Valley Gaming & Racing joint venture.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flow is expected to be adequate to fund operations and capital expenditures over the next twelve months. The company had $298 million of available borrowing capacity under its revolving credit facilities at September 30, 2012, was in compliance with debt covenants and subsequently financed the $141.0 million Riverwalk Casino & Hotel acquisition with borrowings under its amended credit facility.
The company launched Luckity in October 2012 and completed the Riverwalk acquisition on October 23, 2012. Riverwalk adds a casino, hotel, event center and dining facilities in Vicksburg, Mississippi; its post-acquisition financial contribution is not included in the reported third-quarter results.
Unusual and nonrecurring items included $6.5 million of net insurance recoveries year to date related to Harlow’s storm and flood losses, $0.8 million of Florida gaming recoveries, costs associated with Luckity and exchange wagering development, a $0.3 million data-security incident at TwinSpires, and a $0.4 million customer-account credit related to incorrect prior-year wagering payoffs. The company also received a $0.6 million partial insurance payment for the Kentucky hailstorm and had not recorded a material impairment as of September 30.
Key risks include racing and gaming competition, consumer discretionary spending, changes in wagering and gaming laws, license and regulatory risks, horsemen’s agreements, online security, natural disasters and insurance recoveries, acquisition integration, pending litigation and volatility in gaming and online wagering markets. A 1-percentage-point increase in LIBOR would reduce annual pretax earnings by approximately $0.7 million, assuming constant variable-rate debt.
Material legal matters include disputes involving Kentucky Downs ownership rights, the company’s challenge to Texas restrictions on online pari-mutuel wagering, the Balmoral and Maywood litigation concerning TwinSpires and a co-branding agreement, and remaining Illinois Horse Racing Equity Trust Fund-related proceedings. Management does not expect the disclosed proceedings to have a material adverse effect, although several matters remain unresolved.
Important Facts for Investors to Verify
- Verify the impact of the October 2012 Riverwalk acquisition, including incremental revenue, EBITDA, debt and covenant effects.
- Separate recurring operating performance from the $6.5 million of year-to-date insurance recoveries and other unusual items.
- Assess whether Online Business growth and TwinSpires handle gains offset competitive pressure at Calder Casino and other gaming properties.
- Review the reduction in operating cash flow and free cash flow, including working-capital effects, taxes and prior-year Illinois trust fund proceeds.
- Monitor debt incurred for Riverwalk and the company’s remaining borrowing capacity and interest-rate exposure.
- Track regulatory developments involving online wagering, Illinois gaming, Kentucky historical racing machines, horse-racing medication rules and Texas wagering restrictions.
- Review the status and potential exposure of the Kentucky Downs, Balmoral/Maywood and other pending legal matters.
- Consider the seasonality of racing operations when annualizing third-quarter results.