Churchill Downs Incorporated — Q3 2021 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2021. Churchill Downs operates through Live and Historical Racing, TwinSpires, and Gaming segments, with Arlington, United Tote, and corporate activities reported in All Other. Prior-period segment results were reclassified to conform to the 2021 presentation.
Results benefited from reopening and capacity normalization after COVID-19 disruptions in 2020, as well as contributions from Oak Grove’s historical racing machine facility and Newport Racing & Gaming. The 2021 Kentucky Oaks and Derby occurred in the second quarter with capacity restrictions, while the 2020 events occurred in the third quarter without spectators.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $393.0 million | $337.8 million | $1,232.4 million | $775.8 million |
| Operating income | $67.6 million | $49.5 million | $249.7 million | $37.5 million |
| Operating margin | 17% | 15% | 20% | 5% |
| Net income attributable to Churchill Downs | $61.4 million | $43.2 million | $205.8 million | $(99.0) million |
| Diluted earnings per share | $1.57 | $1.08 | $5.23 | $(2.50) |
| Adjusted EBITDA | $156.1 million | $121.9 million | $500.0 million | $207.3 million |
- Segment revenue: Q3 Live and Historical Racing was $79.7 million, TwinSpires was $101.8 million, Gaming was $185.3 million, and All Other was $26.2 million.
- Segment Adjusted EBITDA: Q3 Gaming generated $110.7 million, Live and Historical Racing $27.7 million, and TwinSpires $20.7 million. TwinSpires declined from $32.6 million in the prior-year quarter because of lower horse-racing revenue and higher Sports and Casino marketing costs.
- Equity investments: Equity in income of unconsolidated affiliates increased to $41.7 million in Q3 and $103.0 million for the nine months, compared with $27.6 million and $13.2 million, respectively, in the prior-year periods.
- Cash flow: Nine-month operating cash flow was $391.0 million, versus $138.6 million in 2020. Investing cash outflow was $55.2 million, including $52.1 million of capital expenditures. Financing cash flow was $53.5 million.
- Liquidity: Cash and cash equivalents were $315.7 million at September 30, 2021, compared with $67.4 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $386.3 million.
- Debt: Total debt was $1,983.5 million, or $1,962.0 million net of issuance costs, compared with $1,637.7 million and $1,618.3 million, respectively, at year-end 2020. The company had no Revolver balance at September 30, 2021.
- Capital allocation: The company repurchased approximately $243.9 million of common stock during the first nine months, including a $193.9 million privately negotiated repurchase of 1.0 million shares from an affiliate of The Duchossois Group. A new $500.0 million repurchase authorization replaced and incorporated the remaining prior authorization; approximately $499.2 million remained available at September 30.
Material changes versus the prior comparable period
- Q3 revenue increased $55.2 million, led by a $51.8 million increase in Gaming and a $15.9 million increase in Live and Historical Racing, partially offset by a $25.3 million decline in TwinSpires.
- Nine-month revenue increased $456.6 million, primarily because 2020 included temporary property closures and because of growth at Oak Grove, Newport, Derby City Gaming, and the company’s Gaming properties.
- Q3 operating income increased $18.1 million, while nine-month operating income increased $212.2 million. The nine-month comparison benefited from the absence of the $17.5 million 2020 impairment charge, partially offset by an $11.2 million non-cash impairment charge recorded in 2021 for certain Churchill Downs Racetrack assets.
- Nine-month net income attributable to Churchill Downs improved by $304.8 million. The prior-year period included a $96.1 million after-tax loss from discontinued operations related primarily to the Big Fish Games litigation settlement.
- Marketing and advertising expense increased $28.3 million for the nine months, largely due to TwinSpires expansion and promotional activity. TwinSpires nine-month Adjusted EBITDA declined $21.0 million despite revenue growth.
- Debt increased primarily from the March 2021 issuance of $300.0 million of Term Loan B-1 commitments and $200.0 million of additional 4.75% Senior Notes due 2028. Proceeds were used partly to repay the Revolver and for general corporate purposes.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide explicit quantitative earnings or revenue guidance. Management stated that operating cash flows over the next twelve months are expected to be adequate to fund operations and capital expenditures.
- Arlington sale: The company agreed to sell its 326-acre Arlington Property to the Chicago Bears for $197.2 million, subject to closing conditions. Closing was anticipated in late 2022 or early 2023. Assets totaling $81.5 million were classified as held for sale.
- Hurricane Ida: Damage to Fair Grounds and related off-track betting facilities resulted in a $3.1 million reduction to property and equipment and $2.2 million of operating expenses, offset by a $5.3 million insurance recovery receivable. The company did not expect losses to exceed applicable insurance recoveries, but the claim remained under review.
- COVID-19: The company continued to identify pandemic duration, variants, operating restrictions, consumer demand, and economic effects as material uncertainties.
- Regulatory and legal exposure: Operations are subject to extensive gaming, racing, sports betting, environmental, anti-money-laundering, and other regulations. The company disclosed ongoing litigation involving historical racing machines, Louisiana horsemen’s purses, and other matters, while stating that it does not expect ordinary litigation exposure in excess of accrued amounts to be material.
- Debt and interest-rate risk: Approximately $683.5 million was outstanding under variable-rate credit facilities at September 30, 2021. A one-percentage-point increase in variable rates was estimated to reduce net income and operating cash flow by $4.9 million.
- Covenants: The company reported compliance with applicable debt covenants. The credit agreement requires a minimum interest coverage ratio of 2.5 to 1.0 and a maximum consolidated secured net leverage ratio of 4.0 to 1.0; reported ratios were 6.3 to 1.0 and 1.0 to 1.0, respectively.
- Dividend: Subsequent to quarter-end, the board declared an annual cash dividend of $0.667 per share, payable January 7, 2022.
Most important facts for investors to verify
- Whether Gaming’s post-reopening gains and equity-investment distributions are sustainable after favorable comparisons with COVID-affected 2020 periods.
- Whether TwinSpires Sports and Casino expansion can achieve profitability as marketing and promotional spending remains elevated.
- The timing and conditions for the $197.2 million Arlington Property sale and the use of proceeds.
- Debt maturity, refinancing, and variable-rate exposure, including the 2024 Term Loan B and 2027 and 2028 Senior Notes.
- The final insurance recovery for Hurricane Ida losses and any additional operational impact from remaining facility closures.
- Regulatory developments affecting historical racing machines, sports betting, casino operations, and racing licenses.
- The effect of share repurchases and the new repurchase authorization on leverage, liquidity, and future per-share results.