Business Context and Reporting Period
Churchill Downs Incorporated’s unaudited Form 10-Q covers the three months ended March 31, 2020. The company operates racing, online wagering and gaming businesses through its Churchill Downs, Online Wagering, Gaming and All Other segments. Results were materially affected by COVID-19-related property closures and the rescheduling of the Kentucky Oaks and Kentucky Derby from May to September 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $252.9 million | $265.4 million | Down $12.5 million |
| Operating income | $(11.6) million | $28.0 million | Down $39.6 million |
| Operating margin | (5)% | 11% | Down 16 percentage points |
| Net income from continuing operations | $(22.6) million | $11.9 million | Down $34.5 million |
| Net loss attributable to CDI | $(23.4) million | $11.6 million | Down $35.0 million |
| Diluted EPS | $(0.59) | $0.29 | Down $0.88 |
| Adjusted EBITDA | $55.3 million | $74.6 million | Down $19.3 million |
| Operating cash flow | $43.5 million | $70.3 million | Down $26.8 million |
Revenue by segment was $23.5 million for Churchill Downs, $67.3 million for Online Wagering, $147.6 million for Gaming and $14.5 million for All Other. Segment Adjusted EBITDA was $1.9 million, $15.0 million, $49.0 million and $(10.6) million, respectively.
At March 31, 2020, cash and cash equivalents were $700.9 million, restricted cash was $43.6 million and total current assets were $843.0 million. Gross debt was $2.179 billion, consisting principally of the $688.4 million Revolver, $391.0 million Term Loan B, $600.0 million of 2027 Senior Notes and $500.0 million of 2028 Senior Notes. Total shareholders’ equity was $435.6 million.
Cash used in investing activities was $48.3 million, including $9.0 million of maintenance capital expenditures and $39.3 million of project expenditures. Cash provided by financing activities was $606.8 million, primarily reflecting the $675.4 million Revolver draw. Capital expenditures totaled $48.3 million, compared with $28.1 million in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Gaming revenue decreased $21.2 million, and Gaming Adjusted EBITDA decreased $15.8 million, primarily because all wholly owned gaming properties were temporarily closed in March.
- Online Wagering revenue increased $4.2 million. TwinSpires handle increased 8.3% and active players increased 11.6%, although revenue per active player declined 3.5%. Sports betting was negatively affected by cancellation of sporting events.
- Churchill Downs revenue increased $2.5 million, primarily from Derby City Gaming growth, before its temporary closure.
- Operating expenses increased $27.1 million to $264.5 million. The change included a $17.5 million non-cash impairment charge, $3.8 million of provisional COVID-19 wage and benefit continuation costs, higher personnel costs and increased online wagering marketing expenses.
- The company recorded $17.5 million of impairment charges for Presque Isle gaming rights and its trademark. No Presque Isle goodwill impairment was recognized.
- Interest expense increased $5.6 million to $19.3 million, primarily because of higher debt balances. Equity in losses of unconsolidated affiliates was $3.3 million versus equity income of $4.1 million in Q1 2019.
- Operating cash flow declined despite non-cash impairment and depreciation adjustments. Investing cash outflows were substantially lower than in Q1 2019 because the prior period included the Midwest Gaming investment and Presque Isle acquisition.
Guidance, Outlook, Commentary and Risks
- Management did not provide quantitative full-year earnings guidance in the filing. It stated that second-quarter 2020 results would be materially affected by property closures, suspended racing operations, continued closure of equity-investment casinos and the Derby and Oaks postponement.
- The company could not determine when properties would reopen or the conditions for reopening. It furloughed employees at certain properties, continued specified benefits for furloughed employees and reduced salaries for remaining non-furloughed salaried employees.
- Planned 2020 maintenance and project capital expenditures were reduced to preserve financial flexibility. Management believed available cash would fund operations, financial commitments and key growth projects for at least the next twelve months based on its then-current projections.
- On April 28, 2020, after quarter-end, the company amended its Credit Agreement to suspend the existing secured leverage and interest coverage covenants during a relief period extending through delivery of the compliance certificate for the quarter ending June 30, 2021, subject to exceptions. A minimum liquidity covenant of $150.0 million applies during the relief period, along with restrictions on certain restricted payments.
- The filing identifies COVID-19 duration, consumer demand, reopening restrictions, liquidity, debt covenant compliance, discretionary spending, regulatory requirements, cyberattacks, third-party platform disruptions, legal proceedings and gaming and racing competition as material risks.
- SBTech, a third-party sports betting and iGaming provider, temporarily disabled BetAmerica websites after a March 2020 cyberattack. The company stated that SBTech had no reason to believe customer data was accessed or exfiltrated and that the websites returned to normal operations on April 17, 2020.
- The Louisiana horsemen’s purse settlement remained subject to court approval, legislation and potential opt-out claims. The filing states that the related expected out-of-pocket payment was within the amount accrued.
Important Facts for Investors to Verify
- Actual timing and conditions of reopening, customer return rates and the duration of COVID-19 effects on casinos, racing and wagering.
- Whether operating cash flow and the $700.9 million cash balance are sufficient under prolonged closures, including compliance with the $150.0 million minimum liquidity covenant.
- Revolver utilization, interest-rate exposure and the effect of the higher $2.179 billion gross debt balance on future interest expense and leverage.
- Whether the rescheduled Kentucky Oaks and Derby occur as planned and the resulting effect on second- and third-quarter revenue and cash flow.
- Performance and valuation of Presque Isle and other gaming assets following the $17.5 million impairment.
- Progress and final disposition of the Louisiana horsemen’s settlement and Big Fish-related litigation indemnification obligations.
- Further cyber or third-party platform disruptions affecting BetAmerica and other online wagering operations.