Churchill Downs Inc quarterly report, Q2 FY2013

Churchill Downs Incorporated — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Results are seasonal, with a substantial portion of racing revenue generated during the second quarter around the Kentucky Oaks and Kentucky Derby.

Business Context

Churchill Downs operates racing, casino gaming, online wagering and related investments. Its principal segments are Racing Operations, Gaming, Online Business and Other Investments. The October 2012 acquisition of Riverwalk Casino Hotel materially expanded the Gaming segment.

Key Financial Metrics

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Net revenues	$283.8 million	$270.8 million	$431.8 million	$409.0 million
Operating income	$82.1 million	$82.2 million	$85.1 million	$85.9 million
Operating margin	29%	30%	20%	21%
Earnings from continuing operations	$50.3 million	$48.6 million	$51.4 million	$49.9 million
Net earnings	$50.3 million	$48.6 million	$51.4 million	$49.9 million
Diluted EPS	$2.81	$2.77	$2.87	$2.86
Adjusted EBITDA	$103.9 million	$95.0 million	$125.0 million	$114.0 million

Adjusted EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation and amortization, insurance recoveries, HRE Trust Fund proceeds, share-based compensation and pre-opening costs.

Revenue by Segment

Racing Operations: $157.4 million in the second quarter, down 2%; $185.2 million for six months, down 3%.
Gaming: $66.9 million in the second quarter, up 30%; $139.0 million for six months, up 26%. Riverwalk contributed $14.1 million and $28.2 million, respectively.
Online Business: $52.5 million in the second quarter, essentially flat; $95.4 million for six months, down 1%.
Other: $7.0 million in the second quarter, up 11%; $12.2 million for six months, up 12%.

Cash Flow, Capital Spending and Liquidity

Operating cash flow was $100.3 million for the six months ended June 30, 2013, compared with $96.1 million in the prior-year period.
Capital expenditures were $23.8 million, compared with $16.5 million. Free cash flow, as defined by the company, was $91.1 million versus $85.8 million.
Investing cash outflow was $42.5 million, including $23.8 million of capital expenditures, a $12.5 million contribution to the Miami Valley Gaming joint venture and a $2.3 million gaming-license acquisition.
Cash and cash equivalents were $38.9 million at June 30, 2013; restricted cash was $44.1 million.
The company reported $340 million of available borrowing capacity under its revolving credit facility.

Debt and Balance Sheet

Total assets were $1.129 billion, compared with $1.114 billion at December 31, 2012.
Total liabilities were $420.2 million, down from $470.0 million, primarily reflecting repayment of acquisition-related debt and reductions in deferred revenue and accrued expenses.
Long-term debt was $153.5 million at June 30, 2013; there were no current maturities reported.
On May 17, 2013, the revolving credit facility was amended and expanded from $375 million to $500 million, with an accordion feature of up to an additional $225 million. The facility matures May 17, 2018.
The company was in compliance with its financial covenants at June 30, 2013. Substantially all assets remain pledged as collateral.

Material Changes Versus the Prior Comparable Period

Consolidated revenue increased 5% in the second quarter and 6% for the first six months, driven primarily by the Riverwalk acquisition.
Operating income was flat in the second quarter and declined 1% for six months. Comparability was adversely affected by the absence of $5.0 million of second-quarter 2012 insurance recoveries and $6.5 million of prior-year insurance recoveries for the six-month period.
Net earnings increased 4% in the second quarter and 3% for six months, while diluted EPS increased to $2.81 and $2.87, respectively.
Racing Operations were pressured by the loss of Florida hosting revenue at Calder, fewer Arlington host days, adverse weather and fewer Fair Grounds turf races. These factors offset strong Kentucky Oaks and Derby week performance.
Online results were affected by the lapse of Illinois legislation. TwinSpires stopped accepting Illinois wagers on January 18, 2013 and resumed on June 7, 2013. Illinois online handle declined 78% for the six-month period.
Adjusted EBITDA increased 9% in the second quarter and 10% for six months, reflecting Riverwalk growth and improved Kentucky Oaks and Derby week profitability.
Share-based compensation expense increased to $9.6 million for six months, compared with $7.9 million in the prior-year period. Pre-opening costs related to Miami Valley Gaming were $0.7 million.

Outlook, Risks and Unusual Items

The company stated that operating cash flow over the following twelve months was expected to be adequate to fund operations and capital expenditures.
On July 17, 2013, after quarter-end, the company acquired Oxford Casino in Maine for approximately $160 million, subject to a working-capital adjustment. The acquisition was financed with revolver borrowings.
Miami Valley Gaming was expected to open in December 2013. The company expected to fund approximately $91.3 million of future 2013 capital contributions and related obligations for the joint venture.
Arlington received $7.9 million in July 2013 from Illinois HRE Trust Fund proceeds; $4.3 million was expected to be recognized as miscellaneous income and $3.6 million designated for purses in the third quarter.
Calder and Gulfstream Park began overlapping live racing dates in July 2013, creating potential competition for horses, wagering and simulcast activity. Management could not quantify the ultimate impact.
Key risks include gaming and racing competition, changes in wagering and gaming laws, licensing requirements, regulatory developments, consumer discretionary spending, interest-rate exposure, acquisition integration, litigation, horsemen’s agreements and online security risks.
Pending matters include disputes involving Illinois tax apportionment, Kentucky Downs ownership rights, Texas pari-mutuel wagering, and Illinois racetrack and horsemen’s claims. The company did not believe these matters would have a material adverse effect, but certain outcomes and potential losses were not clearly quantifiable.
A one-percentage-point increase in LIBOR, assuming constant variable-rate debt, would reduce annual earnings and operating cash flow by approximately $0.9 million.
The board authorized a $100 million stock repurchase program through December 31, 2015. No shares were repurchased under the program during the six months ended June 30, 2013; 42,877 shares were withheld during the second quarter to satisfy employee tax obligations.

Investor Verification Checklist

Verify the purchase accounting, financing, leverage and operating contribution of the post-quarter-end Oxford Casino acquisition.
Monitor Calder’s results and the regulatory outcome surrounding overlapping Florida race dates and host-track rights.
Assess the sustainability of Riverwalk’s contribution to Gaming revenue and Adjusted EBITDA, including integration and competitive trends.
Track the opening, funding requirements and operating performance of Miami Valley Gaming.
Reconcile Adjusted EBITDA and free cash flow to GAAP measures and evaluate the effect of insurance recoveries, HRE Trust Fund proceeds and share-based compensation.
Review the status and potential financial exposure of the Illinois, Kentucky Downs, Texas and Illinois racetrack litigation matters.
Evaluate variable-rate debt exposure, covenant headroom and borrowing capacity following the Oxford acquisition.
Confirm the continuation of Illinois online wagering authorization and its effect on TwinSpires handle and revenue.