NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 11 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Revenue Recognition
Racing
Racing revenueLeases
We determine if an arrangement is generated by pari-mutuel wagering transactions with customersa lease at inception. Operating leases are included in property and equipment, net; accrued expense; and other liabilities on liveour condensed consolidated balance sheets. We generally do not separate lease and simulcast racing content as well as simulcast host fees earned from other wagering sites. Additionally, we generate revenue through sponsorships, admissions (including luxury suites), personal seat licenses ("PSLs"), television rights, concessions, programsnon-lease components for our lease contracts. We do not apply the ROUA and parking.leases liability recognition requirements to short-term leases.
Our Racing revenueOperating lease ROUAs and incomelease liabilities are influenced by our racing calendar. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby.
For live races we present at our racetracks, we recognize revenue on wagers we accept from customers at our racetrack ("on-track revenue") and revenue we earn from exporting our live racing signals to other race tracks, off-track betting facilities ("OTBs"), and advance deposit wagering providers ("export revenue"). For simulcast races we display at our racetracks, OTBs, and TwinSpires, we recognize revenue we earn from providing a wagering service to our customers on these imported live races ("import revenue"). Each wagering contract for on-track revenue and import revenue contains a single performance obligation and our export revenue contracts contain a series of distinct services that form a single performance obligation. The transaction price for on-track revenue and import revenue is fixedrecognized based on the established commissionpresent value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we are entitled to retain. The transaction price for export revenue is variableuse our incremental borrowing rate based on the simulcast host fee we charge our customers for exporting our signal. Our export revenue contracts generally have a duration of one year or less. These arrangements are licenses of intellectual property containing a usage based royalty. As a result, we have elected to use the practical expedient to omit disclosure related to remaining performance obligations for our export revenue contracts. We recognize on-track revenue, export revenue, and import revenue once the live race event is made official by the relevant racing regulatory body.
We evaluate our on-track revenue, export revenue, and import revenue contracts in order to determine whether we are acting as the principal or as the agent when providing services, which we considerinformation available at commencement date in determining if revenue should be reported grossthe present value of future lease payments. The operating lease ROUAs also include any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred. Our lease terms include all non-cancelable periods and may include options to extend or net. An entityterminate the lease when it is a principal if it controls the specified service beforereasonably certain that service is transferred to a customer.
The revenue we recognizewill exercise that option. Lease expense for on-track revenue and import revenue is the commission we are entitled to retain for providing a wagering service to our customers. For these arrangements, we are the principal as we control the wagering service; therefore, any charges, including simulcast fees, we incur for delivering the wagering service are presented as operating expenses.
For export revenue, our customer is the third party wagering site such as a race track, OTB, or advance deposit wagering provider. Therefore, the revenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third party wagering site.
Our admission contracts are either for a single live racing event day or multiple days. Our PSLs, sponsorships, and television rights contracts generally relate to multiple live racing event days. Multiple day admission, PSLs, sponsorships, and television rights contracts contain a distinct series of services that form single performance obligations. Sponsorships contracts generally include performance obligations related to admissions and advertising rights at our racetracks. Television rights contracts contain a performance obligation related to the rights to distribute certain live racing events on media platforms. The transaction prices for our admissions, PSLs, sponsorships, and television rights contracts are fixed. We allocate the transaction price to our sponsorship contract performance obligations based on the estimated relative standalone selling price of each distinct service.
The revenue we recognize for admissions to a live racing event dayminimum lease payments is recognized once the related event is complete. For admissions, PSLs, sponsorships, and television rights contracts that relate to multiple live racing event days, we recognize revenue over time using an output method of each completed live racing event day as our measure of progress. Each completed live racing event day corresponds with the transfer of the relevant service to a customer and therefore is considered a faithful depiction of our efforts to satisfy the promises in these contracts. This output method results in measuring the value transferred to date to the customer relative to the remaining services promised under the contracts. Certain premium live racing event days such as the Kentucky Derby and Oaks result in a higher value of revenue allocated relative to other live racing event days due to, among other things, the quality of thoroughbreds racing, higher levels of on-track attendance, national broadcast audience, local and national media coverage, and overall entertainment value of the event.
Timing of revenue recognition may differ from the timing of invoicing to customers for our long-term contracts in our Racing segment. We generally invoice customers prior to delivery of services for our admissions, PSLs, sponsorships, and television rights contracts. Accordingly, we recognize a receivable and a contract liability at the time we have an unconditional right to receive payment. When cash is received in advance of delivering services under our contracts, we defer revenue and recognize it in accordance with our policies for that type of contract. In situations where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
our invoicing terms is to allow our customers to secure the right to the specific services provided under our contracts, not to receive financing from our customers.
Concessions, programs, and parking revenue is recognized once the good or service is delivered.
TwinSpires
TwinSpires revenue is generated through pari-mutuel wagering transactions with customers on simulcast racing content through advance deposit wagering. Advance deposit wagering consists of patrons wagering through an advance deposit account.
Our TwinSpires revenue and income are influenced by racing calendars similar to our Racing segment. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year.
We recognize import revenue in our TwinSpires segment consistent with our policy described in Racing.
We may provide cash incentives in conjunction with wagering transactions we accept from customers. These cash incentives represent consideration payable to a customer and therefore are treated as a reduction of the transaction price for the wagering transaction.
Casino
Casino revenue primarily consists of gaming wager transactions. Other operating revenue, such as food and beverage or hotel revenue, is recognized once delivery of the product or service has occurred.
The transaction price for gaming wager transactions is the difference between gaming wins and losses. The majority of our casinos offer loyalty programs that enable customers to earn loyalty points based on their gaming play. Gaming wager transactions involve two performance obligations for those customers earning loyalty points under the Company’s loyalty programs and a single performance obligation for customers who do not participate in the program. Loyalty points are primarily redeemable for free gaming activities and food and beverage. For purposes of allocating the transaction price in a wagering transaction between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a loyalty point that can be redeemed for gaming activities or food and beverage. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers settle. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a gaming wagering transaction or food and beverage and such goods or services are delivered to the customer.
Casino and Pari-mutuel Taxes
We recognize casino and pari-mutuel tax expense based on the statutory requirements of the federal, state, and local jurisdictions in which we conduct business. All of our casino taxes and the majority of our pari-mutuel taxes are gross receipts taxes levied on the gaming entity. We recognize these taxes as Racing, TwinSpires and Casino operating expenses in our consolidated statements of comprehensive income. In certain jurisdictions governing our Racing and TwinSpires pari-mutuel contracts with customers, there are specific pari-mutuel taxes that are assessed on winning wagers from our customers, which we collect and remit to the government. These taxes are presented on a net basis.
Restricted Cash and Account Wagering Deposit Liabilities
Amounts included in restricted cash represent amounts due to horsemen for purses, stakes and awards that are paid in accordance withstraight-line basis over the terms of our contractual agreements or statutory requirements. Restricted cash also includes deposits collected from our TwinSpires segment customers for account wagering that are paid when customers withdraw cash from their account.lease term.
4. REVENUE FROM CONTRACTS WITH CUSTOMERSACQUISITIONS
Performance Obligations
As of September 30, 2018, our Racing segment had remaining performance obligations with an aggregate transaction price of $183.6 million. The revenue we expect to recognize on these remaining performance obligations is $1.1 million for the remainder of 2018, $46.8 million in 2019, $35.7 million in 2020, and the remainder thereafter.
As of September 30, 2018, our remaining performance obligations in segments other than Racing were not material.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contract Assets and Contract Liabilities
As of January 1, 2018 and September 30, 2018, contract assets were not material.
As of January 1, 2018 and September 30, 2018, contract liabilities were $78.7 million and $37.5 million, respectively, which are included in current deferred revenue, non-current deferred revenue, and accrued expense in the accompanying condensed consolidated balance sheets. Contract liabilities primarily relate to our Racing segment and the decrease was primarily due to revenue recognized for fulfilled performance obligations. We recognized $1.2 million of revenue during the three months ended September 30, 2018 and $51.3 million of revenue during the nine months ended September 30, 2018 that was included in the contract liabilities balance at January 1, 2018.
Disaggregation of Revenue
To determine how we disaggregate our revenue from contracts with customers, we consider the information regularly reviewed by our chief operating decision maker for evaluating the financial performance of operating segments, disclosures presented in our earnings releases, and other similar information that is used by the Company and users of our financial statements to evaluate our financial performance. We believe that the disaggregation of our revenue included in Note 15, Segment Information, coupled with the disclosures included in Note 3, Significant Accounting Policies, reflects these considerations and depicts how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors.
5. DISCONTINUED OPERATIONSPresque Isle
On January 9, 2018,11, 2019, the Company completed the Big FishPresque Isle Transaction which hadfor a cash purchase price of $990.0 million. The Company received cash proceeds of $970.7$178.9 million which was net of $5.2and $1.6 million of working capital adjustments and $14.1 million of transaction costs.other purchase price adjustments. The Company derecognized the following upon the Big Fish Transaction:
|
| | | |
(in millions) | |
Cash and cash equivalents | $ | 0.3 |
|
Accounts receivable | 34.7 |
|
Game software development, net | 6.7 |
|
Other current assets | 17.0 |
|
Property and equipment, net | 17.8 |
|
Game software development, net | 13.8 |
|
Goodwill | 530.7 |
|
Other intangible assets, net | 238.4 |
|
Other assets | 24.0 |
|
Accounts payable | (8.5 | ) |
Accrued expense | (22.6 | ) |
Deferred revenue | (44.2 | ) |
Deferred income taxes | (52.0 | ) |
Other liabilities | (4.9 | ) |
Carrying value of Big Fish Games | $ | 751.2 |
|
The Company recognized a gain of $219.5 million upon the sale recorded in income from discontinued operations on the condensed consolidated statement of comprehensive income for the nine months ended September 30, 2018. The gain consisted of cash proceeds of $970.7 million offset by the carrying value of Big Fish Games of $751.2 million. The income tax provision on the gain was $51.2 million, resulting in an after tax gain of $168.3 million.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the financial results of Big Fish Games included in "(loss) income from discontinued operations, net of tax":
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net revenue | $ | — |
| | $ | 118.0 |
| | $ | 13.2 |
| | $ | 342.5 |
|
| | | | | | | |
Operating expenses | — |
| | 95.3 |
| | 8.4 |
| | 271.5 |
|
Selling, general and administrative expense | 0.7 |
| | 6.7 |
| | 5.6 |
| | 18.9 |
|
Research and development | — |
| | 9.8 |
| | 0.9 |
| | 30.0 |
|
Transaction expense, net | — |
| | 0.2 |
| | — |
| | 0.6 |
|
Total operating expense | 0.7 |
| | 112.0 |
| | 14.9 |
| | 321.0 |
|
Operating (loss) income | (0.7 | ) | | 6.0 |
| | (1.7 | ) | | 21.5 |
|
Other income (expense) | | | | | | | |
Gain on sale of Big Fish Games | — |
| | — |
| | 219.5 |
| | — |
|
Other expense | — |
| | (1.2 | ) | | (0.1 | ) | | (1.6 | ) |
Total other income (loss) | — |
| | (1.2 | ) | | 219.4 |
| | (1.6 | ) |
(Loss) income from discontinued operations before provision for income taxes | (0.7 | ) | | 4.8 |
| | 217.7 |
| | 19.9 |
|
Income tax provision | (1.0 | ) | | (1.2 | ) | | (51.6 | ) | | (5.6 | ) |
(Loss) income from discontinued operations, net of tax | $ | (1.7 | ) | | $ | 3.6 |
| | $ | 166.1 |
| | $ | 14.3 |
|
Stock-Based Compensation
For the nine months ended September 30, 2018, the Company recognized $3.4 million of stock-based compensation expense related to Big Fish Games, which included the impact of the accelerated vesting dates of restricted stock awards held by Big Fish Games' employees in conjunction with the Big Fish Transaction.
Earnout Liabilities
As of December 31, 2017, we had $34.2 million of deferred earnout consideration and $28.4 million of deferred payments due to the founder of Big Fish Games, both of which were paid on January 3, 2018.
6. ACQUISITIONS
Ocean Downs
On July 16, 2018, the Company announced its entry into the Liquidation Agreement for the Ocean Downs/Saratoga Transaction. As part of the Ocean Downs/Saratoga Transaction, SHRI has agreed to grant the Company and its affiliates exclusive rights to operate online real-money sports betting and real-money iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.
On August 31, 2018, the Company completed the Ocean Downs/Saratoga Transaction, which resulted in the Company owning 100% of the equity interests of Ocean Downs, and therefore consolidated Ocean Downs as of the acquisition date. Upon the closing of the Ocean Downs/Saratoga Transaction, the Company no longer has an equity interest or management involvement in Saratoga New York or Saratoga Colorado. Prior to the Ocean Downs/Saratoga Transaction, the Company held an effective 62.5% ownership interest in Ocean Downs, and a 25% ownership interest in Saratoga New York and Saratoga Colorado, all of which were accounted for under the equity method. The consideration transferred to SCH to acquire the remaining interest in Ocean Downs were the Company's equity investments in Saratoga New York and Saratoga Colorado, which had a fair value of $47.8 million at the acquisition date. Under the acquisition method, the fair values of the consideration transferred and the Company's equity method investment in Ocean Downs, which had a fair value of $80.5 million at the acquisition date, were allocated tofor the assets acquired and liabilities assumed in the Ocean Downs/Saratoga Transaction. The Company's carrying values in these equity method investments were significantly less than their fair values, resulting in a pre-tax gain of $54.9 million, which is included in the accompanying condensed consolidated statements of comprehensive income. The fair value of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado were determined under the market and income valuation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.
The fair values of the Ocean Downs/SaratogaPresque Isle Transaction wereshown below are based upon preliminary valuations. Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The primary areas of the preliminary valuations that are not yet finalized relate to the fair value of amounts for income taxes, intangible assets, working capital adjustments, and the final amount of residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed, net of cash acquired of $13.1$8.4 million, at the date of the acquisition.
|
| | | |
(in millions) | Total |
Current assets | $ | 2.1 |
|
Property and equipment | 78.5 |
|
Goodwill | 25.8 |
|
Intangible assets | 71.2 |
|
Current liabilities | (4.9 | ) |
Non-current liabilities | (0.6 | ) |
| $ | 172.1 |
|
|
| | | |
(in millions) | Total |
Current assets | $ | 2.1 |
|
Property and equipment | 57.4 |
|
Goodwill | 20.2 |
|
Intangible assets | 95.4 |
|
Current liabilities | (5.2 | ) |
Debt | (54.7 | ) |
| $ | 115.2 |
|
The preliminary fair value of the intangible assets consists of the following:
|
| | | | | |
(in millions) | Fair Value Recognized | | Weighted-Average Useful Life |
Gaming rights | $ | 56.0 |
| | N/A |
Trademark | 15.2 |
| | N/A |
Total intangible assets | $ | 71.2 |
| | |
|
| | | | | |
(in millions) | Fair Value Recognized | | Weighted-Average Useful Life |
Gaming rights | $ | 87.0 |
| | N/A |
Tradename | 8.3 |
| | N/A |
Other | 0.1 |
| | 1.3 years |
Total intangible assets | $ | 95.4 |
| | |
Current assets and current liabilities were valued at the existing carrying values as theythese items are short term in nature and representedrepresent management's estimated fair value of the respective items at August 31, 2018. The debt of $54.7 million assumed by the Company was valued at its outstanding principal balance which approximated fair value at August 31, 2018. The Company subsequently paid off the debt in full on September 4, 2018.January 11, 2019.
The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures. The fair value of the land was determined using the market approach and the fair values of the remaining property and equipment were primarily determined using the cost replacement method which is based on replacement or reproduction costs of the assets.
The fair value of the Ocean DownsPresque Isle gaming rights was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream. This method assumes that the gaming rights intangible asset provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/
|
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FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 12 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses and start-up costs of Ocean DownsPresque Isle were the primary inputs in the valuation. The gaming rights intangible asset was assigned an indefinite useful life based on the Company's expected use of the asset and determination that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the gaming rights. The renewal of the gaming rights in MarylandPennsylvania is subject to various legal requirements. However, the Company's historical experience has not indicated, nor does the Company expect, any limitations regarding its ability to continue to renew its gaming rights in Maryland.Pennsylvania.
The tradenametrademark intangible asset was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset. The tradenametrademark was assigned an indefinite useful life based on the Company’s intention to keep the Ocean DownsPresque Isle name for an indefinite period of time.
Goodwill of $20.2$25.8 million was recognized due to the expected contribution of Ocean DownsPresque Isle to the Company's overall business strategy. The goodwill was assigned to the CasinoGaming segment and is not deductible for tax purposes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with the Ocean Downs/Saratoga Transaction, the Company recorded a deferred tax liability and income tax expense of $12.6 million. The deferred tax liability represents the excess of the financial reporting amounts of the net assets of Ocean Downs over their respective basis under U.S., state, and local tax law expected to be applied to taxable income in the periods such differences are expected to be realized.
For the period from the Ocean Downs/SaratogaPresque Isle Transaction on September 1January 11, 2019 through SeptemberJune 30, 2018,2019, net revenue was $8.1$67.0 million and net income was not material for the period.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of the remaining 50% interest in Ocean DownsPresque Isle occurred as of January 1, 2017 and excludes the gain recognized from the Ocean Downs/Saratoga Transaction.2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2017.
|
| | | | | | | | | | | | | | | |
| Company Pro Forma Information |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net revenue | $ | 240.2 |
| | $ | 218.7 |
| | $ | 845.7 |
| | $ | 754.8 |
|
Net income | 15.5 |
| | 18.2 |
| | 302.4 |
| | 104.1 |
|
Presque Isle and Nemacolin
On February 28, 2018, the Company entered into two separate definitive asset purchase agreements with Eldorado Resorts, Inc. ("ERI") to acquire substantially all of the assets and properties used in connection with the operation of Presque Isle Downs & Casino in Erie, Pennsylvania (the "Presque Isle Transaction"), and Lady Luck Casino in Vicksburg, Mississippi (the "Lady Luck Vicksburg Transaction") for total aggregate consideration of approximately $229.5 million, to be paid in cash, subject to certain working capital and other purchase price adjustments.
On July 6, 2018, the Company and ERI mutually agreed to terminate the asset purchase agreement with respect to the Lady Luck Vicksburg Transaction (the "Termination Agreement"). Concurrently with the entry into the Termination Agreement, the Company and ERI also entered into an amendment to the previously announced asset purchase agreement relating2018. The unaudited pro forma net income giving effect to the Presque Isle Transaction (the "Amendment"). Pursuant to the Amendment, the Company and ERI agreed to, among other things, cooperate in good faith, subject to certain conditions, to enter into an agreement pursuant to which the Company, for cash consideration of $100,000, will assume the rights and obligations of an affiliate of ERI to operate the was not materially different than our historical net income.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net revenue | $ | 477.4 |
| | $ | 416.3 |
| | $ | 746.0 |
| | $ | 638.8 |
|
Lady Luck Casino Nemacolin in Farmington, Pennsylvania (the "Lady Luck Nemacolin Transaction"). The Presque Isle Transaction reflects a stand-alone purchase price of $178.9 million. Closing of the Presque Isle Transaction was also conditioned on the execution of the definitive agreement with respect to
On March 8, 2019, we completed the Lady Luck Nemacolin Transaction, by which occurred on August 10, 2018 (the "Ladywe assumed management and acquired certain assets related to the management of Lady Luck Nemacolin Agreement"). Subject to receiptfrom ERI for cash consideration of Pennsylvania regulatory approvals$100,000. The Lady Luck Nemacolin Transaction did not meet the definition of a business and other customary closing conditions, the Presque Isle Transaction andtherefore was accounted for as an asset acquisition. The net assets acquired in conjunction with the Lady Luck Nemacolin Transaction are expected to close in the first quarter of 2019.were not material.
Upon the execution of the Lady Luck Nemacolin Agreement and pursuant to the Termination Agreement,Ocean Downs
On July 16, 2018, the Company paid ERIannounced its entry into a termination fee of $5.0 million, which is included in "Transaction expense, net" in the accompanying condensed consolidated statements of comprehensive income.
BetAmerica
On April 24, 2017, we completed the acquisition of certain assets of BAM Software and Services, LLC ("BetAmerica"), which has not had a material impact on our results of operations, financial condition or cash flows. The Company has not included other disclosures regarding BetAmerica because the acquired business is immaterial to our business.
7. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
As of September 30, 2018 and as a result of the Ocean Downs/Saratoga Transaction, the Company's only equity investments were the 50% joint venture ownership in Miami Valley Gaming ("MVG"tax-efficient partial liquidation agreement (the "Liquidation Agreement") in Lebanon, Ohio and other equity investments that are not material. As further discussed in Note 6, Acquisitions, the Company closed the acquisition offor the remaining 50% ownership of the Casino at Ocean Downs and Ocean Downs Racetrack located in Berlin, Maryland ("Ocean Downs") owned by SCHSaratoga Casino Holdings LLC ("SCH") in exchange for liquidating the Company's 25% equity interest in SCH, which is the parent company of Saratoga Casino Hotel in Saratoga Springs, New York ("Saratoga New York") and Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga Colorado") (collectively, the "Ocean Downs/Saratoga Transaction"). As part of the Ocean Downs/Saratoga Transaction, Saratoga Harness Racing, Inc. ("SHRI") has agreed to grant the Company and its affiliates exclusive rights to operate online sports betting and iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.
On August 31, 2018, the Company completed the Ocean Downs/Saratoga Colorado.Transaction, which resulted in the Company owning 100% of the equity interests of Ocean Downs. We therefore consolidated Ocean Downs as of the transaction date. Upon the closing of the Ocean Downs/Saratoga Transaction, on August 31, 2018, the Company owns 100% of Ocean Downs andno longer has noan equity interest or management involvement in Saratoga New York or Saratoga Colorado. Prior to August 31, 2018,the Ocean Downs/Saratoga Transaction, the Company held an effective 62.5% ownership interest in Ocean Downs, wasand a 25% ownership interest in Saratoga New York and Saratoga Colorado, all of which were accounted for under the equity method. The consideration transferred to SCH to acquire the remaining interest in Ocean Downs was the Company's equity investments in Saratoga New York and Saratoga Colorado, which had an aggregate fair value of $47.8 million at the acquisition date. Under the acquisition method, the fair values of the consideration transferred and the Company's equity method investment in Ocean Downs, which had a fair value of $80.5 million at the acquisition date, were allocated to the assets acquired and liabilities assumed in the Ocean Downs/Saratoga Transaction. The Company's carrying values in these equity method investments were significantly less than the fair values, resulting in a pre-tax gain of $54.9 million, which is included in the accompanying consolidated statements of comprehensive income. The fair value of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado was determined under the market and income valuation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 13 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Summarized below are
approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of the remaining 50% interest in Ocean Downs occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Ocean Downs/Saratoga Transaction was not materially different than our historical net income.
|
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2018 |
Net revenue | $ | 400.9 |
| | $ | 607.1 |
|
5. DISCONTINUED OPERATIONS
On January 9, 2018, the Company completed the Big Fish Transaction, which had a purchase price of $990.0 million. The Company received cash proceeds of $970.7 million, which was net of $5.2 million of working capital adjustments and $14.1 million of transaction costs. The Company derecognized the following upon the Big Fish Transaction:
|
| | | |
(in millions) | |
Cash and cash equivalents | $ | 0.3 |
|
Accounts receivable | 34.7 |
|
Game software development, net | 6.7 |
|
Other current assets | 17.0 |
|
Property and equipment, net | 17.8 |
|
Game software development, net | 13.8 |
|
Goodwill | 530.7 |
|
Other intangible assets, net | 238.4 |
|
Other assets | 24.0 |
|
Accounts payable | (8.5 | ) |
Accrued expense | (22.6 | ) |
Deferred revenue | (44.2 | ) |
Deferred income taxes | (52.0 | ) |
Other liabilities | (4.9 | ) |
Carrying value of Big Fish Games | $ | 751.2 |
|
The Company recognized a gain of $219.5 million upon the sale recorded in income from discontinued operations on the condensed consolidated statement of comprehensive income for the three months ended March 31, 2018. The gain consisted of cash proceeds of $970.7 million offset by the carrying value of Big Fish Games of $751.2 million. The income tax provision on the gain was $51.2 million, resulting in an after tax gain of $168.3 million.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 14 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
The following table presents the financial results for our unconsolidated affiliates:of Big Fish Games included in "(loss) income from discontinued operations, net of tax" in the accompanying condensed consolidated statements of comprehensive income:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13.2 |
|
| | | | | | | |
Operating expenses | — |
| | — |
| | — |
| | 8.4 |
|
Selling, general and administrative expense | 1.6 |
| | 0.6 |
| | 2.0 |
| | 4.9 |
|
Research and development | — |
| | — |
| | — |
| | 0.9 |
|
Total operating expense | 1.6 |
| | 0.6 |
| | 2.0 |
| | 14.2 |
|
Operating loss | (1.6 | ) | | (0.6 | ) | | (2.0 | ) | | (1.0 | ) |
Other income (expense) | | | | | | | |
Gain on sale of Big Fish Games | — |
| | — |
| | — |
| | 219.5 |
|
Other expense | — |
| | — |
| | — |
| | (0.1 | ) |
Total other income (expense) | — |
| | — |
| | — |
| | 219.4 |
|
(Loss) income from discontinued operations before provision for income taxes | (1.6 | ) | | (0.6 | ) | | (2.0 | ) | | 218.4 |
|
Income tax benefit (provision) | 0.4 |
| | 0.5 |
| | 0.5 |
| | (50.6 | ) |
(Loss) income from discontinued operations, net of tax | $ | (1.2 | ) | | $ | (0.1 | ) | | $ | (1.5 | ) | | $ | 167.8 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net revenue | $ | 105.2 |
| | $ | 128.4 |
| | $ | 322.1 |
| | $ | 340.9 |
|
| | | | | | | |
Operating and SG&A expense | 76.4 |
| | 97.9 |
| | 240.5 |
| | 263.3 |
|
Depreciation and amortization | 5.9 |
| | 5.2 |
| | 19.0 |
| | 16.1 |
|
Total operating expense | 82.3 |
| | 103.1 |
| | 259.5 |
| | 279.4 |
|
Operating income | 22.9 |
| | 25.3 |
| | 62.6 |
| | 61.5 |
|
Interest and other, net | (1.0 | ) | | 0.3 |
| | (5.6 | ) | | (4.7 | ) |
Net income | $ | 21.9 |
| | $ | 25.6 |
| | $ | 57.0 |
| | $ | 56.8 |
|
Stock-Based CompensationFor the six months ended June 30, 2018, the Company recognized $3.4 million of stock-based compensation expense related to Big Fish Games, which included the impact of the accelerated vesting dates of restricted stock awards held by Big Fish Games' employees in conjunction with the Big Fish Transaction. |
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Assets | | | |
Current assets | $ | 21.5 |
| | $ | 64.5 |
|
Property and equipment, net | 98.0 |
| | 234.6 |
|
Other assets, net | 107.0 |
| | 236.5 |
|
Total assets | $ | 226.5 |
| | $ | 535.6 |
|
| | | |
Liabilities and Members' Equity | | | |
Current liabilities | $ | 19.3 |
| | $ | 100.3 |
|
Long-term debt | 1.6 |
| | 110.1 |
|
Other liabilities | 0.1 |
| | 0.1 |
|
Members' equity | 205.5 |
| | 325.1 |
|
Total liabilities and members' equity | $ | 226.5 |
| | $ | 535.6 |
|
Earnout LiabilitiesAs of December 31, 2017, we had $34.2 million of deferred earnout consideration and $28.4 million of deferred payments due to the founder of Big Fish Games, both of which were paid on January 3, 2018.
8.6. GOODWILL AND OTHER INTANGIBLE ASSETS
In the first quarter of 2019, we realigned our segments as described in Note 1, Description of Business. This change resulted in the allocation of the previous Racing segment goodwill balance of $51.7 million as follows: $49.7 million to the Churchill Downs segment, $1.0 million to the Gaming segment, and $1.0 million to All Other, based on the relative fair value approach. The Company evaluated whether an interim goodwill impairment test should be performed as a result of our segment changes. Based on this evaluation, the Company determined this event did not indicate it was more likely than not that a goodwill impairment exists.
Goodwill, by segment, is comprised of the following: |
| | | | | | | | | | | | | | | | | | | |
| Churchill Downs | | Online Wagering | | Gaming | | All Other | | Total |
Balances as of December 31, 2018 | $ | 49.7 |
| | $ | 148.2 |
| | $ | 139.1 |
| | $ | 1.0 |
| | $ | 338.0 |
|
Additions | — |
| | — |
| | 25.8 |
| | — |
| | 25.8 |
|
Balances as of June 30, 2019 | $ | 49.7 |
| | $ | 148.2 |
| | $ | 164.9 |
| | $ | 1.0 |
| | $ | 363.8 |
|
|
| | | | | | | | | | | | | | | |
(in millions) | Racing | | TwinSpires | | Casino | | Total |
Balances as of December 31, 2017 | $ | 51.7 |
| | $ | 148.2 |
| | $ | 117.7 |
| | $ | 317.6 |
|
Ocean Downs/Saratoga Transaction | — |
| | — |
| | 20.2 |
| | 20.2 |
|
Balances as of September 30, 2018 | $ | 51.7 |
| | $ | 148.2 |
| | $ | 137.9 |
| | $ | 337.8 |
|
During the first quarter of 2019, we established goodwill of $25.8 million related to the Presque Isle Transaction.We performed our annual goodwill impairment analysis as of April 1, 20182019 and no adjustment to the carrying value of goodwill was required. We assessed goodwill for impairment by performing step one fair value calculations on a quantitative basis for each reporting unit. We concluded that the fair values of our reporting units exceeded their carrying valuevalues and therefore step two of the assessment was not required.no impairments were identified.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 15 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Other intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangible assets | $ | 33.1 |
| | $ | (16.6 | ) | | $ | 16.5 |
| | $ | 32.1 |
| | $ | (14.1 | ) | | $ | 18.0 |
|
Indefinite-lived intangible assets | | | | | 338.2 |
| | | | | | 246.0 |
|
Total |
|
| |
|
| | $ | 354.7 |
| | | | | | $ | 264.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangible assets | $ | 42.3 |
| | $ | (23.0 | ) | | $ | 19.3 |
| | $ | 39.8 |
| | $ | (20.6 | ) | | $ | 19.2 |
|
Indefinite-lived intangible assets | | | | | 245.5 |
| | | | | | 150.2 |
|
Total |
|
| |
|
| | $ | 264.8 |
| | | | | | $ | 169.4 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During 2019, we established indefinite-lived intangible assets of $56.0 million for gaming rights and $15.2 million for trademarks related to the Presque Isle Transaction. We also acquired indefinite-lived intangible assets of $8.0 million for online gaming rights in Pennsylvania related to our Online Wagering operations, $10.0 million for retail sports betting gaming rights at Presque Isle and online sports betting gaming rights in Pennsylvania, as well as $3.0 million for other gaming rights at Presque Isle.
We performed our annual indefinite-lived intangible assets impairment analysis as of April 1, 2018,2019, which included an assessment of qualitative and quantitative factors to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying amount. We concluded that the fair values of our indefinite-lived intangible assets exceeded carrying value and therefore step two of the assessment was not required.no impairments were identified.
9.7. INCOME TAXES
The Company’s effective income tax rate for the three months ended June 30, 2019 was higher than the U.S. federal statutory rate of 21.0% primarily due to state income taxes and certain expenses that are not deductible for the purposes of income taxes. This expense was partially offset by tax benefits resulting from tax deductions from vesting of stock awards in excess of book deductions.
The Company’s effective income tax rate for the six months ended June 30, 2019 was higher than the U.S. federal statutory rate of 21.0% primarily due to state income taxes, as well as $2.2 million of future income tax expenses recognized from the remeasurement of our net deferred tax liabilities based on an increase in income attributable to states with higher tax rates compared to the prior year period, and certain expenses that are not deductible for the purposes of income taxes. This expense was partially offset by tax benefits resulting from tax deductions from vesting of stock awards in excess of book deductions.
During the first quarter of 2019, we recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership interest in Midwest Gaming. Refer to Note 12, Investments in and Advances to Unconsolidated Affiliates, for further information.
The Company’s effective income tax rate for the three and ninesix months ended SeptemberJune 30, 2018 was higher than the U.S. federal statutory rate of 21.0%, primarily due to state income taxes and certain expenses that are not deductible for income tax purposes, partially offset by tax benefits resulting from tax deductions from vesting of restricted stock unitsawards in excess of book deductions.
The Company’s incomedeductions as well as deferred tax benefits from Kentucky House Bill 487, which was enacted on April 27th, 2018 and lowered Kentucky’s corporate tax rate from 6% to 5%, imposed a single-sales factor apportionment effective for the 2018 tax year and beyond, and required a combined Kentucky tax return.
8. SHAREHOLDERS’ EQUITY
On October 30, 2018, the Board of Directors of the Company approved a new common stock repurchase program of up to $300.0 million. The new program replaced the prior $250.0 million program that was authorized in April 2017 and had unused authorization of $78.3 million. The new authorized amount includes and is not in addition to any unspent amount remaining under the prior authorization. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended or discontinued at any time.
For the three and ninesix months ended SeptemberJune 30, 2017 was higher than2019, we repurchased 187,608 and 470,024 shares, respectively, of our common stock under the U.S. federal statutory rateOctober 2018 stock repurchase program at an aggregate purchase price of 35.0% primarily due to state income taxes$18.0 million and certain expenses that are not deductible for income tax purposes, partially offset by tax benefits resulting from tax credits and tax deductions from vesting of restricted stock units in excess of book deductions.
10. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified$43.0 million, respectively, based on the lowest leveltrade date. We had approximately $225.0 million of input that is significant to the fair value measurement. The following table presents our assets and liabilities measuredrepurchase authority remaining under this program at fair value on a recurring basis:
|
| | | | | | | |
| Level 1 |
(in millions) | September 30, 2018 | | December 31, 2017 |
Restricted cash | $ | 38.8 |
| | $ | 31.2 |
|
Our restricted cash that is held in interest-bearing accounts qualify for Level 1 in the fair value hierarchy which includes unadjusted quoted market prices in active markets for identical assets.
We currently have no other assets or liabilities subject to fair value measurement on a recurring basis. Our 4.75% Senior Notes due 2028 (the "Senior Notes") are disclosed at fair value which isJune 30, 2019, based on unadjusted quoted pricestrade date. As of June 30, 2019, we had no accrual for similar liabilities in markets that are not active. The fair valuethe future cash settlement of the Senior Notes was $466.9executed repurchases of our common stock compared to $2.5 million at September 30, 2018 and $496.8 million atas of December 31, 2017.
The carrying amounts of the borrowings under the $700.0 million revolving credit facility and $400.0 million Senior Secured Term Loan B due 2024 (the "2017 Credit Agreement") approximate fair value, based upon current interest rates, representing a Level 2 fair value measurement.
Refer to Note 6, Acquisitions, for assets and liabilities measured at fair value using Level 2 and Level 3 inputs on a non-recurring basis in connection with the Ocean Downs/Saratoga Transaction.
11. SHAREHOLDERS’ EQUITY2018.
On November 29, 2017, the Board of Directors of the Company authorized a $500.0 million share repurchase program in a "modified Dutch auction" tender offer (the "Tender Offer") utilizing a portion of the proceeds from the Big Fish Transaction. The Company
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 16 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
completed the tender offerTender Offer on February 12, 2018, and repurchased 1,886,7925,660,376 shares of the Company's common stock at a purchase price of $265$88.33 per share with an aggregate cost of $500.0 million, excluding fees and expenses related to the tender offer.Tender Offer.
12.9. STOCK-BASED COMPENSATION PLANS
We have stock-based employee compensation plans with awards outstanding under the Churchill Downs Incorporated 2007 Omnibus Stock Incentive Plan, the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan ("the 2016(the "2016 Plan"), and the Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan. Our total stock-based compensation expense, which includes expenses related to restricted stock awards ("RSAs"), restricted stock unit awards ("RSUs"), performance share unit awards ("PSUs"), and stock options associated with our employee stock purchase plan was $3.9$7.4 million for the three months ended SeptemberJune 30, 20182019 and 2017.$6.4 million for the three months ended June 30, 2018. Stock-based compensation expense was $13.1$12.1 million for the ninesix months ended SeptemberJune 30, 20182019 and $11.7$9.2 million for the ninesix months ended SeptemberJune 30, 2017.2018.
During the ninesix months ended SeptemberJune 30, 2018,2019, the Company awarded RSAs to employees, RSUs and PSUs to certain named executive officers and RSUs to directors. The vesting criteria for the PSU awards granted in 20182019 were based on a three year service period with two performance conditions and a market condition related to relative total shareholder return ("TSR") consistent with prior year grants. The total compensation cost we will recognize under the PSUs will be determined using the Monte Carlo valuation methodology, which factors in the value of the TSR market condition when determining the grant date fair value of the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PSU. Compensation cost for each PSU is recognized during the performance and service period based on the probable achievement of the two performance criteria. The PSUs are converted into shares of our common stock at the time the PSU award value is finalized.
A summary of the RSAs, RSUs, and PSUs granted during 20182019 is presented below:below (shares/units in thousands):
|
| | | | | | |
Grant Year | | Award Type | | Number of Shares/Units Awarded | | Vesting Terms |
| | | | | | |
2019 | | RSA | | 64 | | Vest equally over three service periods ending in 2020, 2021, and 2022 |
2019 | | RSU | | 55 | | Vest equally over three service periods ending in 2019, 2020, and 2021 |
2019 | | PSU | | 53 | | Three year performance and service period ending in 2021 |
2019 | | RSU | | 10 | | One year service period ending in 2020 |
10. DEBT
2027 Senior Notes
On March 25, 2019, we completed an offering of $600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature on April 1, 2027 (the "2027 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2027 Senior Notes were issued at par, with interest payable on April 1st and October 1st of each year, commencing on October 1, 2019. The Company used the net proceeds from the offering to repay our outstanding balance on our 2017 Senior Secured credit agreement (the "2017 Credit Agreement"). In connection with the offering, we capitalized $9.0 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes.
The 2027 Senior Notes were issued pursuant to an indenture, dated March 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "Guarantors"), and U.S Bank National Association, as trustee. The Company may redeem some or all of the 2027 Senior Notes at any time prior to April 1, 2022, at a price equal to 100% of the principal amount of the 2027 Senior Notes redeemed plus an applicable make-whole premium. On or after such date, the Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture. In addition, at any time prior to April 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 Senior Notes at a redemption price equal to 105.50% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2027 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.
In connection with the issuance of the 2027 Senior Notes, the Company and the Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019.
|
| | | | | | |
Grant Year | | Award Type | | Number of Shares/Units Awarded (in thousands) | | Vesting Terms |
| | | | | | |
2018 | | RSA | | 18 | | Vest equally over three service periods ending in February of 2019, 2020, and 2021 |
2018 | | RSU | | 16 | | Vest equally over three service periods ending December 31 of 2018, 2019, and 2020 |
2018 | | PSU | | 16 | | Three year performance and service period ending December 31, 2020 |
2018 | | RSU | | 3 | | One year service period ending in April 2019 |
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 17 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
11. REVENUE FROM CONTRACTS WITH CUSTOMERS
Performance Obligations
As of June 30, 2019, the Churchill Downs segment had remaining performance obligations, on contracts with a duration greater than one year, with an aggregate transaction price of $144.0 million. The revenue we expect to recognize on these remaining performance obligations is $1.3 million for the remainder of 2019, $40.3 million in 2020, $29.9 million in 2021, and the remainder thereafter.
As of June 30, 2019, our remaining performance obligations in segments other than Churchill Downs were not material.
Contract Assets and Contract Liabilities
As of June 30, 2019 and December 31, 2018, contract assets were not material.
As of June 30, 2019 and December 31, 2018, contract liabilities were $35.9 million and $69.9 million, respectively, which are included in current deferred revenue, non-current deferred revenue, and accrued expense in the accompanying condensed consolidated balance sheets. Contract liabilities primarily relate to the Churchill Downs segment and the decrease was primarily due to revenue recognized for fulfilled performance obligations. We recognized $45.8 million of revenue during the three months ended June 30, 2019 and $48.5 million of revenue during the six months ended June 30, 2019 that was included in the contract liabilities balance at December 31, 2018. We recognized $47.9 million of revenue during the three months ended June 30, 2018 and $50.1 million of revenue during the six months ended June 30, 2018 that was included in the contract liabilities balance at January 1, 2018.
Disaggregation of Revenue
In Note 17, Segment Information, the Company has included its disaggregated revenue disclosures as follows:
For the Churchill Downs segment, revenue is disaggregated between Churchill Downs Racetrack and Derby City Gaming given that Churchill Downs Racetrack's revenues primarily revolve around live racing events while Derby City Gaming's revenues primarily revolve around historical racing events. Within the Churchill Downs segment, revenue is further disaggregated between live and simulcast racing, historical racing, racing event-related services, and other services.
For the Online Wagering segment, revenue is disaggregated between the TwinSpires business and online sports betting and iGaming business given that TwinSpires' revenue is primarily related to online pari-mutuel wagering on live race events while online sports betting and iGaming revenue relates to casino gaming service offerings. Online sports betting and iGaming service offerings are currently nominal. Within the Online Wagering segment, revenue is further disaggregated between live and simulcast racing, gaming, and other services.
For the Gaming segment, revenue is disaggregated by location given the geographic economic factors that affect the revenue of Gaming service offerings. Within the Gaming segment, revenue is further disaggregated between live and simulcast racing, racing event-related services, gaming, and other services.
We believe that these disclosures depict how the amount, nature, timing, and uncertainty of cash flows are affected by economic factors.
12. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Midwest Gaming
On March 5, 2019, the Company completed the Sale Transaction to acquire approximately 42% of Midwest Gaming for cash consideration of approximately $406.6 million and $3.5 million for certain transaction costs and working capital adjustments. Following the closing of the Sale Transaction, the parties completed the Recapitalization pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors. As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3%. High Plaines retained ownership of 36% of Midwest Gaming and Casino Investors retained ownership of 2.7% of Midwest Gaming.
We also recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership stake in Midwest Gaming.
A new LLC agreement was entered into by all members as a result of the change in ownership structure. Under the new LLC agreement, both the Company and High Plaines have participating rights over Midwest Gaming, and both must consent to Midwest Gaming's operating, investing and financing decisions. As a result, we account for Midwest Gaming using the equity method.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 18 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
The Company’s investment in Midwest Gaming is presented at our initial cost of investment plus its accumulated proportional share of income or loss, including depreciation/accretion of the difference in the historical basis of the Company’s contribution, less any distributions it has received. Following the Sale Transaction and Recapitalization, the carrying value of the Company’s investment in Midwest Gaming was $841.4 million higher than the Company’s underlying equity in the net assets of Midwest Gaming. This equity method basis difference was comprised of $860.1 million related to goodwill and indefinite-lived intangible assets, $(13.7) million related to non-depreciable land, $(9.5) million related to buildings that will be accreted into income over a weighted average useful life of 35.3 years, and $4.5 million related to personal property that will be depreciated over a weighted average useful life of 3.7 years. As of June 30, 2019, the net aggregate basis difference between the Company’s investment in Midwest Gaming and the amounts of the underlying equity in net assets was $841.1 million.
Summarized Financial Results for our Unconsolidated Affiliates
Summarized below are the financial results for our unconsolidated affiliates. The summarized income statement information for the three and six months ended June 30, 2019 and summarized balance sheet information as of June 30, 2019 includes the following equity investments: MVG, Midwest Gaming from the transaction date of March 5, 2019, and two other immaterial joint ventures. The summarized income statement information for the three and six months ended June 30, 2018 includes the following equity investments: MVG, Saratoga New York, Saratoga Colorado, Ocean Downs, and two other immaterial joint ventures. Summarized balance sheet information as of December 31, 2018 included MVG and two other immaterial joint ventures.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net revenue | $ | 166.3 |
| | $ | 114.5 |
| | $ | 255.8 |
| | $ | 216.1 |
|
| | | | | | | |
Operating and SG&A expense | 119.1 |
| | 84.4 |
| | 180.1 |
| | 163.3 |
|
Depreciation and amortization | 3.3 |
| | 6.6 |
| | 5.5 |
| | 13.1 |
|
Total operating expense | 122.4 |
| | 91.0 |
| | 185.6 |
| | 176.4 |
|
Operating income | 43.9 |
| | 23.5 |
| | 70.2 |
| | 39.7 |
|
Interest and other, net | (25.3 | ) | | (2.6 | ) | | (42.3 | ) | | (4.9 | ) |
Net income | $ | 18.6 |
| | $ | 20.9 |
| | $ | 27.9 |
| | $ | 34.8 |
|
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Assets | | | |
Current assets | $ | 58.1 |
| | $ | 24.0 |
|
Property and equipment, net | 243.7 |
| | 95.7 |
|
Other assets, net | 235.7 |
| | 106.7 |
|
Total assets | $ | 537.5 |
| | $ | 226.4 |
|
| | | |
Liabilities and Members' Equity | | | |
Current liabilities | $ | 89.0 |
| | $ | 21.2 |
|
Long-term debt | 735.3 |
| | — |
|
Other liabilities | 20.3 |
| | — |
|
Members' (deficit) equity | (307.1 | ) | | 205.2 |
|
Total liabilities and members' (deficit) equity | $ | 537.5 |
| | $ | 226.4 |
|
13. LEASES
Our operating leases with terms greater than one year are primarily related to buildings and land. Our operating leases with terms less than one year are primarily related to equipment. Most of our building and land leases have terms of 2 to 10 years and include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Certain of our lease agreements include lease payments based on a percentage of net gaming revenue and others include rental payment adjustments periodically for inflation. As of June 30, 2019, operating lease ROUAs included in property and equipment, net were $24.9 million.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 19 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
The components of total lease cost were as follows:
|
| | | | | | | |
(in millions) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Short-term lease cost (a) (b) | $ | 6.2 |
| | $ | 8.7 |
|
Operating lease cost (b) | 1.6 |
| | 3.1 |
|
Total lease cost | $ | 7.8 |
| | $ | 11.8 |
|
(a) Includes leases with terms of one month or less
(b) Includes variable lease costs, which were not material
Other information related to operating leases was as follows:
|
| | | | | | | |
(in millions, except lease term and discount rate) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Supplemental Cash Flow Information | | | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 1.3 |
| | $ | 2.3 |
|
ROUAs obtained in exchange for lease obligations | $ | 0.7 |
| | $ | 1.5 |
|
|
| | |
Lease Term and Discount Rate | June 30, 2019 |
Weighted average remaining lease term | 7.0 years |
|
Weighted average discount rate | 3.9 | % |
As of June 30, 2019, future minimum operating lease payments on non-cancelable leases were as follows:
|
| | | | |
(in millions) | | |
Years Ended December 31, | | Totals |
2019 (excludes six months ended June 30, 2019) | | $ | 2.9 |
|
2020 | | 5.2 |
|
2021 | | 4.5 |
|
2022 | | 3.5 |
|
2023 | | 3.0 |
|
Thereafter | | 11.2 |
|
Total future minimum lease payments | | 30.3 |
|
Less: Imputed interest | | 3.8 |
|
Present value of lease liabilities | | $ | 26.5 |
|
| | |
Reported lease liabilities as of June 30, 2019 | | |
Accrued expense (current maturities of leases) | | $ | 4.5 |
|
Other liabilities (non-current maturities of leases) | | 22.0 |
|
Present value of lease liabilities | | $ | 26.5 |
|
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 20 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
As required by ASC 842, the future minimum operating lease payments on non-cancelable leases as of December 31, 2018 under the accounting standards in effect as of that period were as follows:
|
| | | |
(in millions) | |
Years Ended December 31, |
| |
2019 | $ | 5.0 |
|
2020 | 4.5 |
|
2021 | 3.8 |
|
2022 | 3.1 |
|
2023 | 3.0 |
|
Thereafter | 11.2 |
|
Total | $ | 30.6 |
|
14. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate.
Restricted Cash
Our restricted cash accounts that are held in interest-bearing accounts qualify for Level 1 in the fair value hierarchy, which includes unadjusted quoted market prices in active markets for identical assets.
Debt
The fair value of the Company’s 4.75% Senior Notes due 2028 (the "2028 Senior Notes") and 2027 Senior Notes are estimated based on unadjusted quoted prices for identical or similar liabilities in markets that are not active and as such are Level 2 measurements. The fair value of the Company's Senior Secured Term Loan B due 2024 (the "Term Loan B") approximates its gross carrying value as it is variable rate debt and as such is a Level 2 measurement.
The carrying amounts and estimated fair values by input level of the Company's financial instruments are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Restricted cash | $ | 42.8 |
| | $ | 42.8 |
| | $ | 42.8 |
| | $ | — |
| | $ | — |
|
Financial liabilities: | | | | | | | | | |
Term Loan B | 389.6 |
| | 394.0 |
| | — |
| | 394.0 |
| | — |
|
2027 Senior Notes | 591.4 |
| | 627.7 |
| | — |
| | 627.7 |
| | — |
|
2028 Senior Notes | 493.5 |
| | 502.4 |
| | — |
| | 502.4 |
| | — |
|
| | | | | | | | | |
| December 31, 2018 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Restricted cash | $ | 40.0 |
| | $ | 40.0 |
| | $ | 40.0 |
| | $ | — |
| | $ | — |
|
Financial liabilities: | | | | | | | | | |
Term Loan B | 391.3 |
| | 396.0 |
| | — |
| | 396.0 |
| | — |
|
2028 Senior Notes | 493.0 |
| | 452.4 |
| | — |
| | 452.4 |
| | — |
|
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 21 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
15. CONTINGENCIES
We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages.
In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results of operations, or cash flows. Legal fees are expensed as incurred.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated.
If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 22 | |
14. |
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
16. NET INCOME PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the net income per common share computations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except per share data) | 2019 | | 2018 | | 2019 | | 2018 |
Numerator for basic net income per common share: | | | | | | | |
Net income from continuing operations | $ | 108.3 |
| | $ | 103.2 |
| | $ | 120.2 |
| | $ | 117.3 |
|
Net (loss) income from discontinued operations | (1.2 | ) | | (0.1 | ) | | (1.5 | ) | | 167.8 |
|
Numerator for basic net income per common share | $ | 107.1 |
| | $ | 103.1 |
| | $ | 118.7 |
| | $ | 285.1 |
|
| | | | | | | |
Numerator for diluted net income from continuing operations per common share | $ | 108.3 |
| | $ | 103.2 |
| | $ | 120.2 |
| | $ | 117.3 |
|
Numerator for diluted net income per common share: | $ | 107.1 |
| | $ | 103.1 |
| | $ | 118.7 |
| | $ | 285.1 |
|
| | | | | | | |
Denominator for net income per common share: | | | | | | | |
Basic | 40.1 |
| | 40.7 |
| | 40.3 |
| | 42.0 |
|
Plus dilutive effect of stock awards | 0.6 |
| | 0.2 |
| | 0.4 |
| | 0.2 |
|
Diluted | 40.7 |
| | 40.9 |
| | 40.7 |
| | 42.2 |
|
| | | | | | | |
Net income (loss) per common share data: | | | | | | | |
Basic | | | | | | | |
Continuing operations | $ | 2.69 |
| | $ | 2.54 |
| | $ | 2.99 |
| | $ | 2.80 |
|
Discontinued operations | $ | (0.03 | ) | | $ | — |
| | $ | (0.04 | ) | | $ | 3.99 |
|
Net income per common share - basic | $ | 2.66 |
| | $ | 2.54 |
| | $ | 2.95 |
| | $ | 6.79 |
|
| | | | | | | |
Diluted | | | | | | | |
Continuing operations | $ | 2.66 |
| | $ | 2.52 |
| | $ | 2.96 |
| | $ | 2.78 |
|
Discontinued operations | $ | (0.03 | ) | | $ | — |
| | $ | (0.04 | ) | | $ | 3.97 |
|
Net income per common share - diluted | $ | 2.63 |
| | $ | 2.52 |
| | $ | 2.92 |
| | $ | 6.75 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
Numerator for basic net income per common share: | | | | | | | |
Net income from continuing operations | $ | 58.0 |
| | $ | 13.1 |
| | $ | 175.3 |
| | $ | 88.0 |
|
Net loss from continuing operations allocated to participating securities | — |
| | — |
| | — |
| | (0.1 | ) |
Net (loss) income from discontinued operations | (1.7 | ) | | 3.6 |
| | 166.1 |
| | 14.3 |
|
Numerator for basic net income per common share | $ | 56.3 |
| | $ | 16.7 |
| | $ | 341.4 |
| | $ | 102.2 |
|
| | | | | | | |
Numerator for diluted net income from continuing operations per common share | $ | 58.0 |
| | $ | 13.1 |
| | $ | 175.3 |
| | $ | 88.0 |
|
Numerator for diluted net income per common share: | $ | 56.3 |
| | $ | 16.7 |
| | $ | 341.4 |
| | $ | 102.3 |
|
| | | | | | | |
Denominator for net income per common share: | | | | | | | |
Basic | 13.6 |
| | 15.3 |
| | 13.8 |
| | 15.9 |
|
Plus dilutive effect of stock awards | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
|
Plus dilutive effect of participating securities | — |
| | — |
| | — |
| | 0.1 |
|
Diluted | 13.7 |
| | 15.5 |
| | 13.9 |
| | 16.2 |
|
| | | | | | | |
Net income (loss) per common share data: | | | | | | | |
Basic | | | | | | | |
Continuing operations | $ | 4.27 |
| | $ | 0.85 |
| | $ | 12.65 |
| | $ | 5.53 |
|
Discontinued operations | $ | (0.12 | ) | | $ | 0.24 |
| | $ | 11.99 |
| | $ | 0.90 |
|
Net income per common share - basic | $ | 4.15 |
| | $ | 1.09 |
| | $ | 24.64 |
| | $ | 6.43 |
|
| | | | | | | |
Diluted | | | | | | | |
Continuing operations | $ | 4.24 |
| | $ | 0.84 |
| | $ | 12.58 |
| | $ | 5.44 |
|
Discontinued operations | $ | (0.12 | ) | | $ | 0.24 |
| | $ | 11.92 |
| | $ | 0.88 |
|
Net income per common share - diluted | $ | 4.12 |
| | $ | 1.08 |
| | $ | 24.50 |
| | $ | 6.32 |
|
15.17. SEGMENT INFORMATION
We manage our operations through five operatingthree reportable segments:
Racing, which includes Churchill Downs, Racetrack ("Churchill Downs"), Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds")Online Wagering and Calder Race Course ("Calder");
TwinSpires, which includes TwinSpires.com, Fair Grounds Account Wagering, Velocity, BetAmerica and Bloodstock Research Information Services;
Casino, which includes Oxford Casino ("Oxford"), Riverwalk Casino ("Riverwalk"), Harlow's Casino ("Harlow’s"), Calder Casino, Fair Grounds Slots, Video Services, LLC ("VSI"), 50% equity investment in MVG, 50% equity investment in Ocean Downs and 25% equity investment in SCH, which includes investments in Saratoga Casino Hotel, Saratoga Casino Black Hawk and Ocean Downs. On August 31, 2018,Gaming. Refer to Note 1, Description of Business, for further information regarding the Company completed the Ocean Downs/Saratoga Transaction, which resulted in the Company's 100% ownership of Ocean Downs, and no further equity interest or management involvement in Saratoga New York or Saratoga Colorado.
Other Investments, which includes United Tote, Derby City Gaming and other minor investments; and
Corporate, which includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocatedchanges we made to our other operating segments.
Big Fish Games is a global producer and distributorsegments during the first quarter of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices. On January 9, 2018, we closed the Big Fish Transaction, at which time Big Fish Games ceased to be an operating segment. Due to the Big Fish Transaction, the Company has presented Big Fish Games as held for sale and
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
discontinued operations in the accompanying condensed consolidated financial statements and these notes. The Company has not allocated corporate and other certain expenses to Big Fish Games consistent with the discontinued operations presentation in the accompanying condensed consolidated statements of comprehensive income.2019. Accordingly, the prior year amounts werein this Form 10-Q have been reclassified to conform to this presentation.
Eliminations include the elimination of intersegment transactions. We utilize non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and adjustedAdjusted EBITDA. Our chief operating decision maker utilizes adjustedAdjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA includes the following adjustments:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
Transaction expense, net which includes:
Acquisition and disposition related charges, including fair value adjustments related to earnouts and deferred payments;
Calder racing exit costs; and
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 23 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Other transaction expense, including legal, accounting, and other deal-related expense;
Stock-based compensation expense;
Midwest Gaming's impact on our investments in unconsolidated affiliates from:
The impact of changes in fair value of interest rate swaps; and
Recapitalization and transaction costs;
Asset impairments;
Gain on Ocean Downs/Saratoga Transaction;
Gain on Calder land sale;
Calder exit costs;
Loss on extinguishment of debt;
Pre-opening expense; and
Other charges, recoveries and expenses
We utilize the adjustedAdjusted EBITDA metric because we believe the inclusion or exclusion of certain non-recurring items is necessary to provide a more accurate measure of our core operating results and enablesenable management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Our calculation of adjustedAdjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For segment reporting, adjustedAdjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying condensed consolidated statements of comprehensive income.
Effective January 1, 2019, the Company does not allocate corporate and other related expenses to the operating segments in the accompanying condensed consolidated statements of comprehensive income. Accordingly, the prior year amounts in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.
The tables below present net revenue from external customers and intercompany revenue from each of our operating segments, adjustednet revenue from external customers for each group of similar services, Adjusted EBITDA by segment, and reconcilesa reconciliation of comprehensive income to adjustedAdjusted EBITDA:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 24 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net revenue from external customers: | | | | | | | |
Churchill Downs: | | | | | | | |
Churchill Downs Racetrack | $ | 161.0 |
| | $ | 154.9 |
| | $ | 163.3 |
| | $ | 156.9 |
|
Derby City Gaming | 21.2 |
| | — |
| | 39.9 |
| | — |
|
Total Churchill Downs | 182.2 |
| | 154.9 |
| | 203.2 |
| | 156.9 |
|
Online Wagering: | | | | | | | |
TwinSpires | 95.6 |
| | 93.7 |
| | 158.6 |
| | 156.9 |
|
Online Sports Betting and iGaming | — |
| | — |
| | 0.1 |
| | — |
|
Total Online Wagering | 95.6 |
| | 93.7 |
| | 158.7 |
| | 156.9 |
|
Gaming: | | | | | | | |
Oxford | 26.3 |
| | 26.2 |
| | 50.2 |
| | 50.4 |
|
Calder | 25.6 |
| | 26.0 |
| | 51.0 |
| | 50.9 |
|
Riverwalk | 14.2 |
| | 13.6 |
| | 30.5 |
| | 28.0 |
|
Harlow’s | 13.3 |
| | 12.5 |
| | 28.6 |
| | 25.8 |
|
Fair Grounds and VSI | 30.9 |
| | 29.5 |
| | 68.4 |
| | 63.9 |
|
Ocean Downs | 21.9 |
| | — |
| | 40.3 |
| | — |
|
Presque Isle | 37.1 |
| | — |
| | 66.8 |
| | — |
|
Lady Luck Nemacolin | 8.3 |
| | — |
| | 10.6 |
| | — |
|
Saratoga | — |
| | 0.3 |
| | — |
| | 0.6 |
|
Total Gaming | 177.6 |
| | 108.1 |
| | 346.4 |
| | 219.6 |
|
All Other | 22.0 |
| | 22.7 |
| | 34.5 |
| | 35.3 |
|
Net revenue from external customers | $ | 477.4 |
| | $ | 379.4 |
| | $ | 742.8 |
| | $ | 568.7 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Intercompany net revenue: | | | | | | | |
Churchill Downs | $ | 10.9 |
| | $ | 9.4 |
| | $ | 11.3 |
| | $ | 9.7 |
|
Online Wagering | 0.4 |
| | 0.4 |
| | 0.7 |
| | 0.8 |
|
Gaming | 0.2 |
| | 0.1 |
| | 1.5 |
| | 1.1 |
|
All Other | 3.4 |
| | 3.6 |
| | 5.6 |
| | 6.0 |
|
Eliminations | (14.9 | ) | | (13.5 | ) | | (19.1 | ) | | (17.6 | ) |
Intercompany net revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 25 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net revenue from external customers: | | | | | | | |
Racing: | | | | | | | |
Churchill Downs | $ | 8.5 |
| | $ | 8.1 |
| | $ | 165.4 |
| | $ | 147.1 |
|
Arlington | 23.7 |
| | 25.0 |
| | 49.7 |
| | 51.5 |
|
Fair Grounds | 4.8 |
| | 5.0 |
| | 26.8 |
| | 27.5 |
|
Calder | 0.6 |
| | 0.7 |
| | 1.9 |
| | 1.9 |
|
Total Racing | 37.6 |
| | 38.8 |
| | 243.8 |
| | 228.0 |
|
TwinSpires | 71.8 |
| | 65.9 |
| | 228.7 |
| | 198.4 |
|
Casino: | | | | | | | |
Oxford Casino | 28.9 |
| | 25.2 |
| | 79.3 |
| | 69.2 |
|
Calder Casino | 23.4 |
| | 19.4 |
| | 73.0 |
| | 62.6 |
|
Riverwalk Casino | 12.8 |
| | 12.2 |
| | 40.8 |
| | 35.7 |
|
Harlow’s Casino | 12.1 |
| | 12.3 |
| | 37.9 |
| | 38.3 |
|
VSI | 10.6 |
| | 9.3 |
| | 32.7 |
| | 28.8 |
|
Fair Grounds Slots | 9.1 |
| | 8.7 |
| | 28.9 |
| | 27.7 |
|
Ocean Downs | 8.1 |
| | — |
| | 8.1 |
| | — |
|
Saratoga | — |
| | 0.4 |
| | 0.6 |
| | 1.0 |
|
Total Casino | 105.0 |
| | 87.5 |
| | 301.3 |
| | 263.3 |
|
Other Investments | 6.9 |
| | 4.7 |
| | 16.2 |
| | 14.0 |
|
Net revenue from external customers | $ | 221.3 |
| | $ | 196.9 |
| | $ | 790.0 |
| | $ | 703.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
(in millions) | Churchill Downs | | Online Wagering | | Gaming | | Total Segments | | All Other | | Total |
Net revenue from external customers | | | | | | | | | | | |
Pari-mutuel: | | | | | | | | | | | |
Live and simulcast racing | $ | 41.3 |
| | $ | 91.1 |
| | $ | 5.5 |
| | $ | 137.9 |
| | $ | 12.2 |
| | $ | 150.1 |
|
Historical racing | 19.9 |
| | — |
| | — |
| | 19.9 |
| | — |
| | 19.9 |
|
Racing event-related services | 113.4 |
| | — |
| | 0.8 |
| | 114.2 |
| | 2.2 |
| | 116.4 |
|
Gaming(a) | — |
| | — |
| | 150.2 |
| | 150.2 |
| | — |
| | 150.2 |
|
Other(a) | 7.6 |
| | 4.5 |
| | 21.1 |
| | 33.2 |
| | 7.6 |
| | 40.8 |
|
Total | $ | 182.2 |
| | $ | 95.6 |
| | $ | 177.6 |
| | $ | 455.4 |
| | $ | 22.0 |
| | $ | 477.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
(in millions) | Churchill Downs | | Online Wagering | | Gaming | | Total Segments | | All Other | | Total |
Net revenue from external customers | | | | | | | | | | | |
Pari-mutuel: | | | | | | | | | | | |
Live and simulcast racing | $ | 39.5 |
| | $ | 89.7 |
| | $ | 4.4 |
| | $ | 133.6 |
| | $ | 13.6 |
| | $ | 147.2 |
|
Historical racing | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Racing event-related services | 109.6 |
| | — |
| | 0.7 |
| | 110.3 |
| | 2.2 |
| | 112.5 |
|
Gaming(a) | — |
| | — |
| | 87.1 |
| | 87.1 |
| | — |
| | 87.1 |
|
Other(a) | 5.8 |
| | 4.0 |
| | 15.9 |
| | 25.7 |
| | 6.9 |
| | 32.6 |
|
Total | $ | 154.9 |
| | $ | 93.7 |
| | $ | 108.1 |
| | $ | 356.7 |
| | $ | 22.7 |
| | $ | 379.4 |
|
(a) Food and beverage, hotel, and other services furnished to customers for free as an inducement to gamble or through the redemption of our customers' loyalty points are recorded at their estimated standalone selling prices in Other revenue with a corresponding offset recorded as a reduction in Gaming revenue. These amounts were $7.9 million for the three months ended June 30, 2019 and $6.6 million for the three months ended June 30, 2018.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 26 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Intercompany net revenue: | | | | | | | |
Racing: | | | | | | | |
Churchill Downs | $ | 1.0 |
| | $ | 0.9 |
| | $ | 10.7 |
| | $ | 9.6 |
|
Arlington | 2.3 |
| | 2.2 |
| | 5.6 |
| | 5.1 |
|
Fair Grounds | — |
| | — |
| | 1.1 |
| | 1.0 |
|
Calder | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Total Racing | 3.4 |
| | 3.1 |
| | 17.5 |
| | 15.7 |
|
TwinSpires | 0.3 |
| | 0.2 |
| | 1.1 |
| | 0.8 |
|
Other Investments | 0.9 |
| | 1.0 |
| | 3.6 |
| | 3.7 |
|
Eliminations | (4.6 | ) | | (4.3 | ) | | (22.2 | ) | | (20.2 | ) |
Intercompany net revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
(in millions) | Churchill Downs | | Online Wagering | | Gaming | | Total Segments | | All Other | | Total |
Net revenue from external customers | | | | | | | | | | | |
Pari-mutuel: | | | | | | | | | | | |
Live and simulcast racing | $ | 42.7 |
| | $ | 151.6 |
| | $ | 17.7 |
| | $ | 212.0 |
| | $ | 19.7 |
| | $ | 231.7 |
|
Historical racing | 37.4 |
| | — |
| | — |
| | 37.4 |
| | — |
| | 37.4 |
|
Racing event-related services | 113.4 |
| | — |
| | 2.3 |
| | 115.7 |
| | 2.2 |
| | 117.9 |
|
Gaming(b) | — |
| | 0.1 |
| | 289.2 |
| | 289.3 |
| | — |
| | 289.3 |
|
Other(b) | 9.7 |
| | 7.0 |
| | 37.2 |
| | 53.9 |
| | 12.6 |
| | 66.5 |
|
Total | $ | 203.2 |
| | $ | 158.7 |
| | $ | 346.4 |
| | $ | 708.3 |
| | $ | 34.5 |
| | $ | 742.8 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(in millions) | Churchill Downs | | Online Wagering | | Gaming | | Total Segments | | All Other | | Total |
Net revenue from external customers | | | | | | | | | | | |
Pari-mutuel: | | | | | | | | | | | |
Live and simulcast racing | $ | 40.8 |
| | $ | 150.7 |
| | $ | 15.0 |
| | $ | 206.5 |
| | $ | 21.5 |
| | $ | 228.0 |
|
Historical racing | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Racing event-related services | 109.6 |
| | — |
| | 2.1 |
| | 111.7 |
| | 2.2 |
| | 113.9 |
|
Gaming(b) | — |
| | — |
| | 175.0 |
| | 175.0 |
| | — |
| | 175.0 |
|
Other(b) | 6.5 |
| | 6.2 |
| | 27.5 |
| | 40.2 |
| | 11.6 |
| | 51.8 |
|
Total | $ | 156.9 |
| | $ | 156.9 |
| | $ | 219.6 |
| | $ | 533.4 |
| | $ | 35.3 |
| | $ | 568.7 |
|
(b) Food and beverage, hotel, and other services furnished to customers for free as an inducement to gamble or through the redemption of our customers' loyalty points are recorded at their estimated standalone selling prices in Other revenue with a corresponding offset recorded as a reduction in Gaming revenue. These amounts were $15.5 million for the six months ended June 30, 2019 and $12.6 million for the six months ended June 30, 2018.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 27 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Adjusted EBITDA by segment is comprised of the following:
| | | Three Months Ended September 30, 2018 | Three Months Ended June 30, 2019 |
(in millions) | Racing | | TwinSpires | | Casino | | Other Investments | | Corporate | Churchill Downs | | Online Wagering | | Gaming |
Net revenue | $ | 41.0 |
| | $ | 72.1 |
| | $ | 105.0 |
| | $ | 7.8 |
| | $ | — |
| $ | 193.1 |
| | $ | 96.0 |
| | $ | 177.8 |
|
| | | | | | | | | | | | | | |
Taxes & purses | (11.0 | ) | | (4.2 | ) | | (36.0 | ) | | (0.7 | ) | | — |
| (35.7 | ) | | (4.3 | ) | | (68.5 | ) |
Marketing & advertising | (1.2 | ) | | (0.6 | ) | | (3.4 | ) | | (0.1 | ) | | — |
| (3.6 | ) | | (4.5 | ) | | (5.1 | ) |
Salaries & benefits | (10.6 | ) | | (2.1 | ) | | (14.6 | ) | | (3.4 | ) | | — |
| (12.5 | ) | | (2.7 | ) | | (25.4 | ) |
Content expense | (3.4 | ) | | (37.3 | ) | | — |
| | — |
| | — |
| (0.8 | ) | | (51.8 | ) | | (1.7 | ) |
SG&A expense | (4.2 | ) | | (2.9 | ) | | (6.2 | ) | | (1.2 | ) | | (2.6 | ) | (2.0 | ) | | (1.9 | ) | | (6.9 | ) |
Other operating expense | (11.8 | ) | | (5.7 | ) | | (11.8 | ) | | (1.3 | ) | | (0.2 | ) | (16.6 | ) | | (8.6 | ) | | (21.8 | ) |
Other income | — |
| | — |
| | 12.7 |
| | — |
| | — |
| — |
| | — |
| | 27.7 |
|
Adjusted EBITDA | $ | (1.2 | ) | | $ | 19.3 |
| | $ | 45.7 |
| | $ | 1.1 |
| | $ | (2.8 | ) | $ | 121.9 |
| | $ | 22.2 |
| | $ | 76.1 |
|
| | | Three Months Ended September 30, 2017 | Three Months Ended June 30, 2018 |
(in millions) | Racing | | TwinSpires | | Casino | | Other Investments | | Corporate (a) | Churchill Downs | | Online Wagering | | Gaming |
Net revenue | $ | 41.9 |
| | $ | 66.1 |
| | $ | 87.5 |
| | $ | 5.7 |
| | $ | — |
| $ | 164.3 |
| | $ | 94.1 |
| | $ | 108.2 |
|
| | | | | | | | | | | | | | |
Taxes & purses | (11.2 | ) | | (4.5 | ) | | (28.9 | ) | | — |
| | — |
| (27.3 | ) | | (4.6 | ) | | (35.5 | ) |
Marketing & advertising | (1.0 | ) | | (1.1 | ) | | (3.1 | ) | | — |
| | — |
| (3.2 | ) | | (3.1 | ) | | (3.5 | ) |
Salaries & benefits | (10.3 | ) | | (2.3 | ) | | (13.5 | ) | | (2.9 | ) | | — |
| (9.7 | ) | | (2.4 | ) | | (15.6 | ) |
Content expense | (3.8 | ) | | (30.9 | ) | | — |
| | — |
| | — |
| (0.9 | ) | | (49.8 | ) | | (1.1 | ) |
SG&A expense | (3.9 | ) | | (3.2 | ) | | (5.5 | ) | | (0.8 | ) | | (3.1 | ) | (1.2 | ) | | (1.6 | ) | | (4.0 | ) |
Other operating expense | (10.1 | ) | | (5.3 | ) | | (9.8 | ) | | (1.1 | ) | | 0.1 |
| (14.2 | ) | | (8.2 | ) | | (15.7 | ) |
Other income | 0.1 |
| | — |
| | 12.8 |
| | 0.2 |
| | — |
| 0.1 |
| | — |
| | 12.9 |
|
Adjusted EBITDA | $ | 1.7 |
| | $ | 18.8 |
|
| $ | 39.5 |
| | $ | 1.1 |
|
| $ | (3.0 | ) | $ | 107.9 |
| | $ | 24.4 |
|
| $ | 45.7 |
|
(a) The Corporate segment includes corporate and other certain expenses of $0.7 million for the three months ended September 30, 2017 that have not been allocated to Big Fish Games as a result of the Big Fish Transaction. The Big Fish Games segment is reported as held for sale and discontinued operations in the accompanying condensed consolidated financial statements and these notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 28 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
| | | Nine Months Ended September 30, 2018 | Six Months Ended June 30, 2019 |
(in millions) | Racing | | TwinSpires | | Casino | | Other Investments | | Corporate | Churchill Downs | | Online Wagering | | Gaming |
Net revenue | $ | 261.3 |
| | $ | 229.8 |
| | $ | 301.3 |
| | $ | 19.8 |
| | $ | — |
| $ | 214.5 |
| | $ | 159.4 |
| | $ | 347.9 |
|
| | | | | | | | | | | | | | |
Taxes & purses | (55.7 | ) | | (12.2 | ) | | (101.8 | ) | | (0.7 | ) | | — |
| (41.9 | ) | | (7.6 | ) | | (133.5 | ) |
Marketing & advertising | (5.6 | ) | | (4.5 | ) | | (10.1 | ) | | (0.2 | ) | | — |
| (4.7 | ) | | (5.5 | ) | | (10.2 | ) |
Salaries & benefits | (34.5 | ) | | (6.6 | ) | | (41.7 | ) | | (10.2 | ) | | — |
| (17.7 | ) | | (5.2 | ) | | (49.9 | ) |
Content expense | (11.2 | ) | | (119.3 | ) | | — |
| | — |
| | — |
| (1.3 | ) | | (83.9 | ) | | (2.9 | ) |
SG&A expense | (12.8 | ) | | (8.6 | ) | | (17.2 | ) | | (2.6 | ) | | (7.6 | ) | (3.7 | ) | | (3.7 | ) | | (13.3 | ) |
Other operating expense | (43.4 | ) | | (19.7 | ) | | (33.0 | ) | | (3.7 | ) | | (0.5 | ) | (21.9 | ) | | (14.4 | ) | | (40.8 | ) |
Other income | 0.4 |
| | — |
| | 36.4 |
| | 0.1 |
| | 0.1 |
| — |
| | — |
| | 43.6 |
|
Adjusted EBITDA | $ | 98.5 |
| | $ | 58.9 |
| | $ | 133.9 |
| | $ | 2.5 |
| | $ | (8.0 | ) | $ | 123.3 |
| | $ | 39.1 |
| | $ | 140.9 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(in millions) | Churchill Downs | | Online Wagering | | Gaming |
Net revenue | $ | 166.6 |
| | $ | 157.7 |
| | $ | 220.7 |
|
| | | | | |
Taxes & purses | (28.0 | ) | | (8.0 | ) | | (73.5 | ) |
Marketing & advertising | (3.5 | ) | | (3.9 | ) | | (7.1 | ) |
Salaries & benefits | (12.8 | ) | | (4.5 | ) | | (32.5 | ) |
Content expense | (1.3 | ) | | (82.0 | ) | | (2.0 | ) |
SG&A expense | (2.2 | ) | | (3.0 | ) | | (7.8 | ) |
Other operating expense | (17.0 | ) | | (14.0 | ) | | (29.4 | ) |
Other income | 0.1 |
| | — |
| | 23.7 |
|
Adjusted EBITDA | $ | 101.9 |
| | $ | 42.3 |
| | $ | 92.1 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(in millions) | Racing | | TwinSpires | | Casino | | Other Investments | | Corporate (a) |
Net revenue | $ | 243.7 |
| | $ | 199.2 |
| | $ | 263.3 |
| | $ | 17.7 |
| | $ | — |
|
| | | | | | | | | |
Taxes & purses | (54.3 | ) | | (11.6 | ) | | (87.7 | ) | | — |
| | — |
|
Marketing & advertising | (3.9 | ) | | (6.7 | ) | | (9.1 | ) | | — |
| | — |
|
Salaries & benefits | (32.4 | ) | | (7.1 | ) | | (40.0 | ) | | (9.1 | ) | | — |
|
Content expense | (11.7 | ) | | (96.5 | ) | | — |
| | — |
| | — |
|
SG&A expense | (11.9 | ) | | (8.9 | ) | | (16.3 | ) | | (2.3 | ) | | (8.5 | ) |
Other operating expense | (39.4 | ) | | (17.1 | ) | | (31.0 | ) | | (3.6 | ) | | (0.4 | ) |
Other income | 0.6 |
| | — |
| | 33.1 |
| | 0.3 |
| | — |
|
Adjusted EBITDA | $ | 90.7 |
| | $ | 51.3 |
| | $ | 112.3 |
| | $ | 3.0 |
| | $ | (8.9 | ) |
(a) The Corporate segment includes corporate and other certain expenses of $2.1 million for the nine months ended September 30, 2017 that have not been allocated to Big Fish Games as a result of the Big Fish Transaction. The Big Fish Games segment is reported as held for sale and discontinued operations in the accompanying condensed consolidated financial statements and these notes. |
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 29 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Reconciliation of Comprehensive Income to Adjusted EBITDA: | | | | | | | |
| | | | | | | |
Comprehensive income | $ | 107.1 |
| | $ | 102.9 |
| | $ | 118.7 |
| | $ | 285.3 |
|
Foreign currency translation, net of tax | — |
| | — |
| | — |
| | (0.6 | ) |
Change in pension benefits, net of tax | — |
| | 0.2 |
| | — |
| | 0.4 |
|
Net income | 107.1 |
| | 103.1 |
| | 118.7 |
| | 285.1 |
|
Loss (income) from discontinued operations, net of tax | 1.2 |
| | 0.1 |
| | 1.5 |
| | (167.8 | ) |
Income from continuing operations, net of tax | 108.3 |
|
| 103.2 |
|
| 120.2 |
|
| 117.3 |
|
| | | | | | | |
Additions: | | | | | | | |
Depreciation and amortization | 21.5 |
| | 15.3 |
| | 42.3 |
| | 29.1 |
|
Interest expense | 19.4 |
| | 9.7 |
| | 33.1 |
| | 19.3 |
|
Income tax provision | 38.6 |
| | 32.8 |
| | 45.1 |
| | 35.4 |
|
EBITDA | $ | 187.8 |
| | $ | 161.0 |
| | 240.7 |
| | 201.1 |
|
| | | | | | | |
Adjustments to EBITDA: | | | | | | | |
Selling, general and administrative: | | | | | | | |
Stock-based compensation expense | $ | 7.4 |
| | $ | 6.4 |
| | 12.1 |
| | 9.2 |
|
Other charges | — |
| | — |
| | 0.5 |
| | — |
|
Pre-opening expense | 0.9 |
| | 0.7 |
| | 2.2 |
| | 1.3 |
|
Transaction expense, net | 0.6 |
| | 2.1 |
| | 4.1 |
| | 3.5 |
|
Other income, expense: | | | | | | | |
Interest, depreciation and amortization expense related to equity investments | 9.7 |
| | 4.3 |
| | 13.2 |
| | 8.6 |
|
Changes in fair value of Midwest Gaming's interest rate swaps | 7.9 |
| | — |
| | 12.2 |
| | — |
|
Midwest Gaming's recapitalization and transactions costs | 0.8 |
| | — |
| | 4.7 |
| | — |
|
Other | (0.1 | ) | | — |
| | (0.1 | ) | | — |
|
Total adjustments to EBITDA | 27.2 |
| | 13.5 |
| | 48.9 |
| | 22.6 |
|
Adjusted EBITDA | $ | 215.0 |
| | $ | 174.5 |
| | $ | 289.6 |
| | $ | 223.7 |
|
| | | | | | | |
Adjusted EBITDA by segment: | | | | | | | |
Churchill Downs | $ | 121.9 |
| | $ | 107.9 |
| | $ | 123.3 |
| | $ | 101.9 |
|
Online Wagering | 22.2 |
| | 24.4 |
| | 39.1 |
| | 42.3 |
|
Gaming | 76.1 |
| | 45.7 |
| | 140.9 |
| | 92.1 |
|
Total segment Adjusted EBITDA | 220.2 |
| | 178.0 |
| | 303.3 |
| | 236.3 |
|
All Other | (5.2 | ) | | (3.5 | ) | | (13.7 | ) | | (12.6 | ) |
Total Adjusted EBITDA | $ | 215.0 |
| | $ | 174.5 |
| | $ | 289.6 |
| | $ | 223.7 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Reconciliation of Comprehensive Income to Adjusted EBITDA: | | | | | | | |
| | | | | | | |
Comprehensive income | $ | 56.9 |
| | $ | 17.3 |
| | $ | 341.8 |
| | $ | 102.5 |
|
Foreign currency translation, net of tax | (0.4 | ) | | (0.5 | ) | | (0.4 | ) | | (0.1 | ) |
Change in pension benefits, net of tax | (0.2 | ) | | (0.1 | ) | | — |
| | (0.1 | ) |
Net income | 56.3 |
| | 16.7 |
| | 341.4 |
| | 102.3 |
|
Loss (income) from discontinued operations, net of tax | 1.7 |
| | (3.6 | ) | | (166.1 | ) | | (14.3 | ) |
Income from continuing operations, net of tax | 58.0 |
|
| 13.1 |
|
| 175.3 |
|
| 88.0 |
|
| | | | | | | |
Additions: | | | | | | | |
Depreciation and amortization | 16.7 |
| | 13.4 |
| | 45.8 |
| | 42.0 |
|
Interest expense | 9.9 |
| | 12.6 |
| | 29.2 |
| | 36.0 |
|
Income tax provision | 16.7 |
| | 10.3 |
| | 52.1 |
| | 57.9 |
|
EBITDA | 101.3 |
| | 49.4 |
| | 302.4 |
| | 223.9 |
|
| | | | | | | |
Adjustments to EBITDA: | | | | | | | |
Selling, general and administrative: | | | | | | | |
Stock-based compensation expense | 3.9 |
| | 3.9 |
| | 13.1 |
| | 11.7 |
|
Other charges | 0.2 |
| | — |
| | 0.2 |
| | — |
|
Pre-opening expense | 2.6 |
| | — |
| | 3.9 |
| | 0.3 |
|
Other income, expense: | | | | | | | |
Interest, depreciation and amortization expense related to equity investments | 3.6 |
| | 4.0 |
| | 12.2 |
| | 10.6 |
|
Gain on Ocean Downs/Saratoga transaction | (54.9 | ) | | — |
| | (54.9 | ) | | — |
|
Transaction expense, net | 5.4 |
| | 0.6 |
| | 8.9 |
| | 1.1 |
|
Calder exit costs | — |
| | 0.2 |
| | — |
| | 0.8 |
|
Total adjustments to EBITDA | (39.2 | ) | | 8.7 |
| | (16.6 | ) | | 24.5 |
|
Adjusted EBITDA | $ | 62.1 |
| | $ | 58.1 |
| | $ | 285.8 |
| | $ | 248.4 |
|
| | | | | | | |
Adjusted EBITDA by segment: | | | | | | | |
Racing | $ | (1.2 | ) | | $ | 1.7 |
| | $ | 98.5 |
| | $ | 90.7 |
|
TwinSpires | 19.3 |
| | 18.8 |
| | 58.9 |
| | 51.3 |
|
Casino | 45.7 |
| | 39.5 |
| | 133.9 |
| | 112.3 |
|
Other Investments | 1.1 |
| | 1.1 |
| | 2.5 |
| | 3.0 |
|
Corporate(a) | (2.8 | ) | | (3.0 | ) | | (8.0 | ) | | (8.9 | ) |
Adjusted EBITDA | $ | 62.1 |
| | $ | 58.1 |
| | $ | 285.8 |
| | $ | 248.4 |
|
(a) The Corporate segment includes corporate and other certain expenses of $0.7 million for the three months and $2.1 million for the nine months ended September 30, 2017 that have not been allocated to Big Fish Games as a result of the Big Fish Transaction. The Big Fish Games segment is reported as held for sale and discontinued operations in the accompanying condensed consolidated financial statements and these notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents information about equity in income of unconsolidated investments included in our reported segments:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Gaming | $ | 9.5 |
| | $ | 8.8 |
| | $ | 13.6 |
| | $ | 15.3 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Casino | $ | 9.0 |
| | $ | 8.7 |
| | $ | 24.3 |
| | $ | 22.5 |
|
Other Investments | 0.1 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
|
| $ | 9.1 |
| | $ | 8.9 |
| | $ | 24.4 |
| | $ | 22.7 |
|
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 30 | |
|
| | |
Churchill Downs Incorporated |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
The table below presents total asset information for each of our operating segments:
|
| | | | | | | |
(in millions) | June 30, 2019 | | December 31, 2018 |
Total assets: | | | |
Churchill Downs | $ | 371.4 |
| | $ | 359.6 |
|
Online Wagering | 244.3 |
| | 222.8 |
|
Gaming | 1,605.3 |
| | 877.1 |
|
Total segment assets | 2,221.0 |
| | 1,459.5 |
|
All Other | 367.5 |
| | 265.7 |
|
Total assets | $ | 2,588.5 |
| | $ | 1,725.2 |
|
|
| | | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Total assets: | | | |
Racing | $ | 495.4 |
| | $ | 483.0 |
|
TwinSpires | 225.8 |
| | 215.9 |
|
Casino | 803.2 |
| | 679.6 |
|
Other Investments | 84.9 |
| | 15.2 |
|
Corporate | 102.4 |
| | 73.2 |
|
Big Fish Games | — |
| | 892.5 |
|
| $ | 1,711.7 |
| | $ | 2,359.4 |
|
The table below presents total capital expenditures for each of our operating segments:
|
| | | | | | | |
| Six Months Ended June 30, |
(in millions) | 2019 | | 2018 |
Capital expenditures: | | | |
Churchill Downs | $ | 21.9 |
| | $ | 56.1 |
|
Online Wagering | 4.9 |
| | 4.7 |
|
Gaming | 28.2 |
| | 8.6 |
|
Total segment capital expenditures | 55.0 |
| | 69.4 |
|
All Other | 3.8 |
| | 3.0 |
|
Total capital expenditures | $ | 58.8 |
| | $ | 72.4 |
|
|
| | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 |
Capital expenditures: | | | |
Racing | $ | 53.6 |
| | $ | 47.8 |
|
TwinSpires | 7.1 |
| | 7.3 |
|
Casino | 9.2 |
| | 26.0 |
|
Other Investments | 53.8 |
| | 1.3 |
|
Corporate | 1.8 |
| | 1.1 |
|
Big Fish Games | — |
| | 5.6 |
|
| $ | 125.5 |
| | $ | 89.1 |
|
16.18. SUBSEQUENT EVENT
Capital Management
At its regularly scheduled meeting held October 30, 2018, the Board of Directors of the Company approved the following:
declaration of an annual cash dividend of $1.63 per share, to be paid on January 4, 2019 to all shareholders of record on December 7, 2018;
a three-for-one stock split of the Company's common stock and a proportionate increase in the number of its authorized shares of common stock. The additional shares will be distributed on JanuaryOn July 25, 2019, to shareholders of record on January 11, 2019. The Company's common stock will begin trading atMidwest Gaming & Entertainment, LLC, the split-adjusted price on January 28, 2019; and
a new common stock repurchase program of up to $300.0 million. The new program will replace the prior $250.0 million program that was authorized in April 2017 and had unused authorization of $78.3 million. The new authorized amount includes and is not in addition to any unspent amount remaining under the prior authorization. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended or discontinued at any time.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition of Certain Ownership Interestswholly owned operating subsidiary of Midwest Gaming, Holdings, LLC
On October 31, 2018, the Company announced that it has entered into a definitive purchase agreement pursuant to which the Company will acquire certain of the ownership interests of Midwest Gaming Holdings, LLC (“Midwest Gaming”), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois (“Rivers Des Plaines”), for cash (the “Sale Transaction”).
The Sale Transaction will be comprised of (i) the Company’s purchase of 100% of the ownership stake in Midwest Gaming held by affiliates and co-investors of Clairvest Group Inc. (“Clairvest”) for approximately $291.0 million and (ii) the Company’s offer to purchase, on the same terms, units of Midwest Gaming held by High Plaines Gaming, LLC, an affiliate of Rush Street Gaming, LLC (“Rush Street”), and Casino Investors, LLC (“Casino Investors”), resulting in aggregate cash consideration of at least $326.0 million.
Following the closing of the Sale Transaction, the parties expect to enter into a recapitalization transaction pursuant to which Midwest Gaming will use approximately $300.0 million in proceeds from new credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by Rush Street and Casino Investors (the “Recapitalization” and together with the Sale Transaction, the “Transactions”). The Transactions will result in the Company owning at least 50.1% of Midwest Gaming.
Should sufficient members of Rush Street and Casino Investors elect to participate in the Company's offer to purchase additional units in the Sale Transaction, the Company's ownership of Midwest Gaming following the Transactions would increase, as would our cash investment. The Company's cash purchase price in the Sale Transaction is subject to a cap of $500.0 million, which is expected to pay for all of Clairvest's units and those of the other investors being sold in the Sale Transaction.
The Company and Rush Street equally will split priority distributions of two percent of Midwest Gaming's annual gross revenue. In addition, the Company, Rush Street, and Casino Investors will be entitled to receive pro rata quarterly tax distributions calculated based on the highest applicable U.S. individual federal tax rate plus the higher of California or New York individual state tax rates, as well as other distributions permitted under new credit facility covenants.
The Transactions are dependent on usual and customary closing conditions, including securing approval fromnotified the Illinois Gaming Board and clearance underof its intention to reserve 800 additional gaming positions at Rivers Des Plaines in accordance with the Hart-Scott-Rodino Antitrust Improvementsamended Illinois Gambling Act of 1976. The Transactions are expected to close in the first half ofthat was signed into law on June 28, 2019.
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FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information set forth in this discussion and analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "might", "plan", "predict", "project", "seek", "should", "will", and similar words, although some forward-looking statements are expressed differently.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations include the following: the effect of economic conditions on our consumers' confidence and discretionary spending or our access to credit; additional or increased taxes and fees; public perceptions or lack of confidence in the integrity of our business; loss of key or highly skilled personnel; restrictions in our debt facilities limiting our flexibility to operate our business; general risks related to real estate ownership, including fluctuations in market values and environmental regulations; catastrophic events and system failures disrupting our operations,operations; online security risk, including cyber-security breaches; inability to recover under our insurance policies for damages sustained at our properties in the impactevent of naturalinclement weather and other disasters on our operationscasualty events; increases in insurance costs and our abilityinability to obtain similar insurance recoveriescoverage in respect of such losses;the future; inability to identify and complete acquisition, expansion or divestiture projects, on time, on budget or as planned; difficulty in integrating recent or future acquisitions into our operations; additional legalization of online real money gaming and sports wagering in the United States, and our ability to capitalize on and predict such legalization; the number of people attending and wagering on live horse races; inability to respond to rapid technological changes in a timely manner; inadvertent infringement of the intellectual property of others; inability to protect our own intellectual property rights; security breaches and other security risks related to our technology, personal information, source code and other proprietary information, including failure to comply with regulations and other legal obligations relating to receiving, processing, storing and using personal information; payment-related risks, such as chargebacks forrisk associated with fraudulent credit card and debit card use; compliance with the Foreign Corrupt Practices Act or applicable money-laundering regulations; compliance with payment processing and payment transmission regulations; work stoppages and labor issues; difficulty in attracting a sufficient number of horses and trainers for full field horseraces; inability to negotiate agreements with industry constituents, including horsemen and other racetracks; personal injury litigation related to injuries occurring at our racetracks; theour inability of ourto utilize and provide totalisator company, United Tote, to maintain its processes accurately, keep its technology current or maintain its significant customers;services; weather conditions affecting our ability to conduct live racing; increased competition in the horseracing business; changes in the regulatory environment of our racing operations; declining popularity in horseracing; seasonal fluctuations in our horseracing business due to geographic concentration of our operations; increased competition in our casino business; changes in regulatory environment of our casinoonline horseracing business; the cost and possibility for delay, cost overruns and other uncertainties associated with the development and expansion of casinos; concentration and evolution of slot machine manufacturing and other technology conditions that could impose additional costs; impact of further legislation prohibiting tobacco smoking; geographic concentration of our casino business; changes in regulatory environment for our advanced deposit wagering, sports wagering, or online gaming businesses; increase in competition in the advanced deposit wagering, sports wagering, orour online gaming businesses; inability to retain current customers or attract new customers to our advanced deposit wagering, sports wagering, or online gaming businesses;horseracing; uncertainty and changes in the legal landscape relating to our advanced depositonline wagering business; legalization of online sports wagering, or online gaming businesses;betting and iGaming in the United States and our ability to predict and capitalize on any such legalization; inability to expand our sports betting operations and effectively compete; failure to comply with laws requiring us to block access to certain individuals could result in penalties or impairment with respect to our mobile and online wagering products; increased competition in our abilitycasino business; changes in regulatory environment of our casino business; development and expansion of casinos is costly and susceptible to offer advanced deposit wagering, sports wagering, or online gaming.delays, cost overruns and other uncertainties; and concentration and evolution of slot machine manufacturing and other technology conditions that could impose additional costs.
The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts assume dilution unless otherwise noted. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017,2018, including Part I - Item 1A, "Risk Factors" of our Form 10-K for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate.
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Our Business
Executive Overview
We are an industry-leading racing, gamingonline wagering and onlinegaming entertainment company anchored by our iconic flagship event - The Kentucky Derby. We areown and operate Derby City Gaming, a historical racing machine facility in Louisville, Kentucky. We also own and operate the largest legal online accounthorseracing wagering platform for horseracing in the U.S., through our ownership of TwinSpires.com. WeTwinSpires.com, and are also a leader in brick-and-mortar casino gaming with approximately 8,000 gaming positions11,000 slot machines and video lottery terminals ("VLTs") and 200 table games in sixeight states. We have launchedalso operate sports wagering and iGaming through our BetAmerica Sportsbook at our two Mississippi casino properties and have announced our plans to enter additional U.S. sports betting markets and real money online gaming.platform in multiple states. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
Segments
During the first quarter of 2019, we realigned our operating segments to reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources. Refer to Note 1, Description of Business, to our condensed consolidated financial statements for further information. For financial reporting purposes, we aggregate our operating segments into three reportable segments as follows:
Churchill Downs
The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming.
Churchill Downs Racetrack is the home of The Kentucky Derby andconducts live racing during the year. Derby City Gaming is a historical racing machine facility that operates under the Churchill Downs pari-mutuel racing license at its ancillary training facility in Louisville, Kentucky.
Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming; simulcast fees earned form other wagering sites; admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services.
Online Wagering
The Online Wagering segment includes the revenue and expenses for the TwinSpires business ("TwinSpires") and the online Sports Betting and iGaming business.
TwinSpires operates our online horseracing wagering business on TwinSpires.com, BetAmerica.com and other Company platforms; facilitates high dollar wagering by international customers ("Velocity"); and provides the platform for horseracing statistical data generated by our information business that provides data and processing services to the equine industry ("Brisnet").
Our Sports Betting and iGaming business includes the online BetAmerica sports betting and casino gaming operations.
Gaming
The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or Jai Alai facilities which support the casino license. The Gaming segment has approximately 11,000 slot machines and VLTs located in eight states.
The Gaming segment revenue and Adjusted EBITDA includes the following properties:
| |
◦ | Calder Casino and Racing ("Calder") |
| |
◦ | Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI") |
| |
◦ | Harlow’s Casino Resort and Spa ("Harlow's") |
| |
◦ | Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") management agreement |
| |
◦ | Ocean Downs Casino and Racetrack ("Ocean Downs") |
| |
◦ | Oxford Casino and Hotel ("Oxford") |
| |
◦ | Presque Isle Downs and Casino ("Presque Isle") |
| |
◦ | Riverwalk Casino Hotel ("Riverwalk") |
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The Gaming segment Adjusted EBITDA also includes the Adjusted EBITDA related to the Company’s equity investments in the following:
| |
◦ | 61.3% equity investment in Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois ("Rivers Des Plaines") |
| |
◦ | 50% equity investment in Miami Valley Gaming and Racing ("MVG") |
The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, retail sports betting, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and / or other miscellaneous operations.
We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results:
Arlington International Race Course ("Arlington")
United Tote
We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results were reclassified to conform to this presentation.
Effective January 1, 2019, the Company does not allocate corporate and other related expenses to the operating segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.
Acquisitions of Presque Isle and Lady Luck Nemacolin
On January 11, 2019, we completed the acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc. ("ERI") for cash consideration of $178.9 million (the "Presque Isle Transaction") and $1.6 million of working capital and other purchase price adjustments.
On March 8, 2019, the Company assumed management and acquired certain assets related to the management of Lady Luck Nemacolin in Farmington, Pennsylvania, from ERI for cash consideration of $100,000 (the "Lady Luck Nemacolin Transaction").
Acquisition of Certain Ownership Interests of Midwest Gaming Holdings, LLC
On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Des Plaines in Des Plaines, Illinois (the "Sale Transaction") to acquire approximately 42% of Midwest Gaming for cash consideration of approximately $406.6 million and $3.5 million for certain transaction costs and working capital adjustments. Following the closing of the Sale Transaction, the parties completed a recapitalization transaction (the "Recapitalization") pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC, and Casino Investors, LLC ("Casino Investors"). As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3%. High Plaines retained ownership of 36% of Midwest Gaming and Casino Investors retained ownership of 2.7% of Midwest Gaming.
We also recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership stake in Midwest Gaming.
Refer to Note 12, Investments in and Advances to Unconsolidated Affiliates, to our condensed consolidated financial statements for further information on the Sale Transaction and the Recapitalization.
Sale of Big Fish Games, Inc.
On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell its mobile gaming subsidiary, Big Fish Games, Inc. ("Big Fish Games"), a Washington corporation, for aggregate cash consideration of $990.0 million, to Aristocrat Technologies, Inc. (the "Purchaser"), a Nevada corporation, an indirect, wholly owned subsidiary of Aristocrat Leisure Limited, an Australian corporation (the "Big Fish Transaction"). On January 9, 2018, pursuant to the Stock Purchase Agreement, the Company completed the Big Fish Transaction. As described in further detail in Item 1. Financial Statements,The Company received cash proceeds of $970.7 million, which was net of $5.2 million of working capital adjustments and $14.1 million of transaction costs.
Big Fish Games and the Company has presentedrelated Big Fish Transaction meet the criteria for discontinued operation presentation. Accordingly, the condensed consolidated statements of comprehensive income and the notes to financial statements reflect Big Fish Games as held for sale and discontinued operations for all periods presented. Unless otherwise specified, disclosures in these condensed consolidated financial statements reflect continuing operations only. The condensed consolidated statements of cash flows include both continuing and
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discontinued operations. Refer to Note 5 of our condensed consolidated financial statements, Discontinued Operations, for further information on the discontinued operations relating to the Big Fish Transaction.
Stock Split
On October 31, 2018, the Company announced a three-for-one split (the "Stock Split") of the Company's common stock for shareholders of record as of January 11, 2019. The additional shares resulting from the Stock Split were distributed on January 25, 2019. Our common stock began trading at the split-adjusted price on January 28, 2019. All share and per-share amounts in the accompanyingCompany’s condensed consolidated financial statements and related notes.
On August 31, 2018,notes have been retroactively adjusted to reflect the Company completed the Ocean Downs/Saratoga Transaction. As described in further detail in Item 1. Financial Statements, the Company consolidated Ocean Downs aseffects of the closing date,Stock Split.
Key Indicators to Evaluate Business Results and no longer has an equity interest or management involvement in Saratoga New York or Saratoga Colorado. As part of the Ocean Downs/Saratoga Transaction, SHRI has agreed to grant the Company and its affiliates exclusive rights to operate online real-money sports betting and real-money iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.
In September 2018, we opened our new $65.0 million, 85,000 square-foot, state-of-the-art historical racing machine facility, Derby City Gaming, in Louisville, Kentucky, which is included in our Other Investments segment.Financial Condition
Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend.
Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and adjustedAdjusted EBITDA. We believe that the use of adjustedAdjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes adjustedAdjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
The Company has not allocated corporate and other certain expenses to Big Fish Games consistent with the discontinued operations presentation in the accompanying condensed consolidated statements of comprehensive income. Accordingly, the prior year amounts were reclassified to conform to this presentation.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
Transaction expense, net which includes:
Acquisition and disposition related charges, including fair value adjustments related to earnouts and deferred payments;
Calder racing exit costs; and
Other transaction expense, including legal, accounting and other deal-related expense;
Stock-based compensation expense;
Midwest Gaming's impact on our investments in unconsolidated affiliates from:
The impact of changes in fair value of interest rate swaps; and
Recapitalization and transaction costs;
Asset impairments;
Gain on Ocean Downs/Saratoga Transaction;
Gain on Calder land sale;
Calder exit costs;
Loss on extinguishment of debt;
Pre-opening expense; and
Other charges, recoveries and expenses
For segment reporting, adjustedAdjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying condensed consolidated statements of comprehensive income. Refer to the reconciliation of comprehensive income to adjustedAdjusted EBITDA included in this section for additional information.
Our Operations
We manage our operations through five operating segments: Racing, TwinSpires, Casino, Other Investments and Corporate. Big Fish Games is a global producer and distributor of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices. On January 9, 2018, we closed the Big Fish Transaction, at which time Big Fish Games ceased to be an operating segment.
Racing Segment
Our Racing segment includes our four thoroughbred racetracks: Churchill Downs Racetrack ("Churchill Downs"), Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds") and Calder Race Course ("Calder"). We conduct live horseracing at Churchill Downs, Arlington and Fair Grounds. On July 1, 2014, we entered into a racing services agreement with The Stronach Group to allow Gulfstream Park to manage and operate Calder through December 31, 2020. We conducted 56 live thoroughbred race days in the third quarter of 2018, compared to 57 live thoroughbred race days during the third quarter of 2017. For the nine months ended September 30, 2018, we conducted 174 live thoroughbred race days, compared to 176 live thoroughbred race days during the nine months ended September 30, 2017.
TwinSpires Segment
Our TwinSpires segment includes TwinSpires.com, Fair Grounds Account Wagering ("FAW"), Velocity, and Bloodstock Research Information Services. On April 24, 2017, we completed the acquisition of certain assets of BAM Software and Services, LLC ("BetAmerica"), which is also included in our TwinSpires segment.
In May 2018, the Company announced its entry into sports betting and real money online gaming ("iGaming") markets. The Company also announced a strategic partnership agreement with SBTech to utilize their integrated technology platform for the Company's sports betting and iGaming operations.
In May 2018, the Company entered into an agreement with Golden Nugget to enter the New Jersey sports betting and iGaming markets.
Casino Segment
We are a provider of brick-and-mortar real-money casino gaming with approximately 8,000 gaming positions located in eight states. We own six casinos: Oxford Casino ("Oxford"), Riverwalk Casino ("Riverwalk"), Harlow's Casino ("Harlow’s"), Calder Casino, Ocean Downs, and Fair Grounds Slots, in addition to three hotels (Oxford, Riverwalk and Harlow’s). We also own Video Services, LLC ("VSI") associated with our Fair Grounds property. In addition, we have a 50% equity investment in Miami Valley Gaming ("MVG"). On August 31, 2018, the Company completed the Ocean Downs/Saratoga Transaction. As described in further detail in Item 1. Financial Statements, the Company consolidated Ocean Downs as of the closing date, and no longer has an equity interest or management involvement in Saratoga New York or Saratoga Colorado.
Our Casino revenue is primarily generated from slot machines, video poker, table games, and sports betting, while ancillary revenue includes hotel and food and beverage sales.
In August 2018, we launched our BetAmerica Sportsbook at our two Mississippi casino properties.
In February 2018, Calder Casino was issued a jai alai permit by the Department of Business & Professional Regulation ("DBPR") in Florida. In May 2018, Calder Casino received a jai alai license to conduct live summer jai alai performances in May and June 2019 for the State of Florida's 2018-2019 fiscal year. Calder Casino has initiated the construction of building a jai alai facility adjacent to the Calder Casino.
Other Investments Segment
Our Other Investments Segment includes United Tote, Derby City Gaming, and other minor investments.
In September 2018, we opened our new 85,000 square-foot, state-of-the-art historical racing machine facility, Derby City Gaming, in Louisville, Kentucky.
In September 2018, we announced a partnership with Keeneland Association, Inc. to propose the construction of a new racing facility in Oak Grove, Kentucky. The proposed facility will feature live horse racing, a hotel, and historical racing machines.
Corporate Segment
Our Corporate segment includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocated to other operating segments.
Government Regulations and Potential Legislative ChangesActions
We are subject to various federal, state and international laws and regulations that affect our businesses. The ownership, operation and management of our racing operations, our casino operations,Churchill Downs, Online Wagering, Gaming and TwinSpiresother investments are subject to regulation under the laws and regulations of each of the jurisdictions in which we operate. The ownership, operation and management of our segments are also subject to legislative actions at both the federal and state level. The following update on our regulatory and legislative activities should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017,2018, including Part I - Item 1, "Business," for a discussion of regulatory and legislative issues.
Racing
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Specific State Casino Regulations and Legislative Actions
Illinois
In July 2018,On June 28, 2019, the Governor of Illinois signed legislation was signed into law that extends the authorization of advance deposit wagering though December 31, 2022.
TwinSpires Regulations
Federal
In May 2018, the United States Supreme Court struck down the 1992 Professional and Amateur Sports Protection Act, which had effectively banned sports wageringexpands gaming opportunities in most states. RemovalIllinois. Some of the ban gives states the authority to authorize sports wagering. Should states choose to authorize this activity, we believe it will have a positive impact on our business.
Mississippi
In 2017, Mississippi changed its law to allow sports betting as part of a bill legalizing and regulating fantasy sports, subject to the reversalhighlights of the 1992 Professionallegislation are as follows:
Existing Illinois casinos:
The ten existing casinos can expand from 1,200 gaming positions to up to 2,000 gaming positions.
Allows for a tax credit for facility renovation and Amateur Sports Protection Act and approval by the Mississippi Gaming Commission.requires a reconciliation payment after year three post expansion / build.
In June 2018, the Mississippi Gaming Commission approved rules regulating sports betting confinedNew casinos in Illinois:
Authorizes licenses for six new casinos to brick and mortar casinosbe located in Mississippi which became effectivedowntown Chicago, Waukegan, Rockford, Cook County South Suburbs, Williamson County and Danville and slots at the Chicago International and Midway airports.
The combination of the new downtown Chicago casino and the two airports can have up to 4,000 gaming positions. The new Williamson County casino can have up to 1,200 gaming positions. The other four new casinos can have up to 2,000 gaming positions.
Requires an upfront reconciliation payment and a reconciliation payment after year three post expansion / build.
Racetracks in July 2018. TheIllinois:
Racetracks outside of Cook County can add up to 900 gaming positions.
Racetracks inside of Cook County can add up to 1,200 gaming positions.
Authorizes a new standardbred racetrack in Cook County.
Unused gaming positions can be purchased by other racetrack facilities.
Requires a purse contribution based on a graduated percentage of annual adjusted gross gaming receipts and imposes a graduated pari-mutuel tax.
Requires a reconciliation payment after year three post expansion / build if gaming positions are added.
Other significant provisions:
Existing and new video gaming terminal locations can increase from five units to a maximum of six units, can increase the maximum bet and can increase the maximum pay-out. Truck stop locations can increase from five units to a maximum of 10 units.
Promotional free play can be deducted from taxable revenue up to 20% of adjusted gross receipts ("AGR") starting January 1, 2020.
Table games revenue will be taxed under a new separate graduated privilege tax rate onstructure of 15% of the first $25 million of AGR and 20% above $25 million of AGR when the first new casino begins operations.
The new Chicago casino will be required to pay a privilege tax equal to 33% of annual gross gaming revenuesreceipts instead of the graduated privilege tax for sports betting is consistent with our casino gross gaming revenues. We believe this approval will have a positive impact on our business.slot machines and table games.
New Jersey
Online Gaming
In February 2013, legislation was signed into law that allows Atlantic City casinos to offer online casino style gaming in New Jersey. The legislation provides for a $400,000 license fee and a 15% tax rate on gross gaming revenues. We believe this legislation will have a positive impact on our business.business operations.
Specific State Sports WageringBetting and iGaming Regulations and Legislative Actions
InIllinois
Sports Betting
On June 2018, a bill was28, 2019, the Governor of Illinois signed legislation into law whichthat authorizes sports wagering at casinos, racetracks and online, andbetting in Illinois. Some of the Divisionhighlights of Gaming Enforcement issued regulations governing the activity. Each casino or racetrack may offer a maximum of three online sports betting websites. The initial license fee is $100,000 with a tax of 9.75% on land-based gross betting revenue and a 14.25% tax on online gross betting revenue. legislation are as follows:
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▪ | Casinos, racetracks and sports venues that hold more than 17,000 people are authorized to operate sports wagering at brick and mortar locations and online. |
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▪ | Racetracks can have three affiliated off-track betting facilities ("OTBs") that are authorized to operate sports wagering at the OTB location and online. |
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▪ | The license fee for casinos is up to $10.0 million based on AGR, for racetracks is up to $10.0 million based on handle, and for sports venues is $10.0 million. |
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▪ | During the 18-month period after the first license becomes operational, all sports wagering accounts must be established at a licensed gaming facility. |
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▪ | Three online licenses can be issued through a competitive bid process upon payment of a $20.0 million per license fee after the 18-month period. |
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▪ | The lottery is authorized to offer a pilot program of lottery sports betting terminals at 2,500 retail locations. The program is scheduled to sunset in January 1, 2024. |
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▪ | The bill sets a tax rate of 15% on adjusted sports wagering receipts with an additional tax of 2% on wagers placed in Cook County and official league data must be used by operators. |
We believe this legislation will have a positive impact on our business.business operations.
PennsylvaniaTwinSpires Regulations and Legislative Actions
Online GamingIllinois
In October 2017,On June 28, 2019, the Governor of Illinois signed legislation was signed into law that would allowremoves the sunset date for the operation of online gaming in Pennsylvania. The legislation allows for casinos to operate up to three categories of licenses: poker, interactive slots and interactive table games. Existing in-state casinos have 120 days to purchase a license. Each individual license is $4 million per license or $10 million for all three. If any licenses remain after 120 days, the state has the option to allow out of state gaming entities the opportunity to purchase an online gaming license. The tax rate on poker and table games is 14% of gross gaming revenue, while the tax on slot machine style games is 54%. In March 2018, the Pennsylvania Gaming Control Board issued temporary regulations governing the activity. We believe this legislation could have a positive impact on our business.
Sports Wagering
In October 2017, a bill was signed into law that will allow for the operation of brick and mortar and online sportsadvance deposit wagering in Pennsylvania. Under the terms of the legislation, the state’s existing casinos can operate sports wagering and must pay a $10 million license fee. The tax rate on sports wagering is 36% of gross gaming revenue. In July 2018, the Pennsylvania Gaming Control Board issued temporary regulations governing the activity. To date, two operators have applied for and been approved for a license. We believe this legislation could have a positive impact on our business.
Specific State Casino Regulations and Potential Legislative Changes
Florida
In October 2018, the State of Florida Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering (“Division”) issued two separate Final Orders Granting Declaratory Statement in response to two separate Petitions for Declaratory Statements submitted by Calder Race Course, Inc. regarding jai alai.
The Florida Horsemen's Benevolent and Protective Association, Inc. has filed two administrative challenges in Florida related to jai alai and one lawsuit against Calder Casino and DBPR seeking declaratory relief for Division actions related to the issuance of Calder Casino’s jai alai permit.
Maryland
In April 2017, legislation was signed into law to allow a video lottery terminal ("VLT") licensee to reduce the following day's proceeds by the amount of money returned to players that exceeds the amount bet through VLTs or table games on a given day, thereby reducing the taxes owed by the VLT licensee. In April 2018, legislation was signed into law which provides a video lottery operation licensee may carry over the losses for up to seven days. The legislation has had, and we believe will continue to have, a positive impact on our business.
In April 2018, legislation was signed into law which provides for up to $1.2 million annually to be distributed through 2024 to Ocean Downs from the Purse Dedication Account for losses associated with maintaining a minimum 40 days of live racing each year.operations. We believe this legislation will have a positive impact on our business.
Other Regulations and Potential Legislative Changes
Kentucky
In April 2018, House Bill 487 ("HB 487"), was approved by the Kentucky Senate and enacted into law. HB 487 reduces Kentucky’s corporate statutory income tax rate from 6% to 5% and imposes a single-sales factor apportionment effective for the 2018 tax year and beyond. Effective January 1, 2019, HB 487 will require the Company to file either a water’s edge combined or consolidated Kentucky tax return. We believe HB 487 will have a beneficial impact on the Company’s tax rate for 2018 and future years.business operations.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, adjustedAdjusted EBITDA, and certain other financial information:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net revenue | $ | 221.3 |
| | $ | 196.9 |
| | $ | 24.4 |
| | $ | 790.0 |
| | $ | 703.7 |
| | $ | 86.3 |
| $ | 477.4 |
| | $ | 379.4 |
| | $ | 98.0 |
| | $ | 742.8 |
| | $ | 568.7 |
| | $ | 174.1 |
|
Operating income | 20.5 |
| | 27.0 |
| | (6.5 | ) | | 176.8 |
| | 158.4 |
| | 18.4 |
| 156.4 |
| | 136.6 |
| | 19.8 |
| | 184.4 |
| | 156.3 |
| | 28.1 |
|
Operating income margin | 9 | % | | 14 | % | | | | 22 | % | | 23 | % | | | 33 | % | | 36 | % | | | | 25 | % | | 27 | % | | |
Net income from continuing operations | | $ | 108.3 |
| | $ | 103.2 |
| | $ | 5.1 |
| | $ | 120.2 |
| | $ | 117.3 |
| | $ | 2.9 |
|
Net income | $ | 56.3 |
| | $ | 16.7 |
| | $ | 39.6 |
| | $ | 341.4 |
| | $ | 102.3 |
| | $ | 239.1 |
| 107.1 |
| | 103.1 |
| | 4.0 |
| | 118.7 |
| | 285.1 |
| | (166.4 | ) |
Adjusted EBITDA | 62.1 |
| | 58.1 |
| | 4.0 |
| | 285.8 |
| | 248.4 |
| | 37.4 |
| 215.0 |
| | 174.5 |
| | 40.5 |
| | 289.6 |
| | 223.7 |
| | 65.9 |
|
Three Months Ended SeptemberJune 30, 2018,2019, Compared to Three Months Ended SeptemberJune 30, 20172018
Our netNet revenue increased $24.4$98.0 million driven by a $17.5$69.6 million increase from Casinothe Gaming segment primarily from successful marketingdue to the Presque Isle, Lady Luck Nemacolin and promotional activities,Ocean Downs/Saratoga Transactions, as well as growth at our other gaming properties, and a $5.9$28.8 million increase from TwinSpires due to the increase in handle and the adoption of ASC 606 which resulted in modifications between the classification of net revenue and operating expenses, and a $2.2 million increase in Other InvestmentsChurchill Downs primarily due to the opening of our Derby City Gaming facility in September 2018. Partially offsetting these increases was a $1.2 million decrease from Racing primarily from Arlington due to inclement weather.
Our operating income decreased $6.5 million driven by a $4.8 million increase in transaction expense, net primarily due to the $5.0 million termination fee in connection with the Lady Luck Nemacolin Transaction, a $4.3 million decrease from Racing primarily from Arlington due to inclement weather and increased maintenance and other expenses at Churchill Downs, a $1.8 million increase in selling, general and administrative expense primarily driven by salaries and related benefits, a $1.3 million decrease in Other Investments primarily due to pre-opening expenses for Derby City Gaming and a $0.3 decrease million from other sources. Partially offsetting these decreases was a $6.0 million increase from our Casino segment primarily driven by the increase in net revenue.
Our net income increased $39.6 million driven by a $42.3 million net of tax gain ($54.9 million pre-tax) on the Ocean Downs/Saratoga Transaction, a $6.2 million decrease in our income tax provision excluding the book tax on the Ocean Downs/Saratoga Transaction primarily from the reduction in the federal statutory corporate tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, a $2.7 million decrease in interest expense, net associated with lower outstanding
debt balances, and a $0.2 million increase from other sources. Partially offsetting these increases were a $6.5 million decrease in operating income and a $5.3 million decrease in Big Fish Games' net income.
Our adjusted EBITDA increased $4.0 million driven by a $6.2 million increase from Casino primarily due to organic growth from successful marketing and promotional activities at certain properties and our unconsolidated investments, a $0.5 million increase from TwinSpires primarily due to an increase in handle, and a $0.2 million increase from other sources. Partially offsetting these increases was a $2.9 million decrease from Racing primarily due to an increase in maintenance and other expenses at Churchill Downs.
Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017
Our net revenue increased $86.3 million driven by a $38.0 million increase from Casino primarily from successful marketing and promotional activities, a $30.3 million increase from TwinSpires due to the increase in handle, a $15.8 million increase from Racing primarily from a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and handle andat Churchill Downs Racetrack. Partially offsetting these increases was a $2.2$0.4 million decrease from other sources.
Operating income increased $19.8 million due to a $14.4 million increase from Gaming primarily driven by the increase in Other Investmentsnet revenue; an $11.7 million increase from Churchill Downs primarily due to the opening of Derby City Gaming in September 2018.
Our operating income increased $18.4 million driven by a $19.2 million increase from Casino primarily driven by the increase in net revenue from successful marketing and promotional activities, an $8.3 million increase from TwinSpires due to the increase in handle, a $4.4 million increase in Racing primarily from a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and handle at Churchill Downs Racetrack; and a $0.8$1.5 million decrease in Calder exit costs, and a $0.1 million increase from other sources.transaction expense, net. Partially offsetting these increases were a $7.8 million increase in in transaction expenses, net due to the termination fee relating to the Termination Agreement and Lady Luck Nemacolin Transaction and other acquisition-related expenses, a $4.5$7.0 million increase in selling, general and administrative expense primarilyexpenses driven by an increase in salariesthe Presque Isle, Lady Luck Nemacolin and associated benefitsOcean Downs/Saratoga Transactions, and stock-based compensation, and a $2.1 million decrease in Other Investments primarily due to pre-opening expenses for the Derby City Gaming facility.
Our net income increased $239.1 million driven by a $18.4 millionopening, as well as an increase in operating income,stock-based compensation, a $168.3 million after tax gain on the Big Fish Transaction, a $42.3 million net of tax gain ($54.9 million pre-tax) on the on the Ocean Downs/Saratoga Transaction, a $18.4$0.6 million decrease in our income tax provision excluding the book tax on the Ocean Downs/Saratoga Transaction primarily from the reduction in the federal statutory corporate tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, a $6.8 million decrease in interest expense, netOnline Wagering segment for costs associated with lower outstanding debt balances,the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey, and a $1.7 million increase from equity in income of unconsolidated investments primarily due to strong performances at Ocean Downs and MVG. Offsetting these increases were a $16.5 million decrease in Big Fish net income and a $0.3$0.2 million decrease from other sources.
Our adjustedNet income from continuing operations increased $5.1 million. The following items impacted comparability of the Company's second quarter of 2019 net income from continuing operations: (1) $5.8 million after-tax impact of our equity portion of Midwest Gaming's non-cash change in fair value related to interest rate swaps; and (2) $0.6 million after-tax impact of our equity portion of Midwest Gaming's recapitalization and transaction costs. Partially offsetting these increases were (3) a $1.1 million after-tax decrease in expenses related to lower transaction, pre-opening and other expenses; and (4) a $0.6 million non-cash tax benefit related to the re-measurement of our net deferred tax liabilities from changes in state enacted rates. Excluding these items, net income from continuing operations increased $9.8 million primarily due to a $16.7 million after-tax increase driven by the results of our operations and equity income from our unconsolidated affiliates, partially offset by a $6.9 million after-tax increase in interest expense associated with higher outstanding debt balances.
Net income increased $4.0 million due to a $5.1 million increase in net income from continuing operations discussed above, partially offset by a $1.1 million increase in net loss from discontinued operations.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 37 | |
Adjusted EBITDA increased $37.4$40.5 million driven by a $21.6$30.4 million increase from Casinothe Gaming segment primarily due to organic growth from successful marketingthe Presque Isle, Midwest Gaming, and promotional activities at certainOcean Downs/Saratoga Transactions, as well as strong performances of our wholly-owned Gaming properties and our unconsolidated investments,equity investment in MVG, a $7.8$13.9 million increase from Racingthe Churchill Downs segment primarily due to the opening of Derby City Gaming and a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and handle at Churchill Downs Racetrack. Partially offsetting these increases were a $7.6$2.1 million decrease from the Online Wagering segment for costs associated with the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey, and a $1.7 million decrease from All Other mainly due to increased salaries and related benefits at the corporate level.
Six Months Ended June 30, 2019, Compared to Six Months Ended June 30, 2018
Net revenue increased $174.1 million driven by a $127.2 million increase from the Gaming segment primarily due to the Presque Isle, Lady Luck Nemacolin and Ocean Downs/Saratoga Transactions, as well as growth at TwinSpiresour other gaming properties, and a $47.9 million increase from Churchill Downs primarily due to the opening of Derby City Gaming and a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle at Churchill Downs Racetrack. Partially offsetting these increases was a $1.0 million decrease from other sources.
Operating income increased $28.1 million driven by a $26.3 million increase from Gaming primarily driven by the increase in handle,net revenue, and a $0.4$17.2 million increase from Churchill Downs primarily due to the opening of Derby City Gaming and a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle at Churchill Downs Racetrack. Partially offsetting these increases were a $13.5 million increase in selling, general and administrative expenses driven by the Presque Isle, Lady Luck Nemacolin and Ocean Downs/Saratoga Transactions, and the Derby City Gaming opening, as well as an increase in stock-based compensation, a $1.8 decrease in the Online Wagering segment for costs associated with the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey, and a $0.1 million decrease from other sources.
Net income from continuing operations increased $2.9 million. The following items impacted comparability of the Company's six months ended June 30, 2019 net income from continuing operations: (1) $9.1 million after-tax impact of our equity portion of Midwest Gaming's non-cash change in fair value related to interest rate swaps; (2) $3.5 million after-tax impact of our equity portion of Midwest Gaming's recapitalization and transaction costs; (3) $2.2 million non-cash tax impact related to the re-measurement of our net deferred tax liabilities based on an increase in revenue related to states with higher tax rates compared to the prior year period; and (4) a $1.3 million after-tax increase in expenses related to lower transaction, pre-opening and other expenses. Excluding these items, net income from continuing operations increased $19.0 million primarily due to a $28.8 million after-tax increase driven by the results of our operations and equity income from our unconsolidated affiliates, partially offset by a $9.8 million after-tax increase in interest expense associated with higher outstanding debt balances.
Net income decreased $166.4 million due to a $2.9 million increase in net income from continuing operations, offset by a $169.3 million decrease in net income from discontinued operations driven by the $168.3 million after-tax gain on the sale of Big Fish Games in January 2018.
Adjusted EBITDA increased $65.9 million driven by a $48.8 million increase from the Gaming segment primarily due to the Presque Isle, Midwest Gaming, and Ocean Downs/Saratoga Transactions, as well as strong performances of our wholly-owned Gaming properties and our equity investment in MVG, and a $21.3 million increase from the Churchill Downs segment primarily due to the opening of Derby City Gaming in September 2018 and a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle at Churchill Downs Racetrack. Partially offsetting these increases were a $3.1 million decrease from the Online Wagering segment for costs associated with the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey, and a $1.1 million decrease from All Other mainly due to increased salaries and related benefits at the corporate level.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 38 | |
Financial Results by Segment
Net Revenue by Segment
The following table presents net revenue for our operating segments, including intercompany revenue:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Racing: | | | | |
|
| | | | | | |
Churchill Downs | $ | 9.5 |
| | $ | 9.0 |
| | $ | 0.5 |
| | $ | 176.1 |
| | $ | 156.7 |
| | $ | 19.4 |
|
Arlington | 26.0 |
| | 27.2 |
| | (1.2 | ) | | 55.3 |
| | 56.6 |
| | (1.3 | ) |
Fair Grounds | 4.8 |
| | 5.0 |
| | (0.2 | ) | | 27.9 |
| | 28.5 |
| | (0.6 | ) |
Calder | 0.7 |
| | 0.7 |
| | — |
| | 2.0 |
| | 1.9 |
| | 0.1 |
|
Total Racing | 41.0 |
| | 41.9 |
| | (0.9 | ) | | 261.3 |
| | 243.7 |
| | 17.6 |
|
TwinSpires | 72.1 |
| | 66.1 |
| | 6.0 |
| | 229.8 |
| | 199.2 |
| | 30.6 |
|
Casino: | | | | |
|
| | | | | |
|
|
Oxford Casino | 28.9 |
| | 25.2 |
| | 3.7 |
| | 79.3 |
| | 69.2 |
| | 10.1 |
|
Calder Casino | 23.4 |
| | 19.4 |
| | 4.0 |
| | 73.0 |
| | 62.6 |
| | 10.4 |
|
Riverwalk Casino | 12.8 |
| | 12.2 |
| | 0.6 |
| | 40.8 |
| | 35.7 |
| | 5.1 |
|
Harlow's Casino | 12.1 |
| | 12.3 |
| | (0.2 | ) | | 37.9 |
| | 38.3 |
| | (0.4 | ) |
VSI | 10.6 |
| | 9.3 |
| | 1.3 |
| | 32.7 |
| | 28.8 |
| | 3.9 |
|
Fair Grounds Slots | 9.1 |
| | 8.7 |
| | 0.4 |
| | 28.9 |
| | 27.7 |
| | 1.2 |
|
Ocean Downs | 8.1 |
| | — |
| | 8.1 |
| | 8.1 |
| | — |
| | 8.1 |
|
Saratoga | — |
| | 0.4 |
| | (0.4 | ) | | 0.6 |
| | 1.0 |
| | (0.4 | ) |
Total Casino | 105.0 |
| | 87.5 |
| | 17.5 |
| | 301.3 |
| | 263.3 |
| | 38.0 |
|
Other Investments | 7.8 |
| | 5.7 |
| | 2.1 |
| | 19.8 |
| | 17.7 |
| | 2.1 |
|
Eliminations | (4.6 | ) | | (4.3 | ) | | (0.3 | ) | | (22.2 | ) | | (20.2 | ) | | (2.0 | ) |
Net Revenue | $ | 221.3 |
| | $ | 196.9 |
| | $ | 24.4 |
| | $ | 790.0 |
| | $ | 703.7 |
| | $ | 86.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Churchill Downs: | | | | | | | | | | | |
Churchill Downs Racetrack | $ | 171.9 |
| | $ | 164.3 |
| | $ | 7.6 |
| | $ | 174.6 |
| | $ | 166.6 |
| | $ | 8.0 |
|
Derby City Gaming | 21.2 |
| | — |
| | 21.2 |
| | 39.9 |
| | — |
| | 39.9 |
|
Total Churchill Downs | 193.1 |
| | 164.3 |
| | 28.8 |
| | 214.5 |
| | 166.6 |
| | 47.9 |
|
Online Wagering: | | | | | | | | | | | |
TwinSpires | 95.9 |
| | 94.1 |
| | 1.8 |
| | 159.2 |
| | 157.7 |
| | 1.5 |
|
Online Sports Betting and iGaming | 0.1 |
| | — |
| | 0.1 |
| | 0.2 |
| | — |
| | 0.2 |
|
Total Online Wagering | 96.0 |
| | 94.1 |
| | 1.9 |
| | 159.4 |
| | 157.7 |
| | 1.7 |
|
Gaming: | | | | |
|
| | | | | |
|
|
Fair Grounds and VSI | 30.9 |
| | 29.6 |
| | 1.3 |
| | 69.7 |
| | 65.0 |
| | 4.7 |
|
Presque Isle | 37.3 |
| | — |
| | 37.3 |
| | 67.0 |
| | — |
| | 67.0 |
|
Calder | 25.6 |
| | 26.0 |
| | (0.4 | ) | | 51.0 |
| | 50.9 |
| | 0.1 |
|
Oxford | 26.3 |
| | 26.2 |
| | 0.1 |
| | 50.2 |
| | 50.4 |
| | (0.2 | ) |
Ocean Downs | 21.9 |
| | — |
| | 21.9 |
| | 40.3 |
| | — |
| | 40.3 |
|
Riverwalk | 14.2 |
| | 13.6 |
| | 0.6 |
| | 30.5 |
| | 28.0 |
| | 2.5 |
|
Harlow's | 13.3 |
| | 12.5 |
| | 0.8 |
| | 28.6 |
| | 25.8 |
| | 2.8 |
|
Lady Luck Nemacolin | 8.3 |
| | — |
| | 8.3 |
| | 10.6 |
| | — |
| | 10.6 |
|
Saratoga | — |
| | 0.3 |
| | (0.3 | ) | | — |
| | 0.6 |
| | (0.6 | ) |
Total Gaming | 177.8 |
| | 108.2 |
| | 69.6 |
| | 347.9 |
| | 220.7 |
| | 127.2 |
|
All Other | 25.4 |
| | 26.3 |
| | (0.9 | ) | | 40.1 |
| | 41.3 |
| | (1.2 | ) |
Eliminations | (14.9 | ) | | (13.5 | ) | | (1.4 | ) | | (19.1 | ) | | (17.6 | ) | | (1.5 | ) |
Net Revenue | $ | 477.4 |
| | $ | 379.4 |
| | $ | 98.0 |
| | $ | 742.8 |
| | $ | 568.7 |
| | $ | 174.1 |
|
Three Months Ended SeptemberJune 30, 2018,2019, Compared to Three Months Ended SeptemberJune 30, 20172018
RacingChurchill Downs revenue decreased $0.9increased $28.8 million driven by a $1.2 million decrease at Arlington primarily due to lower attendance duringa $21.2 million increase from the meet from inclement weatheropening of Derby City Gaming in September 2018 and a $0.2 million decrease at Fair Grounds Race Course, partially offset by a $0.5$7.6 million increase at Churchill Downs due to a $0.9 million increase primarily from increased handle, partially offset by a $0.4 million decrease from timing of the impact of revenue recognition under ASC 606 in the three months ended September 30, 2018 compared to 2017.
TwinSpires revenue increased $6.0 millionRacetrack, primarily due to a 1.0% handle growth, which was consistent with the industry, and the adoption of ASC 606 which resulted in modifications between the classification of net revenue and marketing and content operating expenses.
Casino revenue increased $17.5 million driven by a $8.1 million increase due to consolidating Ocean Downs as a result of the Ocean Downs/Saratoga Transaction effective August 31, 2018, a $4.0 million increase at Calder Casino due to capital improvements and the continued impact of the temporary closure of a competitor due to Hurricane Irma which re-opened during the second quarter of 2018, a $3.7 million increase at Oxford primarily due to the hotel opening in December 2017 and expanded gaming floor, and a $1.7 million increase at our Louisiana properties which resulted from successful marketing and promotional activities.
Other Investments increased $2.1 million due to the opening of the Derby City Gaming facility in September 2018.
Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017
Racing revenue increased $17.6 million driven by a $19.4 million increase at Churchill Downs primarily from a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and handle, partially offset by a $1.3 million decrease at Arlington primarily due to lower attendance during the meet from inclement weather and $0.5 million decrease from other sources.record handle.
TwinSpiresOnline Wagering revenue increased $30.6$1.9 million primarily due to handle growthTwinSpires, which experienced an increase of 10.4%, which outpaced the U.S. thoroughbred industry performance by 6.5 percentage points.
Casino18.8% in active players, while net revenue increased $38.0 million driven by a $10.4 million increase at Calder Casino due to capital improvements and the temporary closure of a competitor due to Hurricane Irma which re-openedper active player declined 12.7%. Handle grew 3.7% during the second quarter of 2018, a $10.1 million increase at Oxford due2019 compared to the hotel openingprior year, and compared to a 3.0% decrease for the U.S. thoroughbred industry. Industry handle was impacted by the absence of a possible Triple Crown horse in December 2017the Preakness and expanded gaming floor, an $8.1Belmont Stakes and limited field sizes in California in the second quarter of 2019.
Gaming revenue increased $69.6 million driven by a $37.3 million increase due to consolidating Ocean Downs asthe Presque Isle Transaction, a result of$21.9 million increase due to the Ocean Downs/Saratoga Transaction, effective August 31,
2018,an $8.3 million increase due to the Lady Luck Nemacolin Transaction, a $5.1$1.4 million increase from our Mississippi properties primarily due to higher attendance driven by the opening of our retail BetAmerica Sportsbooks, and a $1.3 million increase at Riverwalk,Fair Grounds and a $5.1 million increase at our Louisiana properties, both of which resulted fromVSI primarily due to two additional off-track betting and video poker facilities and successful marketing and promotional activities. Partially offsetting these increases was a $0.8$0.6 million decrease from other sources.
All Other Investmentsrevenue decreased $0.9 million primarily due to a decrease in handle at Arlington from inclement weather during the second quarter of 2019 compared to the prior year.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 39 | |
Six Months Ended June 30, 2019, Compared to Six Months Ended June 30, 2018
Churchill Downs revenue increased $2.1$47.9 million primarily due to a $39.9 million increase from the opening of Derby City Gaming and an $8.0 million increase at Churchill Downs Racetrack, primarily due to a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle.
Online Wagering revenue increased $1.7 million primarily due to a $1.5 million increase from TwinSpires. Active players grew 17.9% while net revenue per active player declined 13.3%. Handle grew 2.3% during the six months ended June 30, 2019 compared to the prior year, and compared to a 3.2% decrease for the U.S. thoroughbred industry. Industry handle was impacted by the absence of a possible Triple Crown horse in the Preakness and Belmont Stakes, and the impact in California of race date cancellations in the first quarter of 2019 and limited field sizes in the second quarter of 2019.
Gaming revenue increased $127.2 million driven by a $67.0 million increase due to the Presque Isle Transaction, a $40.3 million increase due to the Ocean Downs/Saratoga Transaction, a $10.6 million increase due to the Lady Luck Nemacolin Transaction, a $5.3 million increase from our Mississippi properties primarily due to higher attendance driven by the opening of our retail BetAmerica Sportsbooks, and a $4.7 million increase at Fair Grounds and VSI primarily due to two additional off-track betting and video poker facilities, successful marketing and promotional activities and increased handle. Partially offsetting these increases was a $0.7 million decrease primarily from the Derby City Gaming facilityloss of Saratoga revenue as a result of the disposition of our equity ownership in SeptemberAugust 2018.
All Other revenue decreased $1.2 million primarily due to a decrease in handle at Arlington from inclement weather during the six months ended June 30, 2019 compared to the prior year.
Additional Statistical Data by Segment
The following tables provide additional statistical data for our segments:
Racing and TwinSpires
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Racing: | | | | | | | |
Churchill Downs | | | | | | | |
Race Days | 11 |
| | 10 |
| | 49 |
| | 48 |
|
Total handle | $ | 56.1 |
| | $ | 46.6 |
| | $ | 533.9 |
| | $ | 499.3 |
|
Net pari-mutuel revenue | $ | 5.8 |
| | $ | 5.1 |
| | $ | 56.3 |
| | $ | 52.3 |
|
Commission % | 10.3 | % | | 10.9 | % | | 10.5 | % | | 10.5 | % |
Arlington | | | | | | | |
Race Days | 45 |
| | 47 |
| | 71 |
| | 71 |
|
Total handle | $ | 170.4 |
| | $ | 171.5 |
| | $ | 347.4 |
| | $ | 348.9 |
|
Net pari-mutuel revenue | $ | 18.8 |
| | $ | 19.9 |
| | $ | 43.7 |
| | $ | 44.7 |
|
Commission % | 11.0 | % | | 11.6 | % | | 12.6 | % | | 12.8 | % |
Fair Grounds | | | | | | | |
Race Days | — |
| | — |
| | 54 |
| | 57 |
|
Total handle | $ | 21.2 |
| | $ | 21.8 |
| | $ | 187.4 |
| | $ | 192.7 |
|
Net pari-mutuel revenue | $ | 4.1 |
| | $ | 4.3 |
| | $ | 19.9 |
| | $ | 20.6 |
|
Commission % | 19.3 | % | | 19.7 | % | | 10.6 | % | | 10.7 | % |
Total Racing | | | | | | | |
Race Days | 56 |
|
| 57 |
|
| 174 |
|
| 176 |
|
Total handle | $ | 247.7 |
| | $ | 239.9 |
| | $ | 1,068.7 |
| | $ | 1,040.9 |
|
Net pari-mutuel revenue | $ | 28.7 |
| | $ | 29.3 |
| | $ | 119.9 |
| | $ | 117.6 |
|
Commission % | 11.6 | % | | 12.2 | % | | 11.2 | % | | 11.3 | % |
TwinSpires (1) | | | | | | | |
Total handle | $ | 341.8 |
| | $ | 338.5 |
| | $ | 1,097.9 |
| | $ | 994.4 |
|
Net pari-mutuel revenue | $ | 61.4 |
| | $ | 61.2 |
| | $ | 199.9 |
| | $ | 182.3 |
|
Commission % | 18.0 | % | | 18.1 | % | | 18.2 | % | | 18.3 | % |
Eliminations (2) | | | | | | | |
Total handle | $ | (22.7 | ) | | $ | (18.8 | ) | | $ | (141.1 | ) | | $ | (122.3 | ) |
Net pari-mutuel revenue | $ | (3.3 | ) | | $ | (3.2 | ) | | $ | (17.3 | ) | | $ | (14.1 | ) |
Total | | | | | | | |
Handle | $ | 566.8 |
| | $ | 559.6 |
| | $ | 2,025.5 |
| | $ | 1,913.0 |
|
Net pari-mutuel revenue | $ | 86.8 |
| | $ | 87.3 |
| | $ | 302.5 |
| | $ | 285.8 |
|
Commission % | 15.3 | % | | 15.6 | % | | 14.9 | % | | 14.9 | % |
|
| | |
(1) | Total handle and net pari-mutuel revenue generated by Velocity are not included in total handle and net pari-mutuel revenue from TwinSpires. |
| FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
(2) | Eliminations include the elimination of intersegment transactions.40 | |
Casino Activity
Certain key operating statistics specific to the gaming industry are included in our statistical data for our Casino segment. Our slot facilities report slot handle as a volume measurement, defined as the gross amount wagered or cash and tickets placed into slot machines in the aggregate for the period cited. Net gaming revenue includes slot, table games, and sports wagering revenue and is net of customer freeplay; however, it excludes other ancillary property revenue such as food and beverage, ATM, hotel and other miscellaneous revenue.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Oxford Casino | | | | | | | |
Slot handle | $ | 274.2 |
| | $ | 231.8 |
| | $ | 754.2 |
| | $ | 627.2 |
|
Net slot revenue | 22.1 |
| | 19.3 |
| | 60.4 |
| | 52.7 |
|
Net gaming revenue | 26.8 |
| | 23.9 |
| | 74.1 |
| | 65.8 |
|
Riverwalk Casino | | | | | | | |
Slot handle | $ | 156.4 |
| | $ | 162.2 |
| | $ | 509.4 |
| | $ | 451.6 |
|
Net slot revenue | 10.5 |
| | 10.4 |
| | 34.3 |
| | 30.4 |
|
Net gaming revenue | 12.2 |
| | 11.6 |
| | 38.9 |
| | 34.0 |
|
Harlow’s Casino | | | | | | | |
Slot handle | $ | 142.3 |
| | $ | 134.6 |
| | $ | 440.5 |
| | $ | 423.0 |
|
Net slot revenue | 10.6 |
| | 10.6 |
| | 33.4 |
| | 33.1 |
|
Net gaming revenue | 11.5 |
| | 11.7 |
| | 36.0 |
| | 36.3 |
|
Calder Casino | | | | | | | |
Slot handle | $ | 338.0 |
| | $ | 279.5 |
| | $ | 1,035.5 |
| | $ | 868.4 |
|
Net slot revenue | 22.3 |
| | 18.5 |
| | 70.0 |
| | 60.1 |
|
Net gaming revenue | 22.3 |
| | 18.5 |
| | 69.9 |
| | 60.0 |
|
Fair Grounds Slots and Video Poker | | | | | | | |
Slot handle | $ | 102.2 |
| | $ | 97.1 |
| | $ | 324.7 |
| | $ | 312.0 |
|
Net slot revenue | 8.8 |
| | 8.5 |
| | 28.0 |
| | 26.9 |
|
Net gaming revenue | 19.4 |
| | 17.8 |
| | 60.6 |
| | 55.6 |
|
Ocean Downs Casino(1) | | | | | | | |
Slot handle | $ | 76.3 |
| | $ | — |
| | $ | 76.3 |
| | $ | — |
|
Net slot revenue | 6.7 |
| | — |
| | 6.7 |
| | — |
|
Net gaming revenue | 7.6 |
| | — |
| | 7.6 |
| | — |
|
| | | | | | | |
Total net gaming revenue | $ | 99.8 |
| | $ | 83.5 |
| | $ | 287.1 |
| | $ | 251.7 |
|
| |
(1) | On August 31, 2018, we completed the Ocean Downs/Saratoga Transaction, the results of which are presented in 2018 from the date of consolidation through September 30, 2018. |
Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Taxes & purses | $ | 51.9 |
| | $ | 44.6 |
| | $ | 7.3 |
| | $ | 170.4 |
| | $ | 153.6 |
| | $ | 16.8 |
| |
Taxes and purses | | $ | 113.1 |
| | $ | 72.4 |
| | $ | 40.7 |
| | $ | 191.3 |
| | $ | 118.5 |
| | $ | 72.8 |
|
Salaries and benefits | | 47.5 |
| | 34.9 |
| | 12.6 |
| | 84.3 |
| | 62.3 |
| | 22.0 |
|
Content expense | 36.5 |
| | 30.6 |
| | 5.9 |
| | 110.2 |
| | 90.0 |
| | 20.2 |
| 41.8 |
| | 41.7 |
| | 0.1 |
| | 73.9 |
| | 73.7 |
| | 0.2 |
|
Salaries & benefits | 31.6 |
| | 29.0 |
| | 2.6 |
| | 93.9 |
| | 88.6 |
| | 5.3 |
| |
Selling, general and administrative expense | 21.7 |
| | 19.9 |
| | 1.8 |
| | 63.2 |
| | 58.7 |
| | 4.5 |
| 30.1 |
| | 23.1 |
| | 7.0 |
| | 55.0 |
| | 41.5 |
| | 13.5 |
|
Depreciation and amortization | 16.7 |
| | 13.4 |
| | 3.3 |
| | 45.8 |
| | 42.0 |
| | 3.8 |
| 21.5 |
| | 15.3 |
| | 6.2 |
| | 42.3 |
| | 29.1 |
| | 13.2 |
|
Marketing & advertising | 6.0 |
| | 5.1 |
| | 0.9 |
| | 20.9 |
| | 19.3 |
| | 1.6 |
| |
Marketing and advertising | | 13.7 |
| | 10.2 |
| | 3.5 |
| | 20.9 |
| | 14.9 |
| | 6.0 |
|
Transaction expense, net | 5.4 |
| | 0.6 |
| | 4.8 |
| | 8.9 |
| | 1.1 |
| | 7.8 |
| 0.6 |
| | 2.1 |
| | (1.5 | ) | | 4.1 |
| | 3.5 |
| | 0.6 |
|
Calder exit costs | — |
| | 0.2 |
| | (0.2 | ) | | — |
| | 0.8 |
| | (0.8 | ) | |
Other operating expense | 31.0 |
| | 26.5 |
| | 4.5 |
| | 99.9 |
| | 91.2 |
| | 8.7 |
| 52.7 |
| | 43.1 |
| | 9.6 |
| | 86.6 |
| | 68.9 |
| | 17.7 |
|
Total expense | $ | 200.8 |
| | $ | 169.9 |
| | $ | 30.9 |
| | $ | 613.2 |
| | $ | 545.3 |
| | $ | 67.9 |
| $ | 321.0 |
| | $ | 242.8 |
| | $ | 78.2 |
| | $ | 558.4 |
| | $ | 412.4 |
| | $ | 146.0 |
|
Percent of net revenue | 91 | % | | 86 | % | | | | 78 | % | | 77 | % | | | |
Three Months Ended SeptemberJune 30, 2018,2019, Compared to Three Months Ended SeptemberJune 30, 20172018
Significant items affecting comparability of consolidated operating expense include:
Taxes and purses increased $7.3$40.7 million driven by a $6.3$32.3 million increase generated byfrom our CasinoGaming segment primarily associated with the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and an increase in slot handle and a $1.0$8.7 million increase in purses and taxes primarily related to our new Derby City Gaming facility which opened in September 2018.
Content expense increased $5.9 million driven by the increase in TwinSpires' handle, the adoptionopening of ASC 606 which resulted in modifications between the classification of net revenue and content expense, and an increase in host fees for certain jurisdictions.Derby City Gaming. These increases were partially offset by a $0.3 million decrease from other sources.
Salaries and benefits expense increased $2.6$12.6 million driven primarily by additional personnel costs and related benefits.benefits from the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and the opening of Derby City Gaming.
Selling, general and administrative expense increased $1.8$7.0 million primarily from an increase in salaries and related benefits.benefits, and stock-based compensation.
Depreciation and amortization expense increased $3.3$6.2 million primarily driven by additionalthe Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, the opening of Derby City Gaming, and capital expenditures placed ininto service for Churchill Downs Oxford, TwinSpires, and Derby City Gaming.
Racetrack.Marketing &and advertising expense increased $0.9$3.5 million primarily from the opening of Derby City Gaming, the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, an increase in September 2018, partially offset by the adoption of ASC 606 which resulted in modifications between the classification of net revenuemarketing spend for our TwinSpires business, and marketing expensestart-up related costs for TwinSpires.our online sports betting and iGaming operations.
Transaction expense, net increased $4.8decreased $1.5 million primarily due to increased expenses associated with announced transactions in the paymentfirst quarter of 2018 that did not recur in the termination feesecond quarter of $5.0 million pursuant to the Termination Agreement in connection with the Lady Luck Nemacolin Transaction.2019.
Other operating expenses include maintenance, utilities, food and beverage costs, property taxes, and insurance, and other operating expenses. Other operating expense increased $4.5$9.6 million primarily driven by a $1.2 million increase from the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and the opening of Derby City Gaming opening in September 2018 and the consolidation of Ocean Downs effective August 31, 2018, a $1.2 million increase in maintenance and other expenses primarily at Churchill Downs, and a $2.1 million increase from other sources.Gaming.
NineSix Months Ended SeptemberJune 30, 2018,2019, Compared to NineSix Months Ended SeptemberJune 30, 20172018
Significant items affecting comparability of consolidated operating expense include:
Taxes and purses increased $16.8$72.8 million due todriven by a $12.2$58.0 million increase generated byfrom our CasinoGaming segment primarily associated with an increase in slot handle,the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and a $4.1$15.1 million increase in purses primarily driven by an increase at Churchill Downs, andthe opening of Derby City Gaming. These increases were partially offset by a $0.5$0.3 million increasedecrease from other sources.
Content expense increased $20.2 million due primarily to the increase in TwinSpires' handle and the adoption of ASC 606 which resulted in modifications between the classification of net revenue and content expense for TwinSpires.
Salaries and benefits expense increased $5.3$22.0 million driven primarily by additional personnel costs and related benefits.benefits from the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and the opening of Derby City Gaming.
Selling, general and administrative expense increased $4.5$13.5 million driven primarily byfrom an increase in salaries and related
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 41 | |
benefits, and stock-based compensation expense.compensation.
Depreciation and amortization expense increased $3.8$13.2 million primarily driven by additionalthe Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, the opening of Derby City Gaming, and capital expenditures placed ininto service for Churchill Downs.Downs Racetrack.
Marketing &and advertising expense increased $1.6$6.0 million primarily from the opening of Derby City Gaming, the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, an increase in September 2018marketing spend for our TwinSpires business, and promotional expenses at certain Casino properties.start-up related costs for our online sports betting and iGaming operations.
Transaction expense, net increased $7.8$0.6 million primarily due to the payment of the termination fee of $5.0 million pursuant to the Termination Agreement in connection with thePresque Isle and Lady Luck Nemacolin TransactionTransactions.
Other operating expenses include maintenance, utilities, food and beverage costs, property taxes, and other acquisition-relatedoperating expenses.
Other operating expense increased $8.7$17.7 million primarily driven by a $2.8 million increase in contract services expense, a $2.5 million increase in maintenance expense at Churchill Downs, a $1.2 million increase from the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, the opening of Derby City Gaming, opening in September 2018 and the consolidation of Ocean Downs effective August 31, 2018,sports betting and a $2.2 million increase from other sources.
Corporate Allocated Expense
The table below presents Corporate allocated expense included in the adjusted EBITDA of each of the operating segments, excluding corporate stock-based compensation:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Racing | $ | (1.6 | ) | | $ | (1.5 | ) | | $ | (0.1 | ) | | $ | (4.7 | ) | | $ | (4.3 | ) | | $ | (0.4 | ) |
TwinSpires | (1.5 | ) | | (1.4 | ) | | (0.1 | ) | | (4.2 | ) | | (3.9 | ) | | (0.3 | ) |
Casino | (2.2 | ) | | (1.8 | ) | | (0.4 | ) | | (6.3 | ) | | (5.3 | ) | | (1.0 | ) |
Other Investments | (0.4 | ) | | (0.3 | ) | | (0.1 | ) | | (1.1 | ) | | (1.0 | ) | | (0.1 | ) |
Corporate allocated expense | 5.7 |
| | 5.0 |
| | 0.7 |
| | 16.3 |
| | 14.5 |
| | 1.8 |
|
Total Corporate allocated expense | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
iGaming operations.Adjusted EBITDA
We believe that the use of adjustedAdjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
The Company has not allocated corporate and other certain expenses to Big Fish Games consistent with the discontinued operations presentation in the accompanying consolidated statements of comprehensive income. Accordingly, the prior year amounts were reclassified to conform to this presentation.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Racing | $ | (1.2 | ) | | $ | 1.7 |
| | $ | (2.9 | ) | | $ | 98.5 |
| | $ | 90.7 |
| | $ | 7.8 |
|
TwinSpires | 19.3 |
| | 18.8 |
| | 0.5 |
| | 58.9 |
| | 51.3 |
| | 7.6 |
|
Casino | 45.7 |
| | 39.5 |
| | 6.2 |
| | 133.9 |
| | 112.3 |
| | 21.6 |
|
Other Investments | 1.1 |
| | 1.1 |
| | — |
| | 2.5 |
| | 3.0 |
| | (0.5 | ) |
Corporate(a) | (2.8 | ) | | (3.0 | ) | | 0.2 |
| | (8.0 | ) | | (8.9 | ) | | 0.9 |
|
Adjusted EBITDA | $ | 62.1 |
| | $ | 58.1 |
| | $ | 4.0 |
| | $ | 285.8 |
| | $ | 248.4 |
| | $ | 37.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Churchill Downs | $ | 121.9 |
| | $ | 107.9 |
| | $ | 14.0 |
| | $ | 123.3 |
| | $ | 101.9 |
| | $ | 21.4 |
|
Online Wagering | 22.2 |
| | 24.4 |
| | (2.2 | ) | | 39.1 |
| | 42.3 |
| | (3.2 | ) |
Gaming | 76.1 |
| | 45.7 |
| | 30.4 |
| | 140.9 |
| | 92.1 |
| | 48.8 |
|
Total Segment Adjusted EBITDA | 220.2 |
| | 178.0 |
| | 42.2 |
| | 303.3 |
| | 236.3 |
| | 67.0 |
|
All Other | (5.2 | ) | | (3.5 | ) | | (1.7 | ) | | (13.7 | ) | | (12.6 | ) | | (1.1 | ) |
Total Adjusted EBITDA | $ | 215.0 |
| | $ | 174.5 |
| | $ | 40.5 |
| | $ | 289.6 |
| | $ | 223.7 |
| | $ | 65.9 |
|
(a) The Corporate segment includes corporate and other certain expenses of $0.7 million for the three months and $2.1 million for the nine months ended September 30, 2017 that have not been allocated to Big Fish Games as a result of the Big Fish Transaction. The Big Fish Games segment is reported as held for sale and discontinued operations in the accompanying condensed consolidated financial statements and related notes.
Three Months Ended SeptemberJune 30, 2018,2019, Compared to Three Months Ended SeptemberJune 30, 20172018
Racing adjusted EBITDA decreased $2.9 million due to a $1.6 million decrease at Churchill Downs primarily from maintenance and other expenses, a $0.8 million decrease at Fair Grounds primarily from higher insurance costs and taxes, and a $0.5 million decrease at Arlington primarily due to decreased net revenue from lower attendance from inclement weather.
TwinSpires adjustedAdjusted EBITDA increased $0.5 million driven by the 1.0% handle growth, which was consistent with the industry, partially offset by an increase in content expense.
Casino adjusted EBITDA increased $6.2 million driven by a $6.7 million increase from our wholly-owned Casino properties, partially offset by a $0.5 million decrease in our equity investments due to the Ocean Downs/Saratoga Transaction.
Nine Months Ended September 30, 2018, Compared to Nine Months Ended September 30, 2017
Racing adjusted EBITDA increased $7.8$14.0 million due to an $8.8 million increase atfrom the opening of Derby City Gaming in September 2018 and a $5.2 million increase from Churchill Downs Racetrack, primarily fromdue to a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and handle,record handle.
Online Wagering Adjusted EBITDA decreased $2.2 million primarily due to costs associated with the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey, and an increase in marketing spend for our TwinSpires business.
Gaming Adjusted EBITDA increased $30.4 million driven by a $27.7 million increase from our equity investment in Midwest Gaming and the Presque Isle and Lady Luck Nemacolin Transactions; a $1.0 million increase from our Mississippi properties primarily due to higher attendance driven by the opening of our retail BetAmerica Sportsbooks; a $0.9 million increase from our equity investment at MVG; a $0.6 million increase from Ocean Downs due to the acquisition of the remaining 37.5% of Ocean Downs partially offset by the liquidation of our equity investments in Saratoga as a $0.9result of the Ocean Downs/Saratoga Transaction; a $0.6 million increase from Oxford due to successful marketing and promotional activities; and a $0.2 million increase from other sources. Partially offsetting these increases was a $0.6 million decrease at Calder primarily due to the May 2019 opening of the jai alai facility and associated operating costs.
All Other Adjusted EBITDA decreased $1.7 million primarily from increased salaries and related benefits at the corporate level.
|
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 42 | |
Six Months Ended June 30, 2019, Compared to Six Months Ended June 30, 2018
Churchill Downs Adjusted EBITDA increased $21.4 million due to a $16.4 million increase from the opening of Derby City Gaming and a $5.0 million increase at Churchill Downs Racetrack, primarily due to a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle.
Online Wagering Adjusted EBITDA decreased $3.2 million driven by a $3.0 million decrease due to costs associated with the continued build-out of our online sports betting and iGaming operations and the first quarter of 2019 launch in New Jersey. TwinSpires' Adjusted EBITDA decreased $0.2 million primarily due to an increase in marketing spend.
Gaming Adjusted EBITDA increased $48.8 million driven by a $40.8 million increase from our equity investment in Midwest Gaming and the Presque Isle and Lady Luck Nemacolin Transactions; a $3.4 million increase from our Mississippi properties primarily due to higher attendance driven by the opening of our retail BetAmerica Sportsbooks; a $2.2 million increase from Fair Grounds and VSI primarily due to two additional OTBs and video poker facilities, successful marketing and promotional activities, and increased handle; a $1.9 million increase from our equity investment at MVG; and a $1.6 million increase from Ocean Downs due the acquisition of the remaining 37.5% of Ocean Downs partially offset by the liquidation of our equity investments in Saratoga as a result of the Ocean Downs/Saratoga Transaction. Partially offsetting these increases was a $1.1 million decrease at Calder primarily due to the May 2019 opening of the jai alai facility and associated operating costs, and favorable insurance reserve adjustments in the prior year that did not recur in 2019.
All Other Adjusted EBITDA decreased $1.1 million primarily from a $2.0 million increase in salaries and related benefits at the corporate level and a $0.7 million decrease at Arlington due to decreased handle primarily related to inclement weather. Partially offsetting these decreases was a $1.6 million increase from United Tote primarily due to decreased net revenueincreased equipment sales and higher totalisator fees from lower attendance during the meet from inclement weather and a $0.1 million decrease from other sources.new customers.
TwinSpires adjusted EBITDA increased $7.6 million driven by the 10.4% growth in handle, which outpaced the U.S. thoroughbred industry performance by 6.5 percentage points.
Casino adjusted EBITDA increased $21.6 million driven by a $21.8 million increase from our wholly-owned Casino properties, partially offset by a $0.2 million decrease in our equity investments due to the Ocean Downs/Saratoga Transaction. |
| | |
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019 |
| 43 | |
Reconciliation of Comprehensive Income to Adjusted EBITDA
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Comprehensive income | $ | 56.9 |
| | $ | 17.3 |
| | $ | 39.6 |
| | $ | 341.8 |
| | $ | 102.5 |
| | $ | 239.3 |
| $ | 107.1 |
| | $ | 102.9 |
| | $ | 4.2 |
| | $ | 118.7 |
| | $ | 285.3 |
| | $ | (166.6 | ) |
Foreign currency translation, net of tax | (0.4 | ) | | (0.5 | ) | | 0.1 |
| | (0.4 | ) | | (0.1 | ) | | (0.3 | ) | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | 0.6 |
|
Change in pension benefits, net of tax | (0.2 | ) | | (0.1 | ) | | (0.1 | ) | | — |
| | (0.1 | ) | | 0.1 |
| — |
| | 0.2 |
| | (0.2 | ) | | — |
| | 0.4 |
| | (0.4 | ) |
Net income | 56.3 |
| | 16.7 |
| | 39.6 |
| | 341.4 |
| | 102.3 |
| | 239.1 |
| 107.1 |
| | 103.1 |
| | 4.0 |
| | 118.7 |
| | 285.1 |
| | (166.4 | ) |
Loss (income) from discontinued operations, net of tax | 1.7 |
| | (3.6 | ) | | 5.3 |
| | (166.1 | ) | | (14.3 | ) | | (151.8 | ) | 1.2 |
| | 0.1 |
| | 1.1 |
| | 1.5 |
| | (167.8 | ) | | 169.3 |
|
Income from continuing operations, net of tax | 58.0 |
| | 13.1 |
| | 44.9 |
| | 175.3 |
| | 88.0 |
| | 87.3 |
| 108.3 |
| | 103.2 |
| | 5.1 |
| | 120.2 |
| | 117.3 |
| | 2.9 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Additions: | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | 16.7 |
| | 13.4 |
| | 3.3 |
| | 45.8 |
| | 42.0 |
| | 3.8 |
| 21.5 |
| | 15.3 |
| | 6.2 |
| | 42.3 |
| | 29.1 |
| | 13.2 |
|
Interest expense | 9.9 |
| | 12.6 |
| | (2.7 | ) | | 29.2 |
| | 36.0 |
| | (6.8 | ) | 19.4 |
| | 9.7 |
| | 9.7 |
| | 33.1 |
| | 19.3 |
| | 13.8 |
|
Income tax provision | 16.7 |
| | 10.3 |
| | 6.4 |
| | 52.1 |
| | 57.9 |
| | (5.8 | ) | 38.6 |
| | 32.8 |
| | 5.8 |
| | 45.1 |
| | 35.4 |
| | 9.7 |
|
EBITDA | $ | 101.3 |
| | $ | 49.4 |
| | $ | 51.9 |
| | $ | 302.4 |
| | $ | 223.9 |
| | $ | 78.5 |
| $ | 187.8 |
| | $ | 161.0 |
| | $ | 26.8 |
| | $ | 240.7 |
| | $ | 201.1 |
| | $ | 39.6 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Adjustments to EBITDA: | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative: | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | $ | 3.9 |
| | $ | 3.9 |
| | $ | — |
| | $ | 13.1 |
| | $ | 11.7 |
| | $ | 1.4 |
| $ | 7.4 |
| | $ | 6.4 |
| | $ | 1.0 |
| | $ | 12.1 |
| | $ | 9.2 |
| | $ | 2.9 |
|
Other charges | 0.2 |
| | — |
| | 0.2 |
| | 0.2 |
| | — |
| | 0.2 |
| — |
| | — |
| | — |
| | 0.5 |
| | — |
| | 0.5 |
|
Pre-opening expense | 2.6 |
| | — |
| | 2.6 |
| | 3.9 |
| | 0.3 |
| | 3.6 |
| 0.9 |
| | 0.7 |
| | 0.2 |
| | 2.2 |
| | 1.3 |
| | 0.9 |
|
Transaction expense, net | | 0.6 |
| | 2.1 |
| | (1.5 | ) | | 4.1 |
| | 3.5 |
| | 0.6 |
|
Other income (expense): | | | | |
|
| | | | | |
|
| | | | |
|
| | | | | |
|
|
Interest, depreciation and amortization expense related to equity investments | 3.6 |
| | 4.0 |
| | (0.4 | ) | | 12.2 |
| | 10.6 |
| | 1.6 |
| 9.7 |
| | 4.3 |
| | 5.4 |
| | 13.2 |
| | 8.6 |
| | 4.6 |
|
Gain on Ocean Downs/Saratoga transaction | (54.9 | ) | | — |
| | (54.9 | ) | | (54.9 | ) | | — |
| | (54.9 | ) | |
Transaction expense, net | 5.4 |
| | 0.6 |
| | 4.8 |
| | 8.9 |
| | 1.1 |
| | 7.8 |
| |
Calder exit costs | — |
| | 0.2 |
| | (0.2 | ) | | — |
| | 0.8 |
| | (0.8 | ) | |
Changes in fair value of Midwest Gaming's interest rate swaps | | 7.9 |
| | — |
| | 7.9 |
| | 12.2 |
| | — |
| | 12.2 |
|
Midwest Gaming's recapitalization and transactions costs | | 0.8 |
| | — |
| | 0.8 |
| | 4.7 |
| | — |
| | 4.7 |
|
Other | | (0.1 | ) | | — |
| | (0.1 | ) | | (0.1 | ) | | — |
| | (0.1 | ) |
Total adjustments to EBITDA | (39.2 | ) |
| 8.7 |
| | (47.9 | ) | | (16.6 | ) | | 24.5 |
| | (41.1 | ) | 27.2 |
|
| 13.5 |
| | 13.7 |
| | 48.9 |
| | 22.6 |
| | 26.3 |
|
Adjusted EBITDA | $ | 62.1 |
| | $ | 58.1 |
| | $ | 4.0 |
| | $ | 285.8 |
| | $ | 248.4 |
| | $ | 37.4 |
| $ | 215.0 |
| | $ | 174.5 |
| | $ | 40.5 |
| | $ | 289.6 |
| | $ | 223.7 |
| | $ | 65.9 |
|