Churchill Downs Incorporated: FY2023 Form 10-K Summary
Business context and reporting period
Churchill Downs Incorporated operates through three reportable segments: Live and Historical Racing, TwinSpires, and Gaming. Businesses include Churchill Downs Racetrack and the Kentucky Derby, historical racing machine venues, online horse-racing wagering, sports betting, pari-mutuel technology, and regional casinos. The filing covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter filing, although fourth-quarter information is included in the annual results.
As of December 31, 2023, the Company operated 14 live and historical racing entertainment venues, a major U.S. online horse-racing wagering platform, nine wholly owned casino properties, and 13 retail sportsbooks.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net revenue | $2,461.7 million | $1,809.8 million | +$651.9 million, or 36% |
| Operating income | $564.0 million | $321.8 million | +$242.2 million, or 75% |
| Operating margin | 22.9% | 17.8% | +5.1 percentage points |
| Net income | $417.3 million | $439.4 million | -$22.1 million, or 5% |
| Diluted EPS | $5.49 | $5.71 | Down 4% |
| Adjusted EBITDA | $1,023.9 million | $763.6 million | +$260.3 million, or 34% |
| Cash flow from operations | $605.3 million | $510.8 million | +$94.5 million |
| Capital expenditures | $676.5 million | $423.5 million | +$253.0 million |
Revenue growth was led by Live and Historical Racing, which increased to $1,047.3 million from $614.6 million, and Gaming, which increased to $968.6 million from $755.9 million. TwinSpires revenue increased to $444.9 million from $436.4 million. Segment Adjusted EBITDA was $475.4 million for Live and Historical Racing, $132.1 million for TwinSpires, and $488.6 million for Gaming.
Net income declined despite higher operating income primarily because 2022 included a $274.6 million gain on the Calder land sale, compared with a $114.0 million gain on the Arlington property sale in 2023. Higher interest expense also reduced earnings: interest expense increased to $268.4 million from $147.3 million.
Balance sheet, debt, and liquidity
- Total assets were $6.96 billion, compared with $6.21 billion at December 31, 2022.
- Total liabilities were $6.06 billion and shareholders’ equity was $893.6 million.
- Total debt was $4.874 billion, compared with $4.639 billion at the prior year-end; debt net of issuance costs was $4.768 billion.
- Debt included $1.235 billion of Term Loan A due 2027, $1.2 billion of 2030 senior notes, $700 million of 2028 senior notes, $600 million of 2027 senior notes, $600 million of 2031 senior notes, $291.8 million of Term Loan B-1, and $247.2 million drawn on the revolver.
- Cash and cash equivalents were $144.5 million, and restricted cash was $77.3 million.
- Available revolver borrowing capacity was $947.6 million after $5.3 million of outstanding letters of credit.
- The Company was in compliance with its debt covenants. The reported interest coverage ratio was 4.0x versus a minimum of 2.5x, and the consolidated total secured net leverage ratio was 1.1x versus a maximum of 4.0x.
- A one-percentage-point increase in SOFR, assuming debt balances remain constant, would reduce net income and operating cash flow by approximately $12.9 million.
Material changes versus the prior comparable period
- The Company acquired Exacta Systems on August 22, 2023, for preliminary consideration of $248.2 million, net of cash acquired. The acquisition added $177.1 million of goodwill and $54.3 million of intangible assets and contributed to TwinSpires and Live and Historical Racing results.
- The Virginia, New York, and Iowa properties acquired in the 2022 Peninsula Pacific Entertainment transaction contributed a full year of results in 2023, compared with only two months in 2022.
- The Arlington property was sold to the Chicago Bears for $197.2 million, generating $195.7 million of net proceeds and a $114.0 million gain. Proceeds were used primarily to repay revolver borrowings.
- The Company issued $600 million of 6.750% senior notes due 2031 and increased Term Loan A borrowings by $500 million. It used part of the proceeds to repay the Term Loan B facility due 2024.
- Presque Isle recorded a $24.5 million non-cash impairment charge in 2023 related to gaming rights and a trademark, compared with a $33.4 million impairment charge in 2022.
- Churchill Downs Racetrack delivered record Kentucky Derby Week all-sources handle and Adjusted EBITDA. The First Turn Experience opened before the 2023 Derby, while the Paddock Project continued construction.
- The Company opened Derby City Gaming Downtown in December 2023 and a Virginia historical racing venue in Emporia in September 2023.
- The direct online Sports and Casino business was fully exited by December 31, 2023; retail sports betting and selected market-access arrangements remain.
- The common stock underwent a two-for-one split effective May 22, 2023. The Company repurchased $55.3 million of stock under its repurchase program and had $214.9 million of authorization remaining at year-end.
Outlook, commitments, risks, and unusual items
Management expects operating cash flow and available revolver capacity to fund operations and capital expenditures for at least the next twelve months. Project capital expenditures are expected to be approximately $450 million to $550 million in 2024, subject to construction timing, delays, and payment timing.
- The Paddock Project and a $14 million Jockey Club Suites renovation are scheduled for completion in time for the 150th Kentucky Derby in May 2024.
- The Rose Gaming Resort in Dumfries, Virginia, represents an expected investment of approximately $460 million and is scheduled for completion late in the third quarter of 2024.
- The Terre Haute Casino Resort represents an investment of up to $290 million and was scheduled to open in the second quarter of 2024.
- The Company expects to invest approximately $100 million in an Owensboro, Kentucky historical racing venue targeted for completion in the first quarter of 2025.
- The Company expects the pending sale of 49% of United Tote to NYRA Content Management Solutions to close in the first half of 2024, subject to customary conditions and regulatory approvals. A $14.4 million deposit had been received.
- On January 2, 2024, the Company completed a privately negotiated repurchase of 1 million shares from an affiliate of The Duchossois Group for $123.8 million, funded with cash and borrowings.
- Key risks include competition and potential expansion of gaming, sports betting and iGaming; consumer discretionary spending and inflation; higher interest rates; regulatory and licensing changes; cybersecurity and technology failures; construction delays and cost overruns; labor constraints; weather and other disruptions; horse-racing safety and liability matters; and potential impairment of goodwill or gaming rights.
- A Louisiana lawsuit challenges the constitutionality of the state’s 2021 Historical Horse Racing Act. An adverse outcome could affect approximately 500 HRMs operated in Louisiana OTBs and related Gaming results.
- Ordinary-course litigation is ongoing. Management stated that any reasonably estimable excess exposure over accrued amounts is not expected to be material, but outcomes cannot be assured.
Most important facts for investors to verify
- Whether the planned 2024 openings and construction projects remain on schedule and within the stated capital budgets.
- Post-acquisition performance and integration benefits from Exacta and the 2022 Peninsula Pacific Entertainment properties.
- Debt reduction capacity, refinancing needs beginning in 2027, variable-rate exposure, and compliance with credit agreement covenants.
- Presque Isle’s operating trends and the potential for additional impairment charges if competition or economic conditions worsen.
- The outcome and potential impact of the Louisiana Historical Horse Racing Act litigation.
- Whether management’s projected $450 million to $550 million of 2024 project capital expenditures can be funded while maintaining liquidity and shareholder distributions.
- The sustainability of record Kentucky Derby performance and the extent to which 2023 growth reflects acquired properties, acquisitions, and nonrecurring gains rather than recurring operations.