Churchill Downs Incorporated — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter items are identified where disclosed.
Business Context
Churchill Downs Incorporated operates three reportable segments: Live and Historical Racing, TwinSpires, and Gaming. Its portfolio includes Churchill Downs Racetrack and the Kentucky Derby, historical racing machine venues, TwinSpires online horse-racing wagering and technology services, and regional casino and sportsbook properties.
During 2022, the Company completed the $2.75 billion Peninsula Pacific Entertainment acquisition, acquired Ellis Park and Chasers Poker Room, exited direct online Sports and Casino operations in most states, and continued substantial racetrack, HRM, casino, and hotel development projects.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net revenue | $1,809.8 million | $1,597.2 million | +$212.6 million, or 13% |
| Operating income | $321.8 million | $284.4 million | +$37.4 million |
| Operating margin | 17.8% | 17.8% | Flat |
| Net income from continuing operations | $439.4 million | $249.1 million | +$190.3 million, or 76% |
| Diluted EPS from continuing operations | $11.42 | $6.35 | +$5.07 |
| Adjusted EBITDA | $763.6 million | $627.0 million | +$136.6 million, or 22% |
| Cash flow from operating activities | $510.8 million | $459.5 million | +$51.3 million, or 11% |
Adjusted EBITDA is a non-GAAP measure and excludes, among other items, transaction expense, stock compensation, asset impairments, pre-opening costs, and the Calder land-sale gain.
Segment Results
| Segment | 2022 Revenue | 2021 Revenue | 2022 Adjusted EBITDA | Change in Adjusted EBITDA |
|---|---|---|---|---|
| Live and Historical Racing | $614.6 million | $409.1 million | $287.5 million | +$112.5 million, or 64% |
| TwinSpires | $436.4 million | $451.4 million | $114.1 million | +$31.4 million, or 38% |
| Gaming | $755.9 million | $695.4 million | $421.9 million | +$10.0 million, or 2.4% |
| All Other | $2.9 million | $41.3 million | $(59.9) million | $(17.3) million |
Live and Historical Racing benefited from the unrestricted 2022 Kentucky Derby, new and acquired properties, and continued growth at Oak Grove and Derby City Gaming. TwinSpires revenue declined as customers returned to brick-and-mortar wagering and the Company reduced direct online Sports and Casino activity, but lower marketing and promotional spending improved Adjusted EBITDA. Gaming revenue benefited from the acquired Iowa and New York properties and the absence of certain 2021 capacity restrictions, partly offset by weaker Mississippi and Pennsylvania results.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $129.8 million at December 31, 2022, compared with $291.3 million at year-end 2021. Including restricted cash, total cash, cash equivalents, and restricted cash were $204.7 million.
- Operating cash flow was $510.8 million. Investing cash flow was $(3.104) billion, primarily reflecting approximately $3.0 billion of acquisition spending and $423.5 million of capital expenditures. Financing cash flow was $2.416 billion, primarily from new borrowings.
- Total debt principal increased to $4.639 billion from $1.982 billion. Debt, net of issuance costs, was $4.559 billion.
- Debt included $800.0 million of Term Loan A, $664.1 million drawn on the revolver, $1.2 billion of 2030 Senior Notes at 5.75%, $600.0 million of 2027 Senior Notes, and $700.0 million of 2028 Senior Notes.
- The Company had $524.8 million of revolver borrowing capacity available after outstanding letters of credit at year-end and was compliant with its debt covenants. Actual interest coverage was 6.6 times versus a minimum of 2.5 times; secured net leverage was 0.9 times versus a maximum of 4.0 times.
- Interest expense increased to $147.3 million from $84.7 million, reflecting substantially higher debt balances. Management estimated that a one-percentage-point increase in LIBOR or SOFR would reduce net income and operating cash flow by approximately $15.4 million.
- Expected 2023 project capital expenditures were approximately $575 million to $675 million, subject to timing, delays, and payment schedules.
- The Company declared a $0.714 per-share annual dividend, a 7% increase from 2021, and had $270.2 million remaining under its stock-repurchase authorization at year-end.
Material Changes and Unusual Items
- P2E acquisition: Completed November 1, 2022, for preliminary consideration of $2.836 billion net of cash acquired. Acquired Virginia racing and HRM properties, del Lago in New York, Hard Rock Sioux City in Iowa, and development rights. Acquired properties contributed $109.7 million of revenue and $42.9 million of net income during the two months after closing.
- Calder land sale: Sold 115.7 acres for $291.0 million, received $279.0 million net of transaction costs, and recognized a $274.6 million gain. Approximately $76.0 million of related tax was deferred through like-kind exchange transactions.
- Impairments: Recorded $38.3 million of total asset impairments, including a $33.4 million non-cash impairment of Presque Isle gaming rights and trademark in the fourth quarter and a $4.9 million impairment related to exiting direct online Sports and Casino operations.
- Acquisition and transaction costs: Transaction expense increased to $42.1 million from $7.9 million, primarily due to the P2E, Ellis Park, and Chasers transactions.
- Arlington: Arlington ceased racing and simulcast operations at the end of 2021. The Company sold the property to the Chicago Bears for $197.2 million on February 15, 2023.
- Exacta Systems: The Company announced a definitive agreement to acquire Exacta for $250.0 million in cash, subject to customary adjustments and closing conditions.
Outlook, Management Commentary, and Risks
Management stated that the Company’s operating cash flow is expected to be adequate over the next twelve months to fund operations and capital expenditures. Management emphasized strong cash generation, a solid balance sheet, continued organic investment, and strategic acquisitions as drivers of long-term growth.
Key planned projects include the Churchill Downs First Turn Experience, Paddock Project, Derby City Gaming expansion and hotel, Derby City Gaming Downtown, Terre Haute Casino Resort, Virginia HRM facilities in Dumfries and Emporia, and an expanded New Hampshire charitable gaming facility.
- Major risks include discretionary consumer spending, inflation, higher interest rates, credit-market disruption, labor shortages, competition, extreme weather, public health events, and changing consumer preferences.
- Gaming, horse racing, ADW, HRM, and sports-betting operations are highly regulated. License renewals, tax changes, legislative changes, and required agreements with horsemen and racetracks could materially affect operations.
- A Louisiana lawsuit challenges the constitutionality of the 2021 Historical Horse Racing Act; an adverse outcome could affect Fair Grounds’ approximately 340 HRMs in Louisiana.
- Development and acquisition plans are exposed to construction delays, cost overruns, supply-chain disruption, integration risk, regulatory approvals, and additional debt requirements.
- Cybersecurity, technology failures, payment fraud, litigation, insurance limitations, environmental liabilities, and reputational damage remain material risks.
- The Company was compliant with its debt covenants at year-end, but substantially higher leverage and variable-rate borrowings increase sensitivity to interest-rate movements.
Important Facts for Investors to Verify
- Verify the final purchase-price allocation and operating performance of the P2E, Ellis Park, and Chasers acquisitions, which remained subject to measurement-period adjustments.
- Assess whether the acquired Virginia, Iowa, and New York properties meet management’s expected growth and synergy assumptions.
- Monitor leverage, interest expense, revolver availability, covenant compliance, and the impact of the LIBOR-to-alternative-rate transition.
- Evaluate the return, timing, and funding requirements of the $575 million to $675 million of expected 2023 project capital expenditures.
- Track the Exacta acquisition, the pending sale of 49% of United Tote, and the operational and financial effects of the TwinSpires online Sports and Casino exit.
- Review the Louisiana HRM litigation, regulatory developments, and the status of required gaming licenses and horsemen agreements.
- Separate recurring operating earnings from the $274.6 million Calder land-sale gain, acquisition-related costs, and non-cash impairment charges.
- Note that the auditor expressed an unqualified opinion, but internal-control testing excluded the P2E and Ellis Park properties acquired during 2022.