Churchill Downs Incorporated: FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K, not a standalone quarterly filing; fourth-quarter 2019 results are included in the annual and unaudited quarterly disclosures. The company operates racing, historical racing machines, online horse-racing wagering, sports betting, iGaming and regional casinos.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $1,329.7 million | $1,009.0 million | +31.8% |
| Operating income | $215.7 million | $188.8 million | +14.2% |
| Operating margin | 16.2% | 18.7% | Down 2.5 percentage points |
| Income from continuing operations | $139.6 million | $182.6 million | Down $43.0 million |
| Net income attributable to CDI | $137.5 million | $352.8 million | Down $215.3 million |
| Diluted EPS from continuing operations | $3.44 | $4.39 | Down $0.95 |
| Adjusted EBITDA | $451.4 million | $328.8 million | +37.3% |
| Cash flow from operating activities | $289.6 million | $197.8 million | +$91.8 million |
Net income comparisons were materially affected by the $219.5 million pretax gain on the Big Fish Games sale in 2018, which produced $170.2 million of after-tax discontinued-operation income in 2018. Excluding disclosed comparability items, management stated that 2019 continuing-operations net income increased $28.3 million.
Segment performance
- Churchill Downs: Revenue was $274.2 million, up from $195.8 million. Adjusted EBITDA was $137.7 million, up $35.3 million. Derby Week generated an additional $5.4 million of Adjusted EBITDA and set wagering records. Derby City Gaming benefited from a full year of operations after opening in September 2018.
- Online Wagering: Revenue was $290.5 million, essentially flat. TwinSpires handle reached $1.5 billion, up 4.8%; active players increased 16.8%, but revenue per active player declined 14.2%. Adjusted EBITDA declined to $66.3 million from $79.0 million because of sports betting and iGaming expansion costs and increased marketing.
- Gaming: Revenue was $692.4 million, up from $449.5 million. Adjusted EBITDA was $280.9 million, up $106.9 million, driven primarily by acquisitions, Rivers Des Plaines equity income, and organic growth at existing properties.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $96.2 million at December 31, 2019, compared with $133.3 million at year-end 2018; cash, cash equivalents and restricted cash totaled $142.5 million.
- Total debt was $1,492.0 million of principal, or $1,473.9 million net of issuance costs. Debt increased primarily because of the $600.0 million 5.50% senior notes issued in March 2019.
- Net debt, including current maturities and issuance costs as presented in the filing, was $1,469.9 million. The company had $694.4 million of available revolving-credit capacity after outstanding letters of credit.
- The company reported compliance with debt covenants. Actual interest coverage was 5.6x versus a 2.5x minimum, and secured net leverage was 0.6x versus a 4.0x maximum.
- Capital expenditures were $131.2 million, including $48.3 million of maintenance spending and $82.9 million of capital-project spending. Cash used in investing activities was $781.2 million, including $410.1 million invested in Midwest Gaming and $206.6 million for business acquisitions.
- The company repurchased $93.0 million of common stock in 2019 and had $175.0 million remaining under its repurchase authorization at year-end. It declared a $0.581 per-share dividend, paid in January 2020.
Material changes and unusual items
- Completed the $178.9 million Presque Isle acquisition in January 2019, assumed management of Lady Luck Nemacolin in March, and increased ownership of Rivers Des Plaines parent Midwest Gaming to 61.3% through transactions totaling approximately $406.6 million plus costs.
- Acquired Turfway Park in October 2019 for $46.0 million and announced plans to invest up to $150.0 million in its redevelopment. A $10.0 million assignment-rights payment was accelerated into amortization during the fourth quarter.
- Announced a planned $300.0 million Churchill Downs first-turn development consisting of a hotel, HRM facility, stadium seating and related hospitality improvements.
- Interest expense increased to $70.9 million from $40.1 million because of higher debt balances. The company also recorded a $9.3 million after-tax impact from its equity share of Midwest Gaming interest-rate-swap fair-value changes and a $3.5 million after-tax impact from Midwest Gaming transaction and recapitalization costs.
- A $2.8 million penalty related to alleged environmental non-compliance at Fair Grounds was accrued, subject to final regulatory and court approval. An immaterial accrual was also recorded for the Louisiana horsemen’s purses litigation settlement process.
- Adopted the new lease standard in 2019, recognizing operating lease assets and liabilities. Management and the auditor excluded Presque Isle and Turfway Park from the 2019 internal-control assessment because integration remained ongoing; the auditor nevertheless reported effective internal control over financial reporting.
Fourth-quarter 2019 and outlook
| Fourth-quarter 2019 metric | Value |
|---|---|
| Net revenue | $280.6 million |
| Operating income | $3.5 million |
| Income from continuing operations | $4.2 million |
| Basic EPS from continuing operations | $0.11 |
| Diluted EPS from continuing operations | $0.11 |
Management described the company as having strong cash flow and a solid balance sheet to support organic investments and strategic acquisitions, but the filing does not provide quantitative 2020 earnings guidance. Planned investments include Churchill Downs, Turfway Park, Oak Grove, Rivers Des Plaines and the $100.0 million Miami Valley Gaming expansion, which is expected to include a hotel, parking garage and expanded gaming floor.
Principal risks and contingencies
- Extensive state gaming, racing, licensing and suitability requirements; changes in gaming taxes, fees, licenses or regulations could materially affect operations.
- Competition from casinos, lotteries, online wagering, sports betting, Native American gaming, other entertainment and newly legalized gaming markets.
- Execution, integration, cost-overrun and financing risks associated with acquisitions and major development projects.
- Consumer discretionary-spending sensitivity, weather and public-health disruptions, particularly during the Kentucky Derby and other live racing events.
- Technology outages, cybersecurity breaches, payment-processing failures and data-privacy liabilities affecting online wagering and casino operations.
- Variable-rate exposure on the $392.0 million Term Loan B; management estimated that a one-percentage-point LIBOR increase would reduce net income and operating cash flow by approximately $2.8 million.
- Pending legal matters include the Big Fish-related Washington class actions, Kentucky historical-racing-machine litigation, a Kentucky racing-license appeal and Louisiana environmental and horsemen’s-purse matters. Loss amounts for certain proceedings are not clearly estimable from the filing.
Facts investors should verify
- Separate the recurring operating performance improvement from acquisition contributions and non-GAAP Adjusted EBITDA adjustments.
- Assess leverage, refinancing requirements and interest-rate exposure relative to planned capital spending and acquisitions.
- Monitor TwinSpires monetization, declining revenue per active player and the profitability of expanding sports betting and iGaming operations.
- Verify the timing, total cost and expected returns of the Churchill Downs, Turfway Park, Oak Grove, Rivers Des Plaines and Miami Valley Gaming projects.
- Review regulatory, environmental and class-action developments, including the final status of the $2.8 million Fair Grounds penalty and other contingencies.
- Consider the effect of seasonality: Kentucky Derby Week drives a substantial portion of racing-related revenue, making quarterly results non-comparable and potentially volatile.