Churchill Downs Incorporated: FY2013 Form 10-K Summary
Business context and reporting period
Churchill Downs Incorporated is a diversified operator of thoroughbred racing, casino gaming, online advance-deposit wagering and related wagering technology businesses. The filing covers the fiscal year ended December 31, 2013, with quarterly information for the fourth quarter included in the audited annual report.
- Operating segments: Racing Operations, Gaming, Online Business and Other Investments.
- Major 2013 developments included the July acquisition of Oxford Casino for approximately $168.6 million and the December opening of the 50%-owned Miami Valley Gaming & Racing joint venture in Ohio.
- Oxford contributed $34.4 million of revenue from acquisition through year-end. Riverwalk, acquired in October 2012, contributed $53.6 million during 2013.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenue | $779.3 million | $731.3 million | Up 7% |
| Operating income | $90.1 million | $96.6 million | Down 7% |
| Operating margin | 12% | 13% | Down approximately 1 percentage point |
| Earnings from continuing operations | $55.0 million | $58.2 million | Down 5% |
| Net earnings | $54.9 million | $58.3 million | Down 6% |
| Diluted EPS from continuing operations | $3.07 | $3.33 | Down 8% |
| Adjusted EBITDA | $176.2 million | $158.3 million | Up 11% |
| Cash flow from operations | $144.9 million | $144.4 million | Essentially flat |
| Free cash flow | $128.0 million | $127.2 million | Up 1% |
- Gaming revenue increased 33% to $297.5 million, primarily from the Riverwalk and Oxford acquisitions.
- Racing revenue declined 9% to $274.3 million. Total Racing Operations handle declined 11% to $1.806 billion.
- Online revenue increased 1% to $184.5 million. Total Online Business handle increased 1% to $868.7 million, while handle excluding Illinois and Texas increased 6%.
- Adjusted EBITDA increased in Gaming to $80.4 million and Online Business to $49.1 million, but declined in Racing Operations to $50.3 million.
- Fourth-quarter 2013 revenue was $162.4 million, compared with $158.3 million in the fourth quarter of 2012. Fourth-quarter earnings from continuing operations were a loss of $5.6 million, compared with income of $2.4 million in the prior-year quarter, primarily reflecting seasonality and unusual expense items.
- Cash and cash equivalents were $44.7 million at year-end. Total assets were $1.352 billion and shareholders’ equity was $704.8 million.
Debt, liquidity and capital allocation
- Total debt was $369.2 million at December 31, 2013, consisting of $300 million of 5.375% senior unsecured notes due December 2021, $58.0 million drawn under the senior secured credit facility and $11.2 million under the swing line.
- The company issued the $300 million senior unsecured notes in December 2013 and used net proceeds of approximately $295 million to repay borrowings under the senior secured credit facility.
- The senior secured credit facility was increased from $375 million to $500 million, matures in May 2018 and had $425 million of borrowing capacity available at year-end.
- Actual covenant ratios were substantially below maximum leverage thresholds: interest coverage was 30.8 to 1, total leverage was 2.0 to 1 and senior secured leverage was 0.4 to 1. The company reported compliance with all covenants.
- 2013 investing cash outflows were $281.9 million, including $154.9 million for acquisitions and $70.5 million of contributions to MVG. The company anticipated an additional $24.0 million contribution to MVG during 2014.
- Annual dividends paid per share increased to $0.87 from $0.72. The company authorized a $100 million share repurchase program but made no repurchases under that program during 2013.
Material changes versus the prior comparable period
- Revenue growth was acquisition-led: Gaming increased $74.4 million, more than offsetting a $27.8 million decline in Racing Operations.
- Calder racing revenue fell $28.6 million, including an approximately $21.2 million loss of Florida hosting revenue and $7.4 million attributable to fewer live racing days.
- Racing Operations handle declined $220.0 million, or 11%, due mainly to the loss of Florida hosting revenue, fewer Arlington host days and unfavorable weather at Fair Grounds.
- Online handle was affected by the temporary suspension of Illinois wagering and the September 2013 cessation of Texas wagering. Illinois handle declined $25.0 million and Texas handle declined $11.7 million.
- Operating income was pressured by $7.5 million of additional share-based compensation, a $6.6 million reduction in insurance recoveries and the loss of Florida hosting revenue.
- Adjusted EBITDA improved despite lower GAAP earnings because of acquired gaming operations and the exclusion of significant items such as share-based compensation, pre-opening costs and certain recoveries.
Outlook, management commentary, risks and unusual items
- Management stated that operating cash flow over the following twelve months was expected to be adequate to fund operations and capital expenditures.
- Management expected Oxford to add twelve slot machines during 2014 and expected MVG to conduct 66 days of live harness racing during February through May 2014.
- Management identified significant uncertainty from Florida host-track rules and overlapping Calder and Gulfstream racing dates. The long-term financial effect was not determinable at the filing date.
- Key risks include extensive gaming and racing regulation, possible license nonrenewal, changes in gaming taxes, increased competition, economic weakness, declining industry wagering, weather and catastrophic events, cybersecurity and payment risks, and dependence on horsemen and simulcast agreements.
- The company’s online business remains exposed to changing state and federal laws governing ADW and Internet gaming. Texas wagering was suspended after the company lost a challenge to the applicable Texas law; an appeal was pending as of the filing date.
- Unusual 2013 items included $4.5 million of HRE Trust Fund proceeds, $0.4 million of insurance recoveries, $3.6 million of MVG pre-opening costs and a $2.5 million charge related to an Internet gaming license deposit whose collectibility was no longer considered probable.
- Fair Grounds received an EPA notice concerning alleged CAFO noncompliance. Management did not expect operational disruption or material remediation costs, although the analysis was preliminary.
- The company settled litigation involving Balmoral, Maywood and the Illinois Harness Horsemen’s Association for $2.3 million, of which $2.0 million was reimbursed by insurance.
- Goodwill and indefinite-lived intangible asset impairment testing resulted in no impairment charge for 2013.
- PricewaterhouseCoopers issued an unqualified audit opinion. Management and the auditor concluded that internal control over financial reporting was effective, although Oxford was excluded from the 2013 internal-control assessment because it was acquired during the year.
Important facts for investors to verify
- Whether acquired Oxford and Riverwalk operations can sustain expected revenue and EBITDA contributions after integration and normalization.
- The durability of Florida host-track revenue and the ultimate outcome of related regulatory proceedings.
- The effect of the Texas ADW litigation and continuing state-by-state changes on TwinSpires handle and profitability.
- MVG’s ramp-up performance, funding requirements and the potential $10 million contingent consideration obligation.
- Compliance with secured-credit-facility covenants and the company’s ability to manage $369.2 million of debt and scheduled interest payments.
- Exposure to racing-industry handle trends, competing casinos and racinos, gaming-tax changes and discretionary consumer spending.
- Potential impairment of goodwill, gaming rights and other intangible assets if regulatory or competitive conditions weaken.
- The ultimate resolution and recoverability of the $2.9 million Illinois tax protest payment and other disclosed legal or regulatory matters.