Business Context and Reporting Period
Churchill Downs Incorporated filed its Form 10-K for the fiscal year ended December 31, 2012. The filing is an annual report rather than a standalone fourth-quarter filing, although unaudited fourth-quarter results are disclosed. The Company operates racing venues, casinos and gaming facilities, online advance-deposit wagering businesses, and pari-mutuel technology and other investments.
Key operations include Churchill Downs, Arlington, Calder and Fair Grounds racetracks; gaming properties in Mississippi, Florida and Louisiana; TwinSpires and related online businesses; and United Tote. Live racing is highly seasonal, with a substantial portion of annual earnings generated during the Kentucky Derby and Kentucky Oaks period.
Financial Performance and Key Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenue | $732.4 million | $696.9 million | Up 5% |
| Operating income | $96.8 million | $81.0 million | Up 19% |
| Operating margin | 13% | 12% | Improved |
| Earnings from continuing operations | $58.3 million | $60.8 million | Down 4% |
| Diluted EPS from continuing operations | $3.34 | $3.55 | Down $0.21 |
| Net earnings | $58.3 million | $64.4 million | Down 9% |
| Total EBITDA | $151.5 million | $158.7 million | Down 5% |
| Net cash from operating activities | $144.4 million | $173.0 million | Down 17% |
| Free cash flow | $127.2 million | $158.2 million | Down 20% |
- Segment revenue was $302.1 million from Racing Operations, $223.1 million from Gaming, $183.3 million from Online Business and $23.9 million from Other Investments.
- Total pari-mutuel handle increased 3% to $2.75 billion. Racing Operations handle was essentially flat, while Online Business handle increased 10.9% to $859.8 million.
- Gaming revenue increased 5%, including $10.3 million from Riverwalk after its October 23, 2012 acquisition. Harlow’s also benefited from a full year of operations after its 2011 flood-related closure.
- Calder Casino revenue declined 6%, primarily because of increased regional competition and weak South Florida economic conditions.
- Total assets increased 18% to $1.11 billion and shareholders’ equity increased 10% to $644.3 million.
- Cash and cash equivalents were $37.2 million at year-end, with $38.2 million of restricted cash.
- Working capital deficiency was $259.5 million, largely reflecting the classification of $209.7 million of debt as current.
- Total debt was $209.7 million, consisting of borrowings under the $375 million revolving credit facility. The Company had $159 million of available borrowing capacity and was in compliance with its debt covenants.
- Maintenance capital expenditures were $17.2 million; total capital expenditures were $41.3 million.
- The Company paid dividends of $0.72 per common share in 2012.
Fourth-Quarter Information Disclosed in the Annual Report
| Metric | Fourth quarter 2012 | Fourth quarter 2011 |
|---|---|---|
| Net revenue | $158.5 million | $149.3 million |
| Earnings from continuing operations | $2.4 million | $4.3 million |
| Net earnings | $2.4 million | $7.6 million |
| Diluted EPS | $0.14 | $0.44 |
Material Changes Versus the Prior Comparable Period
- Riverwalk Casino Hotel was acquired for approximately $145.6 million and contributed $10.3 million of revenue and $2.0 million of continuing-operations earnings after acquisition.
- The Company acquired Bluff Media for $6.7 million in cash plus estimated contingent consideration of $2.3 million.
- The Company invested $19.9 million in the Miami Valley Gaming & Racing joint venture, which is developing an Ohio harness racetrack and VLT facility expected to open in the first quarter of 2014.
- Operating income improved despite lower total EBITDA, principally because 2011 included $19.3 million of income from the Illinois Horse Racing Equity Trust Fund and other favorable nonrecurring items.
- 2012 included $7.0 million of net insurance recoveries related primarily to Harlow’s flood and wind damage and Churchill Downs hail damage.
- Interest expense declined by $4.4 million because of lower average debt balances and the absence of interest and conversion-related expense associated with the convertible note converted in 2011.
- Cash flow from operations declined because 2011 benefited from Horse Racing Equity Trust Fund proceeds and a $10.4 million federal tax refund.
- Racing Operations EBITDA declined 21% to $50.8 million, while Gaming EBITDA increased 19% to $67.8 million and Online Business EBITDA increased 7% to $40.3 million.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected operating cash flow over the following twelve months to fund operations and capital expenditures and expected to refinance the existing credit facility during 2013 with a new long-term borrowing agreement.
- The Company expected to contribute approximately $25.1 million to the Miami Valley Gaming joint venture during 2013.
- Arlington received 26 Illinois host-track days in 2013, 18 fewer than in the comparable 2012 period. Churchill Downs planned an additional 12-day September meet in 2013.
- TwinSpires ceased accepting wagers from Illinois residents on January 18, 2013 after Illinois ADW authorization expired. The Company expected to resume service if legislation extending authorization was enacted.
- Key risks include extensive and changing gaming and racing regulation, license renewal and suitability requirements, competition from casinos and racinos, declining or volatile racing interest, changes in racing dates and horsemen agreements, online wagering regulation, cyber and data-security incidents, weather and natural disasters, and consumer discretionary spending.
- The Company’s revolving credit facility terminates on December 22, 2013. Substantially all assets are pledged as collateral, and the facility imposes leverage, interest-coverage and other restrictive covenants.
- A one-percentage-point increase in LIBOR was estimated to reduce annual earnings and operating cash flow by approximately $1.3 million, assuming constant debt balances.
- Pending matters included a $2.9 million Illinois tax payment made under protest, litigation concerning the Company’s put right in Kentucky Downs, a Texas challenge to pari-mutuel wagering restrictions, and litigation involving Illinois racing and ADW agreements. Management stated that it did not expect the disclosed proceedings to have a material adverse effect, but some outcomes remained uncertain.
- The 2012 results benefited from $7.0 million of net insurance recoveries, while 2011 benefited from $19.3 million of Illinois trust fund income and $3.6 million of discontinued-operations gains. These items reduce year-over-year comparability.
- Management reported effective disclosure controls and effective internal control over financial reporting. Riverwalk was excluded from management’s and the auditor’s internal-control assessment because it was acquired during 2012.
Most Important Facts for Investors to Verify
- Whether the planned 2013 refinancing was completed on acceptable terms before the existing credit facility’s December 22, 2013 termination date.
- The sustainability of earnings excluding insurance recoveries, Illinois trust fund income and other nonrecurring items.
- Riverwalk’s post-acquisition operating trends and integration results.
- Calder Casino’s performance amid increased competition and the impact of additional Florida gaming capacity.
- The financial commitments, construction progress, opening date and funding requirements for Miami Valley Gaming.
- The status and economic impact of Illinois ADW authorization and any related wagering taxes or surcharges.
- Progress and outcomes in the Illinois tax, Kentucky Downs, Texas wagering and Illinois ADW-related legal matters.
- Compliance with debt covenants, available borrowing capacity, interest-rate exposure and the substantial current debt maturity.
- The effect of racing-date changes, horsemen agreements, regulatory developments and online wagering legislation on future handle and margins.