Churchill Downs Incorporated 2011 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2011; the filing is not a quarterly report despite the request metadata referencing 2011 Q4. Churchill Downs operates four segments: Racing Operations, Gaming, Online Business and Other Investments. Its portfolio includes four racetracks, off-track betting facilities, TwinSpires advance-deposit wagering, casinos and slot/video-poker operations, United Tote totalizator services and related investments.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net revenues | $696.9 million | $585.3 million | 19% |
| Operating income | $81.0 million | $31.6 million | 157% |
| Operating margin | 11.6% approximately | 5.4% approximately | Improved |
| Earnings from continuing operations | $60.8 million | $19.6 million | 211% |
| Net earnings | $64.4 million | $16.4 million | 294% |
| Diluted EPS | $3.76 | $1.05 | Increase |
| Net cash from operating activities | $173.2 million | $59.9 million | Increase of $113.3 million |
| Free cash flow | $158.3 million | $45.1 million | Increase of $113.2 million |
| Capital expenditures | $22.7 million | $62.0 million | Decrease of $39.3 million |
Segment revenue was $298.3 million for Racing Operations, down 3%; $212.6 million for Gaming, up 49%; $165.4 million for Online Business, up 36%; and $20.5 million for Other Investments, up 45%. Total EBITDA, a non-GAAP measure, increased to $158.7 million from $80.4 million.
- Total pari-mutuel handle increased 2% to $2.70 billion, as a 6% decline in Racing Operations handle was more than offset by a 36% increase in Online Business handle to $800.2 million.
- Racing Operations handle declined 6.4%, and live racing days decreased to 368 from 382.
- Gaming revenue benefited from a full year of Calder Casino and the first full year of Harlow’s Casino operations. Harlow’s generated $53.2 million of revenue despite a 25-day closure related to flooding.
- The effective income tax rate increased to 36% from 30%, principally because 2010 included significant one-time tax benefits.
- Cash and cash equivalents were $27.3 million at year-end. Restricted cash was $44.6 million, including funds associated with the Illinois Horse Racing Equity Trust Fund.
- Total assets were $948.0 million, total liabilities were $364.0 million and shareholders’ equity was $584.0 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Harlow’s acquisition, the full-year contribution from Youbet and United Tote, the maturation of Calder Casino and continued TwinSpires growth.
- Racing revenue declined because of lower industry wagering, fewer racing days and competitive pressure, partially offset by stronger Kentucky Derby and Kentucky Oaks week results.
- Harlow’s and Calder Casino materially increased Gaming revenue and EBITDA. Harlow’s was acquired in December 2010 for approximately $140.4 million.
- Operating cash flow increased substantially, supported by improved profitability, $19.3 million of recognized HRE Trust Fund proceeds and federal income tax refunds.
- Debt declined by $137.6 million to $127.6 million as the Company repaid acquisition-related borrowings. The related-party convertible note was extinguished through issuance of 452,603 common shares.
- The Company paid a $0.60 per-share dividend in 2011, compared with $0.50 per share in 2010.
Outlook, unusual items, risks and contingencies
Management stated that operating cash flow over the next twelve months was expected to fund operations and capital expenditures and that the Company had sufficient liquidity for its operating needs. No formal revenue, earnings or margin guidance was provided.
- The $19.3 million HRE Trust Fund recognition, a $2.7 million gain from conversion of the related-party note, $3.1 million of Kentucky TIF-related operating expense reductions and $3.4 million of discontinued-operation gain from Hoosier Park materially affected 2011 comparability.
- Churchill Downs sustained tornado damage in June 2011 and cancelled one racing day. Harlow’s experienced wind damage and Mississippi River flooding, including a temporary closure and damage to its entertainment and dining facilities. Insurance recoveries and receivables partially offset the losses; additional recoveries were received or expected in 2012.
- The Company announced a renovation and improvement program at Harlow’s expected to be completed by early 2013.
- In March 2012, Churchill Downs announced a 50% joint venture with Delaware North to develop a harness racetrack and video lottery terminal facility in Ohio. The project contemplated up to $90 million of aggregate equity contributions and remained subject to regulatory approvals and legal challenges.
- Key risks include declining horse-racing handle, economic weakness, consumer discretionary spending, intense casino and online wagering competition, changes in gaming and ADW regulation, licensing renewals, weather and other business interruptions, cybersecurity and technology failures, and dependence on horsemen and simulcast agreements.
- The $375 million revolving credit facility terminates December 22, 2013, is secured by substantially all Company assets and requires specified interest-coverage, leverage and net-worth ratios. The Company was in compliance at year-end and had $241 million of borrowing capacity.
- Material legal matters included litigation involving the Illinois HRE Trust Fund, a Hialeah-related Florida dispute with unspecified damages, and claims by Illinois harness-racing entities alleging contractual breaches and trade-secret violations, with claimed damages of at least $3.6 million or alternatively $0.8 million.
- PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2011.
Most important facts for investors to verify
- Determine the recurring earnings and cash-flow profile excluding the $19.3 million HRE Trust Fund item, tax benefits, insurance recoveries, note-conversion gain and discontinued-operation gains.
- Assess whether Racing Operations can stabilize as handle, live racing days and industry participation decline.
- Evaluate the sustainability of growth and margins at TwinSpires, Harlow’s and Calder Casino after acquisition and start-up comparisons normalize.
- Review debt maturity, refinancing requirements in 2013, covenant headroom and the sensitivity of earnings and cash flow to interest rates.
- Monitor insurance recoveries, Harlow’s renovation costs and the operational impact of the 2011 flood and wind damage.
- Track regulatory and legal developments affecting Florida gaming, Kentucky and Illinois racing, ADW taxation, Ohio VLT development and online wagering.
- Reconcile reported EBITDA and free cash flow to GAAP results and consider that both are non-GAAP measures.