Churchill Downs Inc. 2007 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2007. Churchill Downs Inc. is a multi-jurisdictional owner and operator of pari-mutuel wagering properties, including Churchill Downs (home of the Kentucky Derby), Arlington Park, Calder Race Course, and Fair Grounds. The company also operates video poker and slot facilities in Louisiana and launched its Advance Deposit Wagering (ADW) business, TwinSpires, in 2007. During the period, the company completed the acquisition of AmericaTab (ATAB) and Bloodstock Research Information Services (BRIS) to expand its ADW and data services capabilities.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Net Revenues | $410.7 million | $376.7 million |
| Operating Income | $33.6 million | $49.6 million |
| Net Earnings (Continuing Ops) | $17.0 million | $30.2 million |
| Net Earnings (Total) | $15.7 million | $29.8 million |
| Diluted EPS (Total) | $1.14 | $2.19 |
| Long-Term Debt | $68.0 million | $0 |
| Cash from Operating Activities | $51.2 million | $69.5 million |
| Total Assets | $624.8 million | $546.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 9% to $410.7 million, driven by the acquisition of ATAB and BRIS, the launch of TwinSpires, and the opening of a temporary slot facility at Fair Grounds in September 2007.
- Profitability Decline: Operating income decreased 32% to $33.6 million. This was primarily due to a significant reduction in insurance recoveries (net of losses) from $19.2 million in 2006 to $0.8 million in 2007, related to Hurricane Katrina and Wilma claims.
- Debt Increase: Long-term debt increased to $68.0 million, up from zero in 2006, as the company borrowed funds to finance the ATAB and BRIS acquisitions.
- Discontinued Operations: The company sold its remaining interest in Hoosier Park in March 2007, resulting in a loss on sale of assets of $1.4 million (net of tax) in discontinued operations.
Guidance, Outlook, and Risks
- Expansion Initiatives: The company is pursuing gaming expansion, including a permanent slot facility at Fair Grounds (expected late 2008) and a pending application to operate slots at Calder following a January 2008 voter referendum in Miami-Dade County.
- Legislative Risks: Operations are heavily dependent on state regulations. Key risks include the outcome of gaming legislation in Kentucky and Illinois, and federal regulatory changes regarding the Unlawful Internet Gambling Enforcement Act (UIGEA) and WTO rulings on internet wagering.
- Competition: The company faces intense competition from casinos, lotteries, and other racetracks, particularly in markets where competitors have access to slot machine revenues to fund higher purses.
- Seasonality: Results are highly seasonal, with a significant portion of earnings generated in the second quarter during the Kentucky Derby and Kentucky Oaks.
Investor Verification Checklist
- Insurance Settlements: Verify the receipt of the $17.2 million insurance settlement for Hurricane Katrina claims, expected in Q1 2008.
- Slot Machine Approvals: Monitor regulatory approvals for the permanent slot facility at Fair Grounds and the slot machine permit application for Calder in Florida.
- ADW Integration: Assess the financial performance and integration progress of the newly acquired ATAB and BRIS assets and the TwinSpires platform.
- Legislative Outcomes: Track the status of gaming legislation in Kentucky (casino expansion) and Illinois (slot machines at racetracks), which could materially impact future revenue streams.
- Debt Covenants: Review the company's compliance with financial covenants under its $120 million revolving credit facility, particularly leverage ratios.