Churchill Downs Inc. 2001 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2001. Churchill Downs Inc. is a racing company conducting pari-mutuel wagering on live Thoroughbred, Quarter Horse, and Standardbred racing, as well as simulcast signals. The Company owns and operates Churchill Downs (home of the Kentucky Derby), Hollywood Park, Calder Race Course, Arlington Park, and Ellis Park. It also manages Hoosier Park (in which it holds a 62% interest) and operates nine Off-Track Betting (OTB) facilities. The Company's operations are seasonal, with significant revenue concentration in the second and third quarters.
Key Financial Metrics
| Metric (in thousands) | 2001 | 2000 |
|---|---|---|
| Net Revenues | $427,038 | $363,010 |
| Operating Income | $49,337 | $46,578 |
| Net Earnings | $22,076 | $19,164 |
| Diluted EPS | $1.67 | $1.75 |
| Cash Flow from Operations | $48,309 | $27,231 |
| Long-Term Debt | $133,348 | $158,040 |
| Working Capital | $(34,545) | $(31,507) |
| Total Assets | $470,715 | $470,004 |
Liquidity: The Company maintains a $250 million revolving credit facility. As of December 31, 2001, $124.7 million was outstanding. The facility matures in 2004 and is secured by substantially all Company assets.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 18% ($64.0 million) to $427.0 million. This was primarily driven by the inclusion of Arlington Park for a full year following its September 2000 merger, which added $68.1 million in revenue.
- Operating Expenses: Increased 20% ($58.2 million) to $345.6 million, largely due to the full-year impact of Arlington Park operations ($55.1 million increase).
- Profitability: Operating income rose 6% to $49.3 million, and Net Earnings increased 15% to $22.1 million. Gross profit increased 8% to $81.4 million.
- Debt Reduction: Long-term debt decreased by $22.9 million as the Company used cash flows to pay down borrowings under its line of credit. Interest expense declined $2.2 million due to lower debt balances and reduced interest rates.
- Segment Performance: Hollywood Park revenues and operating income declined due to West Coast energy issues and economic slowdowns. Conversely, Churchill Downs, Hoosier Park, and Calder Race Course saw revenue increases due to higher wagering handles.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company plans approximately $20.0 million in capital expenditures for 2002, including the first phase of a $27 million renovation plan for Churchill Downs to modernize facilities and construct luxury suites.
- Legislative Risks:
- Indiana: A second racetrack license was granted in Shelbyville, Indiana, potentially increasing competition and reducing Hoosier Park's share of riverboat admissions subsidies.
- Kentucky: Legislation proposed to allow electronic gaming devices at racetracks could provide new revenue but remains uncertain.
- Florida: A new tax structure effective July 2001 may increase competition for Calder Race Course from other Miami-area tracks.
- Competition: The Company faces competition from riverboat casinos, lotteries, and land-based casinos. A new Seminole Tribe casino near Calder Race Course is expected to open in 2002.
- Accounting Changes: The Company will adopt FAS 142 in 2002, which will eliminate goodwill amortization, estimated to reduce expenses by $1.4 million in 2002.
- Environmental: Ellis Park requires a $1.2 million sewer hook-up project expected to be completed in 2002. Remediation costs for the Louisville OTB site are covered by an escrow account and indemnity.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the $250 million credit facility covenants (fixed charge, interest coverage, leverage ratios) given the high debt load relative to equity.
- Indiana Subsidy Impact: Monitor the impact of the new Shelbyville racetrack on Hoosier Park's riverboat admissions subsidy revenue, a key income source.
- Hollywood Park Performance: Assess the recovery of Hollywood Park's handle and attendance following the 2001 decline attributed to energy issues and economic conditions.
- Capital Project Execution: Track the progress and cost overruns of the $27 million Churchill Downs renovation and the $20 million 2002 capital plan.
- Legislative Outcomes: Monitor the status of Kentucky electronic gaming legislation and Florida tax law changes affecting Calder Race Course.