Churchill Downs Incorporated 2020 Form 10-K Summary
Business context and reporting period
Churchill Downs Incorporated filed its annual report for the fiscal year ended December 31, 2020. The Company operates racing and historical racing venues, TwinSpires online wagering and sports/iGaming platforms, retail sportsbooks, and casino gaming properties across multiple U.S. states. Reportable segments are Churchill Downs, Online Wagering, and Gaming.
Results were materially affected by COVID-19-related property closures, capacity restrictions, reduced racing schedules, and the spectator-free Kentucky Oaks and Derby. Most properties reopened during 2020 subject to operating restrictions; several experienced additional closures in December and reopened in January 2021.
Financial results and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | $1,054.0 million | $1,329.7 million | Down $275.7 million |
| Operating income | $60.2 million | $215.7 million | Down $155.5 million |
| Operating margin | 5.7% | 16.2% | Down 10.5 percentage points |
| Income from continuing operations | $13.3 million | $139.6 million | Down $126.3 million |
| Net income attributable to Churchill Downs | $(81.9) million | $137.5 million | Down $219.4 million |
| Adjusted EBITDA | $286.5 million | $451.4 million | Down $164.9 million |
| Cash flow from operating activities | $141.9 million | $289.6 million | Down $147.7 million |
| Capital expenditures | $234.2 million | $131.2 million | Up $103.0 million |
Basic and diluted continuing-operations earnings per share were $0.34 and $0.33, respectively, compared with $3.49 and $3.44 in 2019. Full-year basic and diluted net loss per share were $2.07 and $2.08, respectively.
- Online Wagering: Revenue increased to $408.3 million from $290.5 million. TwinSpires Horse Racing handle rose 35.8% to $1.98 billion, revenue increased 39.2% to $405.0 million, and Adjusted EBITDA rose 61.7% to $126.8 million.
- Churchill Downs: Revenue declined to $142.8 million from $274.2 million. Segment Adjusted EBITDA decreased to $38.3 million from $137.7 million, primarily because the 2020 Kentucky Derby was held without spectators.
- Gaming: Revenue declined to $441.4 million from $692.4 million. Adjusted EBITDA decreased to $176.7 million from $280.9 million due to property closures and capacity restrictions.
- Operating expenses declined 10.8% to $993.8 million, but expenses represented approximately 94% of revenue versus 84% in 2019. Content expense increased $41.1 million due primarily to higher TwinSpires host and source-market fees.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $67.4 million at December 31, 2020, with restricted cash of $53.6 million.
- Debt principal outstanding was $1,637.7 million, consisting of a $388.0 million Term Loan B, $149.7 million drawn on the revolver, $600.0 million of 2027 Senior Notes, and $500.0 million of 2028 Senior Notes. Net debt after issuance costs was $1,618.3 million.
- The Company had $545.8 million available under its $700.0 million revolving credit facility.
- Total assets were $2,686.4 million, total liabilities were $2,319.3 million, and shareholders’ equity was $367.1 million.
- Operating cash flow funded only part of the $234.2 million of capital expenditures, primarily related to Oak Grove, Newport, and other development projects. Financing activities provided $76.0 million.
- The Company maintained a minimum liquidity covenant of $150.0 million during the COVID-19 financial covenant relief period. Management stated that projected operating cash flow, debt capacity, and revised capital spending should fund operations and commitments for well beyond twelve months.
Material changes, outlook and unusual items
- COVID-19 caused temporary closures of substantially all wholly owned and managed gaming properties and certain racing operations. The Company furloughed employees, reduced salaries, cut non-priority capital spending, and implemented health and safety protocols.
- The Company recorded a $17.5 million non-cash impairment charge for Presque Isle gaming rights and trademark assets. No Presque Isle goodwill impairment was recorded.
- Net loss included a $95.4 million after-tax loss from discontinued operations, principally the $124.0 million pre-tax contribution to the settlement of the Kater and Thimmegowda class actions relating to former subsidiary Big Fish Games.
- The Company recorded a $5.3 million income tax benefit, including a $13.3 million benefit from carrying back a 2020 net operating loss under the CARES Act.
- Oak Grove opened its HRM and simulcast facility in September 2020 and its hotel in October 2020. Newport Racing and Gaming opened in October 2020. Additional Oak Grove facilities were expected to open in early 2021.
- The Company launched new TwinSpires Sports and Casino capabilities in Michigan and entered into platform agreements with GAN and Kambi. It planned additional launches and platform transitions in 2021, subject to regulatory approvals.
- Management did not provide numerical 2021 revenue or earnings guidance in the filing. It expected to conduct up to 71 live race days with spectators in 2021 and continued to prioritize high-return capital projects.
- On February 1, 2021, the Company repurchased 1.0 million shares from an affiliate of The Duchossois Group for $193.9 million, funded with cash and revolver borrowings. The same day, the credit agreement was amended to increase permitted restricted payments from $26.0 million to $226.0 million during the covenant relief period.
- On February 23, 2021, the Company launched a process to sell the 326 acres at Arlington Park while committing to conduct the 2021 race dates.
Principal risks and contingencies
- Continued pandemic effects, renewed closures, capacity limits, consumer reluctance, and reduced discretionary spending could adversely affect casinos, racetracks, and wagering activity.
- The Company faces substantial competition from casinos, historical racing, online wagering, sports betting, iGaming, lotteries, Native American gaming, and other entertainment alternatives.
- Gaming, racing, online wagering, and sports betting operations depend on licenses, regulatory approvals, horsemen’s agreements, and changing state and federal laws. Loss or non-renewal of licenses could materially impair operations.
- Debt agreements impose restrictions on additional debt, dividends, repurchases, investments, asset sales, and other corporate actions. Variable-rate debt creates interest-rate exposure; the filing states that a one-percentage-point increase in LIBOR would reduce net income and operating cash flow by approximately $3.8 million, assuming constant debt balances.
- Pending and resolved legal matters include the Big Fish-related class action settlement, Kentucky historical racing litigation, a Kentucky HRM class action, Louisiana environmental proceedings, and Louisiana horsemen’s purse litigation. The Fair Grounds environmental matter includes a $2.8 million accrued penalty and corrective measures, subject to approval.
- Cybersecurity, technology failures, data privacy, weather events, equine and patron injuries, labor issues, environmental liabilities, and the financial performance of equity investments and joint ventures remain material risks.
Investor verification points
- Verify the pace of recovery in casino visitation, capacity limits, racing attendance, Kentucky Derby monetization, and property-level margins after restrictions are lifted.
- Assess whether TwinSpires Horse Racing’s 2020 handle growth is sustainable and whether Sports and Casino expansion can achieve scale after increased marketing and platform costs.
- Reconcile cash generation with planned capital expenditures, the $193.9 million February 2021 share repurchase, and the Company’s approximately $1.6 billion of net debt.
- Review the expiration and operation of the COVID-19 covenant relief period, minimum liquidity requirements, and the Company’s ability to comply with leverage and interest coverage covenants thereafter.
- Monitor the effect of the Presque Isle impairment assumptions, regulatory developments affecting Kentucky HRMs, Arlington Park’s sale process, and all pending litigation and environmental contingencies.
- Confirm that future operating results are not being evaluated solely through Adjusted EBITDA, which is a non-GAAP measure and excludes impairment, stock compensation, pre-opening costs, transaction expense, and other items.