Churchill Downs Inc. 2010 10-K Summary
Business Context and Reporting Period
This summary covers the Annual Report on Form 10-K for Churchill Downs Inc. for the fiscal year ended December 31, 2010. The Company is a diversified provider of pari-mutuel horseracing content and technology, operating through four segments: Racing Operations (Churchill Downs, Arlington Park, Calder, Fair Grounds), Online Business (TwinSpires, Youbet), Gaming (Harlow's, Calder Casino, Fair Grounds Slots), and Other Investments (United Tote). The reporting period was characterized by significant expansion through acquisitions and the opening of new gaming facilities, offset by a challenging economic environment affecting discretionary spending.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net Revenues | $585.3 million | $470.5 million | +24.4% |
| Operating Income | $31.6 million | $34.7 million | -9.1% |
| Net Earnings | $16.4 million | $16.8 million | -2.8% |
| Diluted EPS (Continuing Ops) | $1.26 | $1.27 | -0.8% |
| Free Cash Flow | $45.1 million | $58.8 million | -23.3% |
| Total Assets | $1,017.7 million | $725.4 million | +40.3% |
| Long-Term Debt | $265.1 million | $71.1 million | +272.9% |
| Shareholders' Equity | $506.2 million | $407.0 million | +24.4% |
Material Changes vs. Prior Period
- Acquisitions: The Company completed the acquisition of Youbet.com, Inc. (an Advance Deposit Wagering business) on June 2, 2010, for $131.2 million, and Harlow's Casino Resort & Hotel in Mississippi on December 16, 2010, for approximately $140.4 million. These transactions significantly increased total assets and debt levels.
- Revenue Growth: Net revenues increased by $114.8 million, driven primarily by the full-year operation of Calder Casino (opened Jan 2010), the Youbet acquisition, and the Harlow's acquisition. Gaming revenues nearly doubled to $138.9 million.
- Operating Income Decline: Despite revenue growth, operating income decreased by $3.2 million. This was due to increased operating expenses ($118.0 million increase) related to new acquisitions, the construction of Calder Casino, and higher gaming taxes. The 2009 period benefited from $17.2 million in insurance recoveries from Hurricane Katrina, which were not present in 2010.
- Debt Expansion: Long-term debt increased by $194.0 million to fund acquisitions and capital projects. The Company amended its revolving credit facility in November 2010, increasing the commitment from $275 million to $375 million.
- Discontinued Operations: The Company ceased operations of Churchill Downs Entertainment Group (CDE), recording a loss from operations of $5.8 million (net of tax) in discontinued operations.
Guidance, Outlook, and Risks
Management Commentary: Management noted that the continuing weakness in the U.S. economy negatively impacted consumer spending, resulting in a 3.0% decline in pari-mutuel handle despite the addition of Youbet. However, the Company believes it is in a strong financial position with adequate cash flows to fund operations and capital expenditures.
Risks and Contingencies:
- Regulatory/Legislative: Significant risks exist regarding state-level legislation in Florida, Illinois, Kentucky, and Ohio regarding gaming expansion, slot machine rights, and racing dates. Specifically, challenges to the Illinois Horse Racing Equity Trust Fund (HRE Trust Fund) remain pending, with $40.5 million in subsidies held in escrow.
- Competition: The Company faces intense competition from casinos, racinos, and online gaming. New legislation in Ohio and Florida could further intensify competition.
- Legal Proceedings: Pending litigation includes a lawsuit by Hialeah Race Course alleging unfair competition and a lawsuit by the Florida Quarter Horse Track Association challenging Calder's racing permit. A class action regarding the Youbet merger was settled in December 2010.
- WTO Ruling: The World Trade Organization ruling regarding U.S. internet gambling policy remains a potential risk to the ADW business.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the amended credit facility covenants, specifically the interest coverage ratio (>3.5:1) and leverage ratio (<3.25:1), given the significant increase in debt.
- Illinois Subsidy Escrow: Monitor the status of the $40.5 million in Illinois riverboat subsidies held in escrow and the outcome of the ongoing legal challenges regarding Public Act 94-804.
- Acquisition Integration: Assess the financial performance and integration progress of the Youbet and Harlow's acquisitions, particularly regarding the realization of projected synergies.
- Regulatory Changes: Track legislative developments in Florida (slot machine expansion), Ohio (video lottery terminals), and Kentucky (interstate compacts) that could impact racing dates and gaming rights.
- Discontinued Operations: Confirm the finalization of the CDE dissolution and the settlement of the Hoosier Park contingent consideration ($8.5 million expected payment).