Churchill Downs Inc. 2009 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Churchill Downs Incorporated (CHDN)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: A leading multi-jurisdictional owner and operator of pari-mutuel wagering properties and gaming businesses. Operations are managed through four segments: Racing Operations (Churchill Downs, Arlington Park, Calder, Fair Grounds), Online Business (TwinSpires ADW, BRIS data services), Gaming (slot and video poker facilities in Florida and Louisiana), and Other Investments.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Revenues | $439.7 million | $430.6 million |
| Operating Income | $34.7 million | $52.8 million |
| Net Earnings (Continuing Ops) | $17.7 million | $29.1 million |
| Net Earnings (Total) | $16.8 million | $28.5 million |
| Diluted EPS (Total) | $1.21 | $2.05 |
| Total Assets | $725.4 million | $637.7 million |
| Long-Term Debt | $71.1 million | $43.1 million |
| Shareholders' Equity | $407.0 million | $393.9 million |
| Operating Cash Flow | $71.0 million | $78.2 million |
Liquidity: As of December 31, 2009, the Company had $197 million of borrowing capacity under its amended revolving credit facility (increased from $120 million to $275 million in December 2009). Cash and cash equivalents totaled $13.6 million, with an additional $35.1 million in restricted cash (including $24.0 million in escrow related to Illinois riverboat subsidies).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 2% ($9.1 million) primarily driven by the Online Business segment (TwinSpires) and the full-year impact of the permanent slot facility at Fair Grounds. This offset declines in racetrack pari-mutuel revenues due to a 5% decline in total handle and fewer live racing days.
- Profitability Decline: Operating income decreased 34% ($18.0 million). This was significantly impacted by the absence of $17.2 million in insurance recoveries recognized in 2008 related to Hurricane Katrina damages. Additionally, the effective tax rate increased from 41% to 49% due to proposed IRS audit adjustments.
- Segment Performance:
- Racing Operations: EBITDA declined 39% due to lower handle, fewer race days, and the lack of prior-year insurance recoveries.
- Online Business: EBITDA increased significantly (from a loss of $1.5 million in 2007 to $13.9 million in 2009) due to expanded racing content and user growth.
- Gaming: EBITDA remained relatively flat despite $3.1 million in pre-opening expenses for the new Calder Casino, offset by growth at Fair Grounds Slots.
- Capital Expenditures: Additions to property and equipment increased to $81.9 million (from $40.2 million in 2008), primarily for the construction of Calder Casino and land acquisition at Arlington Park.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Acquisitions: In November 2009, the Company entered into a merger agreement to acquire Youbet.com, Inc. for approximately $137.0 million (stock and cash). Completion is expected in the first half of 2010. The transaction faces litigation challenges from Youbet shareholders regarding fiduciary duties.
- New Operations: Calder Casino (1,200+ slots) opened on January 22, 2010. The HullabaLOU Music Festival is scheduled for July 2010 at Churchill Downs.
- Regulatory & Legal Risks:
- Illinois Subsidies: $24.0 million received from the Horse Racing Equity Trust Fund is held in escrow pending litigation by riverboat casinos challenging the constitutionality of the funding mechanism.
- Tax Contingency: The IRS proposed an adjustment regarding the tax treatment of Personal Seat License (PSL) sales from 2005-2006. The Company recorded a $7.9 million liability and $2.3 million in interest expense but intends to contest the adjustment.
- Legislative Changes: Potential expansion of gaming in Ohio (video lottery terminals and land-based casinos) poses a competitive threat to Churchill Downs. Virginia implemented a new source market fee structure effective January 1, 2010.
- Economic Outlook: Management notes that the global economic downturn continues to negatively impact discretionary spending on leisure activities, though confidence in a recovery is growing.
Key Facts for Investor Verification
- Youbet Merger Status: Verify the resolution of pending class-action lawsuits challenging the Youbet merger and the expected closing timeline.
- IRS Audit Outcome: Monitor the resolution of the IRS audit regarding PSL income recognition, which could result in a cash outflow of up to $7.9 million plus interest if the Company's position is not sustained.
- Illinois Riverboat Litigation: Track the status of the legal challenge to the $24.0 million subsidy payment currently held in escrow; revenue recognition is deferred until resolution.
- Calder Casino Performance: Assess the initial performance of the newly opened Calder Casino (Jan 2010) and its impact on the Gaming segment's EBITDA in 2010.
- Ohio Gaming Legislation: Monitor the implementation of video lottery terminals and land-based casinos in Ohio, which could materially impact Churchill Downs' handle and purses.