Business Context and Reporting Period
Churchill Downs Incorporated filed its Form 10-K for the fiscal year ended December 31, 2021. The company operates live and historical racing venues, TwinSpires online horse-racing, sports betting and iGaming platforms, and casino properties across multiple U.S. states. Reportable segments are Live and Historical Racing, TwinSpires, and Gaming. Results were materially affected by recovery from COVID-19 operating restrictions; all gaming properties were open during 2021, although certain restrictions remained.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net revenue | $1,597.2 million | $1,054.0 million | +$543.2 million, or 51.5% |
| Operating income | $284.4 million | $60.2 million | +$224.2 million |
| Operating margin | 17.8% | 5.7% | +12.1 percentage points |
| Net income attributable to Churchill Downs | $249.1 million | $(81.9) million | +$331.0 million |
| Diluted earnings per share | $6.35 | $(2.08) | +$8.43 |
| Adjusted EBITDA | $627.0 million | $286.5 million | +$340.5 million, or 118.8% |
| Cash flow from operating activities | $459.5 million | $143.2 million | +$316.3 million |
| Capital expenditures | $91.8 million | $234.2 million | $(142.4) million |
At December 31, 2021, cash and cash equivalents were $291.3 million, restricted cash was $64.3 million, total assets were $2.98 billion, and total shareholders’ equity was $306.8 million. Gross debt was $1.982 billion, consisting primarily of the Term Loan B, the new Term Loan B-1, and the 2027 and 2028 Senior Notes. The company reported $695.4 million of available revolver capacity after outstanding letters of credit and was compliant with applicable debt covenants.
- Live and Historical Racing Adjusted EBITDA was $175.0 million, up $135.9 million.
- TwinSpires Adjusted EBITDA was $78.0 million, down $34.9 million, primarily because of increased sports and casino marketing and promotional spending and lower horse-racing revenue.
- Gaming Adjusted EBITDA was $411.9 million, up $238.8 million. Wholly owned casino margins were 36.6%, up 11.1 percentage points.
- The company declared a $0.667 per-share annual dividend, a 7% increase from 2020, and repurchased $297.5 million of common stock, including a $193.9 million privately negotiated repurchase from an affiliate of The Duchossois Group.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability rebounded sharply as properties reopened and restrictions eased. The 2021 Kentucky Oaks and Derby had more than 51,000 spectators, compared with no spectators for the 2020 events, although 2021 attendance remained capacity constrained.
- Live and Historical Racing benefited from the first full year of Oak Grove operations, the October 2020 opening of Newport, improved Derby City Gaming results, and higher Churchill Downs event revenue.
- Gaming benefited from the absence of the widespread temporary property closures experienced in 2020, operating efficiencies, and stronger results from Rivers Des Plaines and Miami Valley Gaming equity investments.
- TwinSpires Sports and Casino expanded into additional states, including Michigan, Tennessee, Pennsylvania, Indiana, Colorado and Arizona, but the resulting revenue growth was more than offset at the EBITDA level by marketing investment and promotional activity.
- Interest expense increased to $84.7 million from $80.0 million, while equity in income of unconsolidated affiliates increased to $143.2 million from $27.7 million.
- Total liabilities increased by $355.5 million, primarily because of new debt issued in 2021. Equity declined by $60.3 million, principally due to share repurchases, dividends and taxes paid on net share settlements.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2022 project capital expenditures of $300 million to $350 million, subject to construction timing, delays and payment schedules.
- Major development projects include Churchill Downs Racetrack enhancements, the Derby City Gaming expansion and hotel, Derby City Gaming Downtown, the Turfway Park facility, Louisiana HRMs, and the Queen of Terre Haute Casino Resort. The company expects up to $260 million of investment in Queen of Terre Haute, with completion scheduled for the second half of 2023.
- The company agreed to sell the Arlington property to the Chicago Bears for $197.2 million, anticipated to close in early 2023, and 115.7 acres near Calder for $291.0 million, anticipated to close in the first half of 2022. Both transactions remain subject to closing conditions.
- On February 18, 2022, after year-end, the company agreed to acquire substantially all assets of Peninsula Pacific Entertainment for $2.485 billion. The transaction requires regulatory approvals and financing. Termination fees could reach $137.5 million if certain regulatory approvals are not obtained or $330.0 million if required financing is not secured.
- COVID-19 remains a significant uncertainty, including potential variant-related restrictions, attendance impacts, property closures and construction disruptions. Other material risks include intense gaming and online wagering competition, regulatory and licensing changes, cybersecurity incidents, labor shortages, weather and natural disasters, environmental compliance, horse-racing safety, and reliance on horsemen and other industry agreements.
- Hurricane Ida caused damage to Fair Grounds and related off-track betting facilities. The company recorded $2.8 million of property damage and $2.5 million of operating expense, received $2.7 million of insurance recoveries, and recorded a $2.6 million insurance receivable. Management did not expect losses to exceed applicable insurance recoveries.
- The company recorded $15.3 million of asset impairment charges in 2021, including $11.2 million related to Churchill Downs Racetrack assets and $4.1 million related to TwinSpires assets.
- Variable-rate debt totaled $681.8 million at year-end. Management estimated that a one-percentage-point increase in LIBOR would reduce net income and operating cash flow by approximately $4.9 million. LIBOR is expected to be phased out by the end of 2023.
- Pending matters include litigation concerning Kentucky historical racing machines, a Louisiana horsemen’s class action settlement subject to further review, and ordinary-course litigation. The filing states that potential excess exposure beyond accrued amounts is not expected to be material, but outcomes cannot be assured.
Important Facts for Investors to Verify
- Verify the sustainability of the 2021 recovery, particularly after removing COVID-related comparisons and capacity restrictions.
- Assess whether TwinSpires Sports and Casino marketing investment can translate into durable revenue growth and positive EBITDA.
- Monitor leverage, debt maturities, variable-rate exposure, covenant compliance and financing capacity in light of the P2E acquisition and planned capital spending.
- Confirm the timing, proceeds and closing conditions for the Arlington and Calder land sales.
- Track regulatory approvals, financing and potential termination fees associated with the $2.485 billion P2E transaction.
- Evaluate construction execution, cost inflation and delays across the company’s multiple expansion projects.
- Review the impairment sensitivity of Presque Isle gaming rights and other indefinite-lived assets to changes in projected revenue, operating costs and discount rates.
- Consider the effects of gaming legalization, tax rates, licensing requirements, competition, cybersecurity, labor availability and public health conditions on future results.