Churchill Downs Incorporated — Fiscal 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly information is included in Note 24. Churchill Downs operates racing, casino gaming, TwinSpires online wagering, Big Fish Games, and related investments.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $1.212 billion | $812.2 million | +$400.1 million |
| Adjusted EBITDA | $335.6 million | $202.5 million | +$133.1 million |
| Operating income | $123.6 million | $90.4 million | +$33.2 million |
| Operating margin | 10% | 11% | Down from prior year |
| Net income | $65.2 million | $46.4 million | +$18.8 million |
| Diluted EPS | $3.71 | $2.64 | +$1.07 |
| Cash flow from operations | $264.5 million | $141.6 million | +$122.9 million |
| Free cash flow | $233.5 million | $118.9 million | +$114.6 million |
| Total debt, net of current maturities | $765.5 million | $752.9 million | +$12.7 million |
| Cash and cash equivalents | $74.5 million | $67.9 million | +$6.6 million |
Segment Performance
- Big Fish Games: Full-year contribution was $413.7 million of revenue and $108.0 million of Adjusted EBITDA. Bookings were $453.2 million. The acquisition was completed on December 16, 2014, so the prior-year comparison includes only a partial period.
- Casinos: Revenue increased $4.0 million to $332.3 million; Adjusted EBITDA increased $7.4 million to $108.5 million. Oxford and VSI improved, while Fair Grounds Slots and Mississippi properties faced pressure.
- TwinSpires: Revenue increased $9.9 million to $200.2 million. TwinSpires.com handle grew 7.5%, compared with 1.2% industry growth, and Adjusted EBITDA increased $6.3 million to $51.5 million.
- Racing: Revenue declined $13.3 million to $248.6 million, primarily because Calder ceased pari-mutuel operations and Arlington had fewer race days and lower handle. Strong Kentucky Oaks and Kentucky Derby performance partially offset the decline.
Liquidity, Debt, and Capital Allocation
- Operating cash flow was $264.5 million; investing cash outflow was $65.5 million; financing cash outflow was $190.6 million.
- Maintenance capital expenditures were $31.1 million, and total property and equipment additions were $43.5 million.
- Debt principal totaled $788.8 million before issuance costs and premiums, consisting primarily of $188.8 million under the Term Loan and $600.0 million of 5.375% senior unsecured notes due 2021.
- The company had $492.1 million of borrowing capacity under its Senior Secured Credit Facility at December 31, 2015 and was in compliance with all covenants. Actual interest coverage was 11.4x, total leverage was 2.6x, and senior secured leverage was 0.8x.
- On December 16, 2015, Churchill Downs issued $300 million of additional 5.375% senior unsecured notes. Proceeds were used primarily to repay revolver borrowings.
- The company returned approximately $155.5 million to shareholders through dividends and share repurchases. It repurchased approximately 945,000 shares from The Duchossois Group for $138.1 million and declared a $1.15 per-share dividend.
- On February 17, 2016, the company amended its credit agreement, extending the Senior Secured Credit Facility and Term Loan maturities to February 2021.
Material Changes Versus Prior Period
- The full-year consolidation of Big Fish Games transformed the revenue mix and increased operating expenses, including platform and development fees, marketing, research and development, and amortization.
- Big Fish Games achieved its earnout milestones. Churchill Downs expects to pay $281.6 million in 2016 and $68.4 million in 2017, subject to the disclosed obligation.
- Calder exit costs were $13.9 million, including a $12.7 million non-cash impairment charge and $1.2 million of demolition costs. Additional demolition costs of approximately $3.2 million were expected in 2016.
- Racing revenue declined despite record Kentucky Oaks and Kentucky Derby metrics because Calder racing operations had ceased and Arlington experienced reduced race days and weaker operating conditions.
- Churchill Downs acquired a 25% equity investment in Saratoga Casino Holdings for $24.5 million in October 2015 and entered into a five-year management agreement.
- The company sold its remaining HRTV investment for $6.0 million and recognized a $5.8 million gain.
- Shareholders’ equity declined $82.8 million to $617.2 million, primarily due to share repurchases, while total assets declined $78.8 million to $2.277 billion.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that operating cash flow over the following twelve months was expected to fund business operations and capital expenditures and emphasized organic growth, acquisitions, and strategic investments.
- Management expected approximately 70 Churchill Downs race days, 74 Arlington race days, and 80 Fair Grounds thoroughbred race days in 2016. An $18 million Churchill Downs Turf Club and premium-area modernization project was expected to be completed before the 2016 Derby events.
- Key risks include extensive gaming and racing regulation, license renewal, changes in gaming taxes, competition, consumer discretionary spending, weather and business interruption, horsemen and simulcast agreements, online wagering regulation, cybersecurity and privacy, mobile platform dependence, and the ability to develop successful games.
- Potential legislative changes involving Florida gaming and decoupling, Kentucky expanded gaming, online gaming, ADW taxation, and Ohio promotional play could materially affect results, but their effects were not determinable at filing.
- Churchill Downs continued discussions with the EPA and Department of Justice regarding alleged CAFO non-compliance at Fair Grounds and expected remediation-related capital expenditures.
- A Louisiana horsemen’s class action regarding allocation of video poker purse supplements remained pending after the Louisiana Racing Commission ruled that the plaintiffs lacked standing; the plaintiffs appealed.
- Fourth-quarter 2015 included a $2.8 million correcting benefit related to deferred compensation plan accounting. Management concluded the error was not material to current or prior periods.
- Big Fish Games revenue recognition depends on estimates of virtual-goods consumption periods and digital storefront reporting. Deferred revenue was $81.3 million current and $16.1 million long term at year-end.
Investor Verification Checklist
- Verify the sustainability of Big Fish Games bookings, user-acquisition spending, margins, deferred revenue conversion, and the remaining $350.0 million maximum earnout obligation.
- Assess leverage and liquidity after the Big Fish Games earnout payments, scheduled Term Loan amortization, dividends, and share repurchases.
- Reconcile Adjusted EBITDA to GAAP operating income and net income, particularly the treatment of deferred revenue, acquisition-related charges, stock compensation, Calder exit costs, and other adjustments.
- Monitor racing-day awards, handle, purse subsidies, horsemen agreements, and the effect of reduced Arlington and Calder racing activity.
- Evaluate the effect of smoking restrictions, regional competition, and new gaming facilities on the casino portfolio.
- Review the Fair Grounds environmental matter and Louisiana horsemen litigation for potential future cash costs or operational restrictions.
- Confirm the status and financial impact of the February 2016 credit amendment, the new $150 million repurchase authorization, and 2016 capital projects.