|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in "Item 8-Financial Statements and Supplementary Data".
Our Business
Executive Overview
We are an industry-leading racing, gaming and online entertainment company anchored by our iconic flagship event -
The Kentucky Derby
. We are a leader in brick-and-mortar casino gaming with approximately
9,030
gaming positions in seven states, and we are the largest, legal online account wagering platform for horseracing in the U.S. We are also one of the world's largest producers and distributors of mobile games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend.
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with U.S GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.
During 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue and to exclude depreciation and amortization from our equity investments. The prior year amounts were reclassified to conform to this presentation. We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
|
|
•
|
Acquisition expense, net which includes:
|
|
|
◦
|
Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and
|
|
|
◦
|
Transaction expense, including legal, accounting and other deal-related expense;
|
|
|
•
|
Stock-based compensation expense;
|
|
|
•
|
Gain on Calder land sale;
|
|
|
•
|
Other charges and recoveries
|
For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the Consolidated Statements of Comprehensive Income. See the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information.
Business Highlights
In 2016, we continued to take steps to position ourselves for sustainable value creation over the long term.
|
|
•
|
We delivered record revenue, net income, diluted EPS, and Adjusted EBITDA.
|
|
|
•
|
Revenue grew 7.9% to $1.3 billion;
|
|
|
•
|
Net income grew 65.8% to $108.1 million;
|
|
|
•
|
Diluted net income per share grew 73.0% to $6.42; and
|
|
|
•
|
Adjusted EBITDA grew 10.6% to $334.5 million.
|
|
|
•
|
Our Kentucky Derby and Oaks week of events set all time-records for attendance and all sources handle. Our ongoing investment to expand the Derby capacity, pricing, and customer experiences reflects our commitment to growing this iconic event.
|
|
|
•
|
Our Calder, Miami Valley Gaming and Oxford casino properties delivered strong organic growth. We benefited from a full year of equity income and management fee revenue from our equity investment in Saratoga. In November, we acquired a 25.0% interest in Saratoga’s Black Hawk Casino in Colorado. And, in January 2017, we partnered with Saratoga to acquire the casino and racetrack at Ocean Downs in Maryland.
|
|
|
•
|
Our TwinSpires.com handle grew to $1.1 billion, up 13.7% compared to 2015 as we outpaced the industry growth by 13.1 percentage points. Our TwinSpires.com handle represented 10.2% of all pari-mutuel industry handle in 2016, up 1.2 percentage points from 2015.
|
|
|
•
|
Our Big Fish Games segment delivered $486.2 million in bookings, up 7.3% compared to 2015.
Big Fish Casino
maintained its position as the #2 top grossing social casino iOS mobile app in the U.S. and #3 worldwide. We continued to refine our strategic growth plans for Big Fish Games with a renewed focus on disciplined user acquisition spending based on the long term return of investable games, increasing the number of new games in our development pipeline and refining our game development to better enable the ability to scale the audience for our games.
|
|
|
•
|
We maintained our focus on cost reductions across all properties and continued to be disciplined in our maintenance and project capital expenditures.
|
We accomplished these initiatives while returning approximately $58.0 million to shareholders through dividends and share repurchases.
As we look to 2017 and beyond, we remain committed to delivering long-term sustainable growth and strong financial results for our shareholders. We have strong cash flow and a solid balance sheet that supports organic growth as well as other strategic acquisitions and investment opportunities that will create additional long-term value for our shareholders in the coming years.
Our Operations
We manage our operations through six operating segments: Racing, Casinos, TwinSpires, Big Fish Games, Other Investments and Corporate.
Refer to Item 1. Business for more information on our operating segments and a description of our competition and government regulations and potential legislative changes that affect our business.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Net revenue
|
$
|
1,308.6
|
|
|
$
|
1,212.3
|
|
|
$
|
812.2
|
|
|
$
|
96.3
|
|
|
$
|
400.1
|
|
Operating income
|
194.2
|
|
|
123.6
|
|
|
90.4
|
|
|
70.6
|
|
|
33.2
|
|
Operating income margin
|
14.8%
|
|
10.2%
|
|
11.1%
|
|
|
|
|
|
|
Net income
|
$
|
108.1
|
|
|
$
|
65.2
|
|
|
$
|
46.4
|
|
|
$
|
42.9
|
|
|
$
|
18.8
|
|
Adjusted EBITDA
|
334.5
|
|
|
302.5
|
|
|
204.1
|
|
|
32.0
|
|
|
98.4
|
|
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
|
|
•
|
Our net revenue increased $96.3 million driven primarily by a $72.5 million increase from Big Fish Games primarily from casual and mid-core free-to-play game growth, a $20.4 million increase from TwinSpires due to a 13.7% increase in handle, a $3.1 million increase in Racing due to a strong Kentucky Derby and Oaks week performance and a $0.3 million net increase in other revenue.
|
|
|
•
|
Our operating income increased $70.6 million driven by a $26.6 million increase in our segment operating income primarily from TwinSpires handle growth, growth in our casual and mid-core free-to-play Big Fish Games, a strong Kentucky Derby and Oaks week and from Casinos revenue growth and operational efficiencies, a $23.7 million gain
|
on sale of Calder excess land, an $18.3 million reduction of acquisition expenses primarily related to the Big Fish Games acquisition and an $11.4 million decrease in Calder exit costs. Partially offsetting these improvements was a $9.4 million increase in selling, general and administrative expense.
|
|
•
|
Our net income increased $42.9 million driven by a $70.6 million increase in operating income and a $6.2 million increase in income from our equity investments and $0.1 million of other income. Partially offsetting these increases were a $15.1 million increase in net interest expense associated with higher outstanding debt balances, a $13.1 million increase in our income tax provision primarily from higher operating income from our segments and $5.8 million gain in 2015 from the sale of our remaining HRTV investment.
|
|
|
•
|
Our Adjusted EBITDA increased $32.0 million driven by a $10.9 million increase in Casinos as a result of our MVG and SCH investments, as well as organic growth and operational efficiencies within certain owned properties, a $10.6 million increase from Big Fish Games driven by the growth in our casual and mid-core free-to-play games, a $7.9 million increase from Racing primarily associated with Churchill Downs, and a $6.6 million increase from TwinSpires as a result of handle growth. Partially offsetting these increases were a $3.8 million increase in Corporate expenses driven primarily by a non-recurring 2015 benefit associated with our deferred compensation program and a $0.2 million decline from our Other Investments.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
|
|
•
|
Our net revenue increased $400.1 million in 2015 driven by $399.8 million from the full year impact of the Big Fish Games acquisition, $9.2 million from our TwinSpires segment due to a 7.5% increase in handle and $4.6 million from our Casinos segment as improvements at our Maine, Louisiana and Florida properties were partially offset by regional weakness in Mississippi. Partially offsetting these increases was a $13.4 million decline in Racing revenue as the cessation of Calder's pari-mutuel operations and declines at Arlington due to reductions of state purse subsidies more than offset higher revenue from a strong Kentucky Oaks and Kentucky Derby week, as well as a $0.1 million decrease in other revenue.
|
|
|
•
|
Our operating income increased $33.2 million in 2015 driven by a $18.9 million increase from the full year impact of the Big Fish Games acquisition, a $18.5 million increase from our Racing segment and a $4.5 million increase from TwinSpires as a result of a successful Kentucky Oaks and Kentucky Derby week and the effect of a strong Triple Crown season, a $9.5 million increase from Casinos as a result of revenue growth and operational cost savings at most of our casino properties, a $6.4 million decrease in acquisition-related expenses from Big Fish Games that did not recur in 2015 and a $5.5 million decrease from Luckity and Capital View Casino & Resort ("Capital View") non-cash impairment charges in 2014 that did not recur in 2015. Partially offsetting these improvements were an $11.6 million increase in incremental Calder exit costs, a $17.9 million increase in non-cash Big Fish Games acquisition expenses associated with fair value adjustments to the liabilities for the earnout and deferred payments to the founders and a $0.6 million increase in other expense.
|
|
|
•
|
Our net income increased $18.8 million in 2015 driven by a $33.2 million increase in operating income as discussed above, a $4.9 million increase in income from our equity investments and a $5.8 million gain from the sale of our remaining HRTV investment. Partially offsetting these increases were $7.8 million of additional interest expense associated with higher outstanding debt balances, $11.5 million of additional income tax expense associated with the increase in income from operations, $5.3 million of additional income tax expense as a result of certain non-deductible Big Fish Games acquisition expense and $0.5 million of other expense.
|
|
|
•
|
Our Adjusted EBITDA increased $98.4 million in 2015 driven by a $69.2 million increase from the full year impact of the Big Fish Games acquisition, a $10.6 million increase from Racing as strong Kentucky Oaks and Kentucky Derby week revenue growth and cost reductions to offset lower revenue at Calder and Arlington, an $8.8 million increase from TwinSpires as a result of increased handle and lower expense, a $7.7 million increase from Casinos as a result of organic growth and cost reductions, a $1.3 million increase in Other Investments primarily due to United Tote operations and a $0.8 million decrease in Corporate expense.
|
Financial Results by Segment
Net Revenue by Segment
The following table presents net revenue for our operating segments, including intercompany revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Racing:
|
|
|
|
|
|
|
|
|
|
|
|
Churchill Downs
|
$
|
165.2
|
|
|
$
|
158.9
|
|
|
$
|
150.2
|
|
|
$
|
6.3
|
|
|
$
|
8.7
|
|
Arlington
|
60.8
|
|
|
59.5
|
|
|
66.1
|
|
|
1.3
|
|
|
(6.6
|
)
|
Fair Grounds
|
39.5
|
|
|
41.1
|
|
|
39.7
|
|
|
(1.6
|
)
|
|
1.4
|
|
Calder
|
2.6
|
|
|
2.7
|
|
|
20.0
|
|
|
(0.1
|
)
|
|
(17.3
|
)
|
Total Racing
|
268.1
|
|
|
262.2
|
|
|
276.0
|
|
|
5.9
|
|
|
(13.8
|
)
|
Casinos:
|
|
|
|
|
|
|
|
|
|
|
|
Oxford Casino
|
84.6
|
|
|
80.4
|
|
|
76.5
|
|
|
4.2
|
|
|
3.9
|
|
Riverwalk Casino
|
46.1
|
|
|
49.8
|
|
|
50.1
|
|
|
(3.7
|
)
|
|
(0.3
|
)
|
Harlow's Casino
|
48.4
|
|
|
49.0
|
|
|
50.2
|
|
|
(0.6
|
)
|
|
(1.2
|
)
|
Calder Casino
|
79.1
|
|
|
77.4
|
|
|
77.0
|
|
|
1.7
|
|
|
0.4
|
|
Fair Grounds Slots
|
36.9
|
|
|
39.0
|
|
|
40.8
|
|
|
(2.1
|
)
|
|
(1.8
|
)
|
VSI
|
36.9
|
|
|
36.9
|
|
|
33.7
|
|
|
—
|
|
|
3.2
|
|
Saratoga
|
0.8
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Total Casino
|
332.8
|
|
|
332.9
|
|
|
328.3
|
|
|
(0.1
|
)
|
|
4.6
|
|
TwinSpires
|
221.9
|
|
|
201.3
|
|
|
192.0
|
|
|
20.6
|
|
|
9.3
|
|
Big Fish Games:
|
|
|
|
|
|
|
|
|
|
Social casino
|
182.5
|
|
|
193.4
|
|
|
7.6
|
|
|
(10.9
|
)
|
|
185.8
|
|
Casual and mid-core free-to-play
|
212.7
|
|
|
125.3
|
|
|
2.1
|
|
|
87.4
|
|
|
123.2
|
|
Premium
|
91.0
|
|
|
95.0
|
|
|
4.2
|
|
|
(4.0
|
)
|
|
90.8
|
|
Total Big Fish Games
|
486.2
|
|
|
413.7
|
|
|
13.9
|
|
|
72.5
|
|
|
399.8
|
|
Other Investments
|
20.8
|
|
|
20.1
|
|
|
20.6
|
|
|
0.7
|
|
|
(0.5
|
)
|
Corporate
|
1.0
|
|
|
0.9
|
|
|
1.1
|
|
|
0.1
|
|
|
(0.2
|
)
|
Eliminations
|
(22.2
|
)
|
|
(18.8
|
)
|
|
(19.7
|
)
|
|
(3.4
|
)
|
|
0.9
|
|
Net Revenue
|
$
|
1,308.6
|
|
|
$
|
1,212.3
|
|
|
$
|
812.2
|
|
|
$
|
96.3
|
|
|
$
|
400.1
|
|
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
|
|
•
|
Racing revenue increased $5.9 million due to a $6.3 million increase at Churchill Downs primarily due to a successful Kentucky Derby and Oaks week and a $1.3 million increase at Arlington due to an additional 37 host days during 2016 as compared to 2015. Partially offsetting these increases was a decrease of $1.7 million primarily at Fair Grounds driven by five fewer race days.
|
|
|
•
|
Casino revenue decreased $0.1 million due to a $3.7 million decrease at Riverwalk resulting from a loss of market share within an overall declining market, a $2.1 million decrease at Fair Grounds Slots as it maintained market share despite a decline in the overall New Orleans gaming market associated with stronger competition from the Mississippi Gulf Coast gaming market and a $0.6 million decrease at Harlow's due to a declining market which was negatively impacted by adverse weather conditions during 2016. Partially offsetting these decreases were a $4.2 million increase in Oxford due to successful promotional activities, favorable weather conditions and strong local economy, a $1.7 million increase at Calder Casino due to growth in the overall market as well as successful marketing and promotional activities and a $0.4 million increase at Saratoga from a full year of management fee revenue in 2016.
|
|
|
•
|
TwinSpires revenue increased $20.6 million primarily due to a 23.3% increase in active players who were acquired from marketing efforts primarily during big horse racing events. Handle growth of $131.8 million, or 13.7%, outpaced the U.S. thoroughbred industry performance by 13.1 percentage points.
|
|
|
•
|
Big Fish Games revenue increased $72.5 million primarily driven by an $87.4 million increase in casual and mid-core free-to-play revenue from multiple games as compared to the prior year. Partially offsetting this increase were a $4.0 million decrease in premium revenue from a reduction in game club redemptions and expirations and a $10.9 million decrease in social casino revenue associated with a reduction in bookings.
|
|
|
•
|
Other Investments revenue increased $0.7 million at United Tote due to incremental international equipment sales and higher totalisator fees from new customers.
|
|
|
•
|
Eliminations increased $3.4 million driven primarily by higher Churchill Downs intercompany revenue from increased wagering by TwinSpires customers on Kentucky Derby and Oaks week.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
|
|
•
|
Racing revenue decreased $13.8 million in 2015 driven by a $17.3 million decline in Calder revenue as a result of the July 1, 2014 cessation of pari-mutuel operations that was partially offset by rental income for the use of Calder's racetrack facilities. Arlington decreased $6.6 million due to twelve fewer live race days, smaller field sizes, fewer races per day and inclement weather for the Arlington Million which led to a decline in attendance, pari-mutuel wagering and other operational-based revenue. Partially offsetting these declines were an $8.7 million increase in Churchill Downs revenue primarily related to a successful Kentucky Oaks and Kentucky Derby week and a $1.4 million increase in Fair Grounds revenue from a 7.5% increase in handle.
|
|
|
•
|
Casinos revenue increased $4.6 million in 2015 driven by $3.9 million from Oxford due to successful promotional activities, a strengthening market and improvements in market share; $3.2 million from VSI due to the installation of upgraded video poker machines and the improved performance of OTB facilities that are not included within the Orleans Parish smoking ban limits; and a $0.8 million increase from Saratoga and Calder revenue. Partially offsetting these increases was a $1.8 million decline in Fair Grounds Slots revenue which was negatively impacted by a smoking ban in Orleans Parish which commenced on April 22, 2015 and a $1.5 million decline in our Mississippi properties as a result of aggressive competitors' offerings.
|
|
|
•
|
TwinSpires revenue increased $9.3 million in 2015, primarily driven by a $12.3 million increase in pari-mutuel and other revenue due to a 7.5% increase in TwinSpires.com handle compared to the industry increase of 1.2% for the period. The increase was partially offset by a $2.4 million decline as the result of the cancellation of a low-margin, third-party administrative call center services agreement during the fourth quarter of 2014 as well as a decline of $0.6 million due to the cessation of the print edition of
BLUFF
Magazine during January 2015.
|
|
|
•
|
Big Fish Games revenue increased $399.8 million in 2015 driven by the full year impact of the Big Fish Games acquisition. Big Fish Games net revenue includes amounts recognized from its social casino games, casual and mid-core free-to-play games and premium paid games.
|
|
|
•
|
Other Investments revenue decreased $0.5 million in 2015 due to lower revenue at United Tote.
|
|
|
•
|
Eliminations decreased $0.9 million in 2015 driven by lower intercompany transactions between Racing and United Tote.
|
Additional Statistical Data by Segment
The following tables provide additional statistical data for our segments:
Racing and TwinSpires
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Racing
|
|
|
|
|
|
Churchill Downs
|
|
|
|
|
|
Race days
|
70
|
|
|
70
|
|
|
74
|
|
Total handle
|
$
|
593.7
|
|
|
$
|
585.2
|
|
|
$
|
580.1
|
|
Net pari-mutuel revenue
|
$
|
61.5
|
|
|
$
|
60.9
|
|
|
$
|
60.1
|
|
Commission %
|
10.4
|
%
|
|
10.4
|
%
|
|
10.4
|
%
|
Arlington
|
|
|
|
|
|
Race days
|
74
|
|
|
77
|
|
|
89
|
|
Total handle
|
$
|
375.2
|
|
|
$
|
373.8
|
|
|
$
|
458.8
|
|
Net pari-mutuel revenue
|
$
|
48.2
|
|
|
$
|
46.0
|
|
|
$
|
53.1
|
|
Commission %
|
12.8
|
%
|
|
12.3
|
%
|
|
11.6
|
%
|
Calder
(2)
|
|
|
|
|
|
Race days
|
—
|
|
|
—
|
|
|
79
|
|
Total handle
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
155.8
|
|
Net pari-mutuel revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16.9
|
|
Commission %
|
NM
|
|
|
NM
|
|
|
10.9
|
%
|
Fair Grounds
|
|
|
|
|
|
Race days
|
78
|
|
|
83
|
|
|
82
|
|
Total handle
|
$
|
289.5
|
|
|
$
|
296.9
|
|
|
$
|
276.1
|
|
Net pari-mutuel revenue
|
$
|
29.3
|
|
|
$
|
30.4
|
|
|
$
|
29.1
|
|
Commission %
|
10.1
|
%
|
|
10.2
|
%
|
|
10.5
|
%
|
Total Racing
|
|
|
|
|
|
Race days
|
222
|
|
|
230
|
|
|
324
|
|
Total handle
|
$
|
1,258.4
|
|
|
$
|
1,255.9
|
|
|
$
|
1,470.8
|
|
Net pari-mutuel revenue
|
$
|
139.0
|
|
|
$
|
137.3
|
|
|
$
|
159.2
|
|
Commission %
|
11.0
|
%
|
|
10.9
|
%
|
|
10.8
|
%
|
TwinSpires.com
|
|
|
|
|
|
Total handle
|
$
|
1,096.9
|
|
|
$
|
965.1
|
|
|
$
|
897.7
|
|
Net pari-mutuel revenue
|
$
|
201.8
|
|
|
$
|
183.6
|
|
|
$
|
172.2
|
|
Commission %
|
18.4
|
%
|
|
19.0
|
%
|
|
19.2
|
%
|
Eliminations
(3)
|
|
|
|
|
|
Total handle
|
$
|
(128.4
|
)
|
|
$
|
(106.0
|
)
|
|
$
|
(112.7
|
)
|
Net pari-mutuel revenue
|
$
|
(16.6
|
)
|
|
$
|
(14.0
|
)
|
|
$
|
(14.5
|
)
|
Total
|
|
|
|
|
|
Handle
|
$
|
2,226.9
|
|
|
$
|
2,115.0
|
|
|
$
|
2,255.8
|
|
Net pari-mutuel revenue
|
$
|
324.2
|
|
|
$
|
306.9
|
|
|
$
|
316.9
|
|
Commission %
|
14.6
|
%
|
|
14.5
|
%
|
|
14.0
|
%
|
|
|
(1)
|
Total handle and net pari-mutuel revenue generated by Velocity are not included in total handle and net pari-mutuel revenue from TwinSpires.com.
|
|
|
(2)
|
Calder ceased pari-mutuel operations on July 1, 2014.
|
|
|
(3)
|
Eliminations include the elimination of intersegment transactions.
|
Casinos Activity
Certain key operating statistics specific to the gaming industry are included in our statistical data for our Casinos segment. Our slot facilities report slot handle as a volume measurement, defined as the gross amount wagered or cash and tickets placed into slot machines in the aggregate for the period cited. Net gaming revenue includes slot and table games revenue and is net of customer freeplay; however, it excludes other ancillary property revenue such as food and beverage, ATM, hotel and other miscellaneous revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Oxford Casino
|
|
|
|
|
|
Slot handle
|
$
|
774.0
|
|
|
$
|
722.6
|
|
|
$
|
675.4
|
|
Net slot revenue
|
64.9
|
|
|
62.1
|
|
|
58.4
|
|
Net gaming revenue
|
80.4
|
|
|
76.5
|
|
|
72.7
|
|
Riverwalk Casino
|
|
|
|
|
|
Slot handle
|
$
|
485.6
|
|
|
$
|
522.2
|
|
|
$
|
508.7
|
|
Net slot revenue
|
38.7
|
|
|
42.5
|
|
|
43.6
|
|
Net gaming revenue
|
43.7
|
|
|
47.2
|
|
|
47.4
|
|
Harlow’s Casino
|
|
|
|
|
|
Slot handle
|
$
|
535.1
|
|
|
$
|
538.6
|
|
|
$
|
554.9
|
|
Net slot revenue
|
42.0
|
|
|
42.6
|
|
|
43.3
|
|
Net gaming revenue
|
45.7
|
|
|
46.4
|
|
|
47.6
|
|
Calder Casino
|
|
|
|
|
|
Slot handle
|
$
|
1,044.7
|
|
|
$
|
986.2
|
|
|
$
|
961.1
|
|
Net slot revenue
|
75.8
|
|
|
74.4
|
|
|
73.2
|
|
Net gaming revenue
|
75.7
|
|
|
74.3
|
|
|
74.0
|
|
Fair Grounds Slots and Video Poker
|
|
|
|
|
|
Slot handle
|
$
|
405.5
|
|
|
$
|
417.1
|
|
|
$
|
428.0
|
|
Net slot revenue
|
35.8
|
|
|
38.0
|
|
|
39.6
|
|
Net gaming revenue
|
72.5
|
|
|
74.7
|
|
|
73.1
|
|
|
|
|
|
|
|
Total net gaming revenue
|
$
|
318.0
|
|
|
$
|
319.1
|
|
|
$
|
314.8
|
|
Big Fish Games
Our key operating statistic specific to Big Fish Games is bookings. Bookings represent the amount of virtual currency, virtual goods or premium games that consumers have purchased through third party app stores or the Big Fish Games website.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
(1)
|
Bookings
|
|
|
|
|
|
Social casino
|
$
|
182.3
|
|
|
$
|
193.0
|
|
|
$
|
9.0
|
|
Casual and mid-core free-to-play
|
211.0
|
|
|
151.2
|
|
|
3.8
|
|
Premium
|
92.9
|
|
|
109.0
|
|
|
5.6
|
|
Total bookings
|
$
|
486.2
|
|
|
$
|
453.2
|
|
|
$
|
18.4
|
|
|
|
(1)
|
We completed the acquisition of Big Fish Games on December 16, 2014.
|
Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes & purses
|
$
|
186.8
|
|
|
$
|
184.1
|
|
|
$
|
189.9
|
|
|
$
|
2.7
|
|
|
$
|
(5.8
|
)
|
Platform & development fees
|
179.9
|
|
|
143.6
|
|
|
5.1
|
|
|
36.3
|
|
|
138.5
|
|
Marketing & advertising
|
151.0
|
|
|
130.7
|
|
|
28.8
|
|
|
20.3
|
|
|
101.9
|
|
Salaries & benefits
|
137.0
|
|
|
132.2
|
|
|
120.3
|
|
|
4.8
|
|
|
11.9
|
|
Depreciation and amortization
|
108.6
|
|
|
109.7
|
|
|
68.3
|
|
|
(1.1
|
)
|
|
41.4
|
|
Content expense
|
103.0
|
|
|
95.3
|
|
|
93.7
|
|
|
7.7
|
|
|
1.6
|
|
Selling, general and administrative expense
|
100.2
|
|
|
90.8
|
|
|
76.0
|
|
|
9.4
|
|
|
14.8
|
|
Research & development
|
39.0
|
|
|
39.4
|
|
|
—
|
|
|
(0.4
|
)
|
|
39.4
|
|
Acquisition expense, net
|
3.4
|
|
|
21.7
|
|
|
10.2
|
|
|
(18.3
|
)
|
|
11.5
|
|
Calder exit costs
|
2.5
|
|
|
13.9
|
|
|
2.3
|
|
|
(11.4
|
)
|
|
11.6
|
|
Gain on Calder land sale
|
(23.7
|
)
|
|
—
|
|
|
—
|
|
|
(23.7
|
)
|
|
—
|
|
Other operating expense
|
126.7
|
|
|
127.3
|
|
|
127.2
|
|
|
(0.6
|
)
|
|
0.1
|
|
Total expense
|
$
|
1,114.4
|
|
|
$
|
1,088.7
|
|
|
$
|
721.8
|
|
|
$
|
25.7
|
|
|
$
|
366.9
|
|
Percent of revenue
|
85
|
%
|
|
90
|
%
|
|
89
|
%
|
|
|
|
|
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
Significant items affecting comparability of consolidated operating expense include:
|
|
•
|
Taxes and purses increased $2.7 million due to a $1.1 million increase in casino gaming taxes as a result of casino revenue growth at Oxford, a $0.9 million increase in purses primarily associated with 37 additional host days at Arlington and a $0.7 million increase in pari-mutuel taxes primarily related to TwinSpires.
|
|
|
•
|
Platform and development fees at Big Fish Games increased $36.3 million driven by the $72.5 million increase in Big Fish Games revenues.
|
|
|
•
|
Marketing and advertising expense increased $20.3 million relating to an increase in Big Fish Games user acquisition expense primarily associated with casual and mid-core free-to-play games.
|
|
|
•
|
Salaries and benefits expense increased $4.8 million primarily driven by a $2.7 million increase in additional personnel costs added at Big Fish Games to support the growth in the business, a $1.6 million increase in contract services related to Churchill Downs and a $0.5 million increase in other expense.
|
|
|
•
|
Depreciation and amortization expense decreased $1.1 million driven primarily by a $1.9 million decrease at Calder associated with fully depreciated assets, which was partially offset by a $0.8 million increase in expense in our other segments.
|
|
|
•
|
Content expense increased $7.7 million driven by a $7.1 million increase in third-party pari-mutuel content fees at TwinSpires associated with an increase in handle and a $0.6 million increase in other expense.
|
|
|
•
|
Selling, general and administrative expense increased $9.4 million driven primarily by a $5.1 million increase in stock-based compensation expense, a $1.5 million expense within our Casino segment arising from potential tax penalties associated with the untimely submission of certain informational tax returns, a $1.1 million increase in professional fees, an increase of $0.9 million in employee benefits for severance and relocation expenses and a $0.8 million increase in other expenses.
|
|
|
•
|
Research and development expense decreased $0.4 million resulting from higher capitalized payroll related to Big Fish Games software development expense.
|
|
|
•
|
Acquisition expense, net decreased $18.3 million driven by a decrease of $16.0 million as a result of the non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders in 2016 compared to 2015 and a $2.3 million benefit recognized in 2016 related to the elimination of a contingent liability established in 2012 for the acquisition of Bluff.
|
|
|
•
|
Calder exit costs decreased $11.4 million due to the 2015 non-cash impairment of $12.7 million to reduce the net book value of Calder’s grandstand and ancillary facilities to zero, partially offset by an increase in ongoing grandstand demolition costs of $1.3 million during 2016 compared to 2015.
|
|
|
•
|
Gain on Calder land sale increased $23.7 million from the sale of 61 acres of excess land at Calder, which represents proceeds of $25.6 million less the book value $1.9 million.
|
|
|
•
|
Other operating expense decreased $0.6 million in 2016. Other operating expense includes utilities, maintenance, food and beverage costs, property taxes and insurance and other operating expense. Insurance and property taxes decreased $4.0 million primarily from the cessation of pari-mutuel racing and demolition of property at Calder. Partially offsetting the decrease was a $1.7 million increase in TwinSpires third party processing expense related to handle growth and a $1.7 million increase in corporate deferred compensation expense.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
Significant items affecting comparability of consolidated operating expense include:
|
|
•
|
Taxes and purses decreased $5.8 million in 2015 primarily as a result of an $8.2 million decline in Calder expense related to the cessation of racing operations. Partially offsetting this decline was a $2.4 million increase in casino gaming taxes as a result of 1.4% casino revenue growth.
|
|
|
•
|
Platform and development fees increased $138.5 million in 2015 related to digital storefronts and third-party game developers' expenditures based on Big Fish Games revenue.
|
|
|
•
|
Marketing and advertising expense increased $101.9 million in 2015 driven primarily by additional user acquisition and advertising expense from the full year impact of Big Fish Games.
|
|
|
•
|
Salaries and benefit expense increased $11.9 million in 2015 driven by $19.7 million of additional expense from the full year impact of Big Fish Games. Partially offsetting this increase was a $3.4 million decline in Calder salaries and benefit expense due to the cessation of pari-mutuel racing and the closure of its poker room and a $4.4 million reduction in salaries across our other segments in response to moderating revenue growth.
|
|
|
•
|
Depreciation and amortization expense increased $41.4 million in 2015 driven by $49.5 million of additional expense associated with the Big Fish Games acquisition. Partially offsetting this increase was a $3.4 million reduction in depreciation expense at Calder as certain gaming assets were fully depreciated during 2014, $4.2 million in depreciation expense at Calder from the cessation of pari-mutuel operation and $0.5 million of other expense reductions.
|
|
|
•
|
Content expense increased $1.6 million in 2015 driven by a $5.0 million increase in fees incurred to import third-party pari-mutuel content for our Racing and TwinSpires segments. Partially offsetting this increase was a $3.4 million decline in Calder content expense due to the cessation of pari-mutuel racing and favorable terms obtained under the Calder agreement with TSG.
|
|
|
•
|
Selling, general and administrative expense increased $14.8 million in 2015 driven by $14.4 million of additional expense from the full year impact of Big Fish Games, $2.0 million of increased annual bonus compensation expense due to our financial performance and $1.0 million of other expense. Partially offsetting these increases were $1.4 million decline in Calder expense due to the cessation of pari-mutuel racing and a $1.2 million decline in corporate contributions and legal expense related to prior year matters which did not recur.
|
|
|
•
|
Research and development expense increased $39.4 million in 2015 driven by studio and engineering functions salary and benefit related expense from the full year impact of Big Fish Games.
|
|
|
•
|
Acquisition expense, net increased $11.5 million in 2015 as a result of the non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders.
|
|
|
•
|
Calder exit costs increased $11.6 million in 2015 due to $12.7 million of non-cash impairment charges to reduce the net book value of Calder's grandstand and ancillary facilities to zero, partially offset by a decrease in demolition and exit costs at Calder of $1.1 million.
|
|
|
•
|
Other operating expense increased $0.1 million in 2015. Other operating expense includes utilities, maintenance, food and beverage costs, property taxes and insurance and other operating expense. The increase was driven by $14.4 million of additional expense from the full year impact of Big Fish Games and $0.2 million of other expense. Partially offsetting these increases were declines of $3.4 million at Calder due to the cessation of pari-mutuel racing, $3.2 million related to 2014 Luckity asset impairment charges that did not recur in 2015, $3.1 million in casino operational efficiencies, $2.3 million in TwinSpires contract service expense, $1.7 million in corporate deferred compensation expense related to prior periods and $0.8 million in Racing and United Tote bad debt recoveries.
|
Corporate Allocated Expense
On January 1, 2016, we prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation. Excluding corporate stock-based compensation, the table below presents Corporate allocated expense included in the Adjusted EBITDA of each of the operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Racing
|
$
|
(6.0
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.6
|
|
|
$
|
0.2
|
|
Casinos
|
(6.9
|
)
|
|
(8.4
|
)
|
|
(8.1
|
)
|
|
1.5
|
|
|
(0.3
|
)
|
TwinSpires
|
(5.4
|
)
|
|
(5.0
|
)
|
|
(4.8
|
)
|
|
(0.4
|
)
|
|
(0.2
|
)
|
Big Fish Games
|
(2.8
|
)
|
|
(3.0
|
)
|
|
—
|
|
|
0.2
|
|
|
(3.0
|
)
|
Other Investments
|
(1.6
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(1.1
|
)
|
|
—
|
|
Corporate allocated expense
|
22.7
|
|
|
23.5
|
|
|
20.2
|
|
|
(0.8
|
)
|
|
3.3
|
|
Total Corporate allocated expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Adjusted EBITDA
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.
During 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue and to exclude depreciation and amortization from our equity investments. We also reclassified expense from our I-Gaming and Bluff Media operations from Other Investments to TwinSpires. The prior year amounts were reclassified to conform to this presentation. We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Racing
|
$
|
79.7
|
|
|
$
|
71.8
|
|
|
$
|
61.2
|
|
|
$
|
7.9
|
|
|
$
|
10.6
|
|
Casinos
|
125.8
|
|
|
114.9
|
|
|
107.2
|
|
|
10.9
|
|
|
7.7
|
|
TwinSpires
|
55.2
|
|
|
48.6
|
|
|
39.8
|
|
|
6.6
|
|
|
8.8
|
|
Big Fish Games
|
79.1
|
|
|
68.5
|
|
|
(0.7
|
)
|
|
10.6
|
|
|
69.2
|
|
Other Investments
|
2.7
|
|
|
2.9
|
|
|
1.6
|
|
|
(0.2
|
)
|
|
1.3
|
|
Corporate
|
(8.0
|
)
|
|
(4.2
|
)
|
|
(5.0
|
)
|
|
(3.8
|
)
|
|
0.8
|
|
Adjusted EBITDA
|
$
|
334.5
|
|
|
$
|
302.5
|
|
|
$
|
204.1
|
|
|
$
|
32.0
|
|
|
$
|
98.4
|
|
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
|
|
•
|
Racing Adjusted EBITDA increased $7.9 million due to a $5.2 million increase at Churchill Downs in profitability from the Kentucky Derby and Oaks week driven by increased ticket sales revenue, increased media revenue and record attendance, a $1.8 million increase at Calder from reduced property taxes and insurance savings from the cessation of pari-mutuel operations, a $0.8 million increase at Arlington on higher pari-mutuel revenue associated with 37 additional host days during 2016, a $0.8 million increase at Churchill Downs from non-Kentucky Derby and Oaks week handle increases during the racing meets and a $0.6 million increase from a decrease in corporate allocated expense. Partially offsetting these improvements was a $1.3 million decrease at Fair Grounds from a decline in revenue associated with five fewer live race days in 2016 and unfavorable development of general liability insurance claims.
|
|
|
•
|
Casinos Adjusted EBITDA increased $10.9 million driven by a $5.1 million increase at Saratoga from a full year of management fee revenue and equity income, a $3.3 million increase at MVG from higher equity income driven primarily by market share growth and higher net revenue from successful promotional activities, a $2.7 million increase at Oxford from a strong regional gaming market and higher market share combined with operational expense efficiencies, a $1.7
|
million increase at Calder from the implementation of successful marketing and promotional campaigns and a $1.4 million decrease in corporate expense allocated to the Casinos segment. Partially offsetting these improvements was a $2.0 million decrease at our Mississippi properties due to overall market revenue declines and aggressive local promotional activity and a $1.3 million decrease at Fair Grounds Slots and VSI as strong competition from the Mississippi Gulf Coast gaming market negatively impacted the New Orleans gaming market.
|
|
•
|
TwinSpires Adjusted EBITDA increased $6.6 million driven by a $7.3 million favorable impact of increased wagering, net of content costs, associated with handle growth of 13.7% and a 23.3% increase in active players, a $1.0 million increase at Velocity driven by handle growth of 7.2% and a $0.4 million increase in other TwinSpires income. These increases were partially offset by a $0.6 million increase in net taxes and purses, which includes the benefit of a $1.7 million Pennsylvania tax refund, and a $1.5 million increase in marketing and advertising primarily associated with the addition and retention of customers acquired during Kentucky Derby and Oaks week.
|
|
|
•
|
Big Fish Games Adjusted EBITDA increased $10.6 million driven by a $72.5 million increase in revenue primarily from our casual and mid-core free-to-play growth, partially offset by a $36.3 million increase in platform and developer fees, a $20.2 million increase in user acquisition fees and a $5.4 million increase in other expenses.
|
|
|
•
|
Corporate Adjusted EBITDA decreased $3.8 million driven by a $1.3 million benefit in 2015 related to deferred compensation expense which did not recur in 2016, a $0.9 million increase in salary expense, a $0.8 million decrease in corporate allocated expense, and a $0.8 million increase in professional expense.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
|
|
•
|
Racing Adjusted EBITDA increased $10.6 million in 2015 due to $6.0 million of increased profitability from the Kentucky Oaks and Kentucky Derby week, $3.8 million primarily due to the cessation of Calder pari-mutuel operations, $1.4 million at Churchill Downs outside of Kentucky Oaks and Kentucky Derby week results and $0.3 million at Fair Grounds. Partially offsetting these increases was a $0.9 million decrease at Arlington resulting from lower live and simulcast racing revenue as a result of lower purse sized due to the depletion of the Horse Racing Equity Trust Fund ("HRE Trust Fund") monies in 2014.
|
|
|
•
|
Casinos Adjusted EBITDA increased $7.7 million in 2015 driven by a $2.7 million increase at Oxford as a result of strong revenue trends, a $2.5 million increase at Riverwalk as a result of disciplined labor and other variable expense reductions, a $1.7 million increase at MVG from growth that was partially offset by new competition, a $1.2 million increase from VSI market share growth, a $0.6 million increase from Calder primarily from freeplay reductions and a $0.7 million increase from Saratoga from management fee income and equity income. Partially offsetting these increases was a $1.7 million decrease at Fair Grounds Slots primarily driven by the impact from the introduction of a parish-wide smoking ban on April 22, 2015.
|
|
|
•
|
TwinSpires Adjusted EBITDA increased $6.3 million in 2015 driven by $6.0 million primarily from handle growth of 7.5% which outpaced industry performance by 6.3 percentage points as customers continue to migrate to online wagering and $1.3 million from the discontinuation of Luckity, our online real-money bingo operations. These increases were partially offset by $1.0 million in higher marketing expense related to the 2015 Triple Crown Season and Breeders’ Cup, as well as higher New York taxes due to the cancellation of a service agreement.
|
|
|
•
|
Big Fish Games Adjusted EBITDA increased $69.2 million in 2015 due to the full year impact of the Big Fish Games acquisition which was completed on December 16, 2014. Operating expense reflects a full year of user acquisition costs, advertising and marketing, salaries and benefits and developer and platform fees.
|
|
|
•
|
Other Investments Adjusted EBITDA increased $3.8 million in 2015 due to a $1.9 million reduction of Internet gaming development expense, $1.3 million from United Tote cost control efforts and bad debt expense recoveries and $0.6 million from the elimination of losses from the cessation of the print edition of
BLUFF
Magazine during January 2015.
|
|
|
•
|
Corporate Adjusted EBITDA increased $0.8 million in 2015 due to a $1.3 million decrease in deferred compensation expense related to prior periods and $3.3 million in corporate expense allocated to the other operating segments. Partially offsetting these increases were $3.4 million in salaries, benefits and bonus compensation and $0.4 million in increased recruiting and professional fees.
|
Reconciliation of Comprehensive Income to Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Comprehensive income
|
$
|
107.5
|
|
|
$
|
64.7
|
|
|
$
|
46.3
|
|
|
$
|
42.8
|
|
|
$
|
18.4
|
|
Foreign currency translation, net of tax
|
(0.2
|
)
|
|
0.5
|
|
|
0.1
|
|
|
(0.7
|
)
|
|
0.4
|
|
Net change in pension benefits, net of tax
|
0.8
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Net income
|
108.1
|
|
|
65.2
|
|
|
46.4
|
|
|
42.9
|
|
|
18.8
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
108.6
|
|
|
109.7
|
|
|
68.3
|
|
|
(1.1
|
)
|
|
41.4
|
|
Interest expense
|
43.7
|
|
|
28.6
|
|
|
20.8
|
|
|
15.1
|
|
|
7.8
|
|
Income tax provision
|
60.0
|
|
|
46.9
|
|
|
30.1
|
|
|
13.1
|
|
|
16.8
|
|
EBITDA
|
320.4
|
|
|
250.4
|
|
|
165.6
|
|
|
70.0
|
|
|
84.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
18.9
|
|
|
13.8
|
|
|
11.9
|
|
|
5.1
|
|
|
1.9
|
|
Other charges
|
2.5
|
|
|
—
|
|
|
(0.4
|
)
|
|
2.5
|
|
|
0.4
|
|
TwinSpires operating expense
|
—
|
|
|
—
|
|
|
3.2
|
|
|
—
|
|
|
(3.2
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest, depreciation and amortization expense related to equity investments
|
10.0
|
|
|
8.5
|
|
|
8.7
|
|
|
1.5
|
|
|
(0.2
|
)
|
Other charges and recoveries, net
|
0.5
|
|
|
(5.8
|
)
|
|
2.6
|
|
|
6.3
|
|
|
(8.4
|
)
|
Acquisition expenses, net
|
3.4
|
|
|
21.7
|
|
|
10.2
|
|
|
(18.3
|
)
|
|
11.5
|
|
Gain on Calder land sale
|
(23.7
|
)
|
|
—
|
|
|
—
|
|
|
(23.7
|
)
|
|
—
|
|
Calder exit costs
|
2.5
|
|
|
13.9
|
|
|
2.3
|
|
|
(11.4
|
)
|
|
11.6
|
|
Total adjustments to EBITDA
|
14.1
|
|
|
52.1
|
|
|
38.5
|
|
|
(38.0
|
)
|
|
13.6
|
|
Adjusted EBITDA
|
$
|
334.5
|
|
|
$
|
302.5
|
|
|
$
|
204.1
|
|
|
$
|
32.0
|
|
|
$
|
98.4
|
|
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
|
|
•
|
Foreign currency translation, net of tax was favorable by $0.7 million driven by the effect of a stronger U.S. dollar on Big Fish Games international operations.
|
|
|
•
|
Net change in pension benefits, net of tax increased $0.8 million from a change in estimate associated with our executive pension plan obligation.
|
|
|
•
|
Depreciation and amortization expense decreased $1.1 million primarily driven by a $1.9 million decrease at Calder associated with fully depreciated racing assets, which was partially offset by a $0.8 million increases in our other segments.
|
|
|
•
|
Interest expense net increased $15.1 million primarily as a result of higher long-term debt balances outstanding and borrowings under our Senior Secured Credit Facility for payment of the Big Fish Games earnout liability.
|
|
|
•
|
Income tax provision increased $13.1 million driven by the increase in pretax income partially offset by a benefit from a decrease in our effective tax rate from lower non-deductible acquisition-related charges and the early adoption of a stock-based compensation accounting standard.
|
|
|
•
|
Stock-based compensation expense increased $5.1 million driven by an increase in retention awards for Big Fish employees and other key resources.
|
|
|
•
|
Other selling, general and administrative expense increased $2.5 million driven by $1.5 million in potential federal tax penalties from the untimely submission of informational gaming tax returns and a $1.0 million increase in severance and relocation expense at TwinSpires.
|
|
|
•
|
Interest, depreciation and amortization expense related to equity investments increased $1.5 million driven by amortization expense related to the basis difference between the fair value of property, equipment and definite-lived intangibles from our Saratoga investment.
|
|
|
•
|
Other charges and recoveries, net decreased $6.3 million driven by a 2015 gain of $5.8 million from the sale of our remaining ownership interest in HRTV and $0.5 million in 2016 expenses related to development costs in our Other Investments segment.
|
|
|
•
|
Acquisition expenses, net decreased $18.3 million driven by a $16.0 million reduction in non-cash fair value adjustments related to the liabilities for Big Fish Games earnout and deferred payments to the founders which were partially paid during 2016 and a $2.3 million reduction in contingent consideration associated with the Bluff acquisition which was deemed unlikely to be paid.
|
|
|
•
|
Gain on Calder land sale increased $23.7 million from the sale of 61 acres of excess land at Calder.
|
|
|
•
|
Calder exit costs decreased $11.4 million driven by a $12.7 million decrease in 2015 grandstand non-cash impairment expense which did not recur in 2016, partially offset by a $1.3 million in 2016 expenses, compared to 2015, to prepare the Calder facility for alternative use.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
|
|
•
|
Foreign currency translation, net of tax was unfavorable by $0.3 million driven by the effect of a weaker U.S. dollar on Big Fish Games international operations.
|
|
|
•
|
Depreciation and amortization expense increased $41.4 million in 2015 driven by $49.5 million of additional expense associated with the Big Fish Games acquisition. Partially offsetting this increase was a $3.4 million reduction in depreciation expense at Calder as certain gaming assets were fully depreciated during 2014, $3.9 million in depreciation expense at Calder from the cessation of pari-mutuel operation and $0.8 million of other expense reductions.
|
|
|
•
|
Interest expense increased $7.7 million in 2015 primarily as a result of higher long-term debt balances outstanding due to the acquisition of Big Fish Games.
|
|
|
•
|
Income tax provision increased $16.8 million in 2015 driven by $11.5 million of additional income tax expense associated with the increase in income from operations and $5.3 million of additional income tax expense as a result of certain non-deductible Big Fish Games acquisition expense.
|
|
|
•
|
Stock-based compensation expense increased $1.9 million in 2015 driven by $6.9 million in incremental restricted stock award expense and $1.3 million in accelerated restricted stock expense upon the September 30, 2015 retirement of our previous Chief Executive Officer. Partially offsetting these increases was a decline of $6.3 million in stock-based compensation expense associated with grants under the 2013 New Company Long Term Incentive Plan that were substantially recognized during 2014.
|
|
|
•
|
Interest, depreciation and amortization expense related to equity investments decreased $0.2 million in 2015 driven by reduced interest expense associated with lower outstanding MVG debt balances.
|
|
|
•
|
Other charges and recoveries, net increased $11.6 million in 2015 driven by a $5.8 million gain in 2015 from the sale of our remaining ownership interest in HRTV, $3.2 million in prior year Luckity impairment expense and $2.6 million in prior year impairment expense and equity losses from our unsuccessful attempt to bid on the development of a destination casino and resort in the Capital Region of New York.
|
|
|
•
|
Acquisition expense, net increased $11.5 million as a result of the non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders.
|
|
|
•
|
Calder exit costs increased $11.6 million in 2015 driven by $12.7 million in non-cash impairment charges to reduce the net book value of Calder's grandstand and ancillary facilities to zero, partially offset by a reduction of $1.1 million in 2015, compared to 2014, of barn and grandstand demolition costs in preparation for future use and to achieve operational cost savings.
|
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
(in millions)
|
2016
|
|
2015
|
|
Total assets
|
$
|
2,254.4
|
|
|
$
|
2,277.4
|
|
|
$
|
(23.0
|
)
|
Total liabilities
|
1,569.4
|
|
|
1,660.2
|
|
|
(90.8
|
)
|
Total shareholders’ equity
|
685.0
|
|
|
617.2
|
|
|
67.8
|
|
|
|
•
|
Total assets decreased $23.0 million in 2016 driven by a $50.5 million decrease in intangible assets due to 2016 amortization expense, a $25.9 million decrease in unrestricted cash due to the utilization of excess cash to fund share repurchases, term loan payments and a portion of the Big Fish Games earnout payment and a $9.5 million decrease in Big Fish Games goodwill associated with an out-of-period adjustment to correct errors that originated in the purchase price allocation for Big Fish Games. Partially offsetting these decreases was a $16.9 million increase related to prepaids and developer costs, a $13.6 million increase related to timing of accounts receivable receipts, a $13.6 million increase related to the Calder land sale receivable from escrow, a $6.6 million increase related to income tax receivable and a $12.2 million increase in all other assets.
|
|
|
•
|
Total liabilities decreased $90.8 million driven by a $304.0 million decrease in the Big Fish Games earnout liability and deferred payment to the founders. Partially offsetting this decrease were a $139.9 million increase in our total debt balance as we borrowed under our Senior Secured Credit Facility to fund the Big Fish Games earnout payment, a $26.6 million increase in deferred revenue due to advance billings for the 2017 Kentucky Derby and Oaks events, a $25.2 million increase in deferred taxes, a $14.0 million increase in accounts payable and a $7.5 million increase in all other liabilities.
|
|
|
•
|
Total shareholders’ equity increased $67.8 million driven by a $108.1 million increase in current year net income, a $19.7 million increase in stock-based compensation which was earned during 2016 and a $1.5 million increase in common shares issued, net of forfeitures. Partially offsetting these increases were a $27.6 million decrease from open-market repurchases of common stock, a $22.1 million decrease from our annual dividend declared, a $11.4 million decrease from repurchases of common stock for payment of taxes owed on vested shares and a $0.4 million decrease in other equity components.
|
Liquidity and Capital Resources
The following table is a summary of our liquidity and cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
'16 vs. '15 Change
|
|
'15 vs. '14 Change
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
|
Cash Flows from:
|
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
226.8
|
|
|
$
|
264.5
|
|
|
$
|
141.6
|
|
|
$
|
(37.7
|
)
|
|
$
|
122.9
|
|
Investing activities
|
(50.7
|
)
|
|
(65.5
|
)
|
|
(440.3
|
)
|
|
14.8
|
|
|
374.8
|
|
Financing activities
|
(201.9
|
)
|
|
(190.6
|
)
|
|
322.0
|
|
|
(11.3
|
)
|
|
(512.6
|
)
|
Included in cash flows from investing activities are capital maintenance expenditures and capital project expenditures. Capital maintenance expenditures relate to the replacement of existing fixed assets with a useful life greater than one year that are obsolete, exhausted, or no longer cost effective to repair. Capital project expenditures represent fixed asset additions related to land or building improvements to new or existing assets or purchases of new (non-replacement) equipment or software related to specific projects deemed necessary expenditures.
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
|
|
•
|
Cash provided by operating activities decreased $37.7 million driven by a $39.6 million decrease in the change in deferred revenue associated with Big Fish Games which benefited 2015, and a $19.7 million decrease in the Big Fish Games fair value of the earnout payment in March 2016 related to 2015 earnout milestones. Partially offsetting these decreases were a $19.2 million increase in Kentucky Derby and Oaks deferred revenue related primarily to the timing of advanced ticket sales for the 2017 events and $2.4 million increase in other cash flows. We anticipate that cash flows from operations over the next twelve months will be adequate to fund our business operations and capital expenditures.
|
|
|
•
|
Cash used in investing activities decreased $14.8 million driven by the $12.0 million in net proceeds from the Calder land sale and the $24.5 million prior year SCH payment for the 25% equity investment for Saratoga's New York facility. Partially offsetting these decreases were an $11.4 million increase in capital project expenditures primarily related to Churchill Downs, $6.0 million of prior year proceeds related to the sale of our remaining investment in HRTV and a $4.3 million increase in all other investing activities.
|
|
|
•
|
Cash used in financing activities increased $11.3 million driven by $300.0 million associated with our 2015 tack-on unsecured notes offering and a $261.9 outflow in 2016 related to the payment of the Big Fish Games earnout liability. Partially offsetting these increases were $420.4 million change in net repayments under our Senior Secured Credit Facility, $108.5 million less common stock repurchase activity in the current year and $21.7 million in other financing activities.
|
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
|
|
•
|
Cash provided by operating activities increased $122.9 million in 2015 due to $106.6 million from Big Fish Games cash flows, $15.3 million of dividends from our equity investments and $1.0 million of other cash flows.
|
|
|
•
|
Cash used in investing activities decreased $374.8 million in 2015 due to the $366.0 million purchase of Big Fish Games in 2014, $17.4 million in lower funding requirements for our MVG and Capital View joint ventures, $19.4 million in lower capital project expenditures driven by 2014 Churchill Downs projects and $6.0 million of proceeds from the sale of our remaining investment in HRTV. Partially offsetting these increases were the $24.5 million payment for the 25% equity investment in SCH, $8.4 million of increased capital maintenance expenditures driven by the replacement of slot machines at several Casino projects and $1.1 million of other cash flows.
|
|
|
•
|
Cash used in financing activities increased $512.6 million in 2015 primarily due to $682.8 million change in net repayments under our Senior Secured Credit Facility, $71.0 million in stock repurchases, $17.7 million of payments made to Big Fish Games' equity holders for the receipt of income tax refunds related to the acquisition, $28.5 million in deferred payments related to the Big Fish Games acquisition and $12.6 million in other activities. Partially offsetting these amounts were $300.0 million associated with our tack-on unsecured notes offering.
|
Credit Facilities and Indebtedness
The following table presents our debt outstanding, bond premium and issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
'16 vs. '15 Change
|
(in millions)
|
2016
|
|
2015
|
|
Senior Secured Credit Facility:
|
|
|
|
|
|
Senior Secured Credit Facility due 2021
|
$
|
135.0
|
|
|
$
|
—
|
|
|
$
|
135.0
|
|
Term Loan due 2021
|
179.3
|
|
|
188.7
|
|
|
(9.4
|
)
|
Swing line of credit
|
13.2
|
|
|
—
|
|
|
13.2
|
|
Total Senior Secured Credit Facility
|
327.5
|
|
|
188.7
|
|
|
138.8
|
|
5.375% Senior Unsecured Notes due 2021
|
600.0
|
|
|
600.0
|
|
|
—
|
|
Total debt
|
927.5
|
|
|
788.7
|
|
|
138.8
|
|
Current maturities of long-term debt
|
14.2
|
|
|
16.2
|
|
|
(2.0
|
)
|
Total debt, net of current maturities
|
913.3
|
|
|
772.5
|
|
|
140.8
|
|
Bond premium and issuance costs, net
|
(5.8
|
)
|
|
(6.9
|
)
|
|
1.1
|
|
Net debt
|
$
|
907.5
|
|
|
$
|
765.6
|
|
|
$
|
141.9
|
|
Senior Secured Credit Facility
On February 17, 2016, we entered into an amendment to our Fourth Amended and Restated Credit Agreement (the "New Agreement") which amends certain provisions of the credit agreement including extending the maturity of both the Senior Secured Credit Facility and the Term Loan (collectively the "Facilities") through February 2021, coterminous with one another. The maximum aggregate commitment for the Senior Secured Credit Facility remains at $500.0 million and the unamortized Term Loan of $188.7 million was refinanced as part of this amendment.
On December 1, 2014, we executed the Fourth Amended and Restated Credit Agreement (the "Senior Secured Credit Facility") whereby it added a $200.0 million Term Loan Facility ("Term Loan") to the existing Senior Secured Credit Facility and amended certain definitions and provisions of the credit agreement including consolidated funded indebtedness, EBITDA and calculation of the total leverage ratio.
Following the execution of the New Agreement, the new maturity date for both the Senior Secured Credit Facility and the Term Loan is February 17, 2021.
Regarding the Term Loan, we were required to make quarterly principal payments that commenced on March 31, 2015, per the amortization schedule laid out in the Fourth Amended and Restated Credit Agreement. Upon the execution of the New Agreement, the amortization schedule was modified based on $188.7 million outstanding Term Loan balance. Payments are set to occur on the last day of each quarter through the new maturity date with annual paydown requirements of 5%, 7.5%, 10%, 12.5%, 15% and a bullet payment due at maturity. The new amortization schedule called for quarterly principal payments of $2.4 million that commenced on March 31, 2016 and increases in increments of $1.2 million on March 31 of each year to reach final year
quarterly payment amounts of $7.1 million. If no additional payments are made, the balance due at termination will be $94.4 million.
Generally, borrowings made pursuant to the Senior Secured Credit Facility bear interest at a LIBOR-based rate per annum plus an applicable percentage ranging from 1.125% to 2.5% depending on our total leverage ratio. In addition, under the Senior Secured Credit Facility, we agreed to pay a commitment fee at rates that range from 0.15% to 0.35% of the available aggregate commitment, depending on our total leverage ratio. The Term Loan is not subject to, nor included in the calculation of, the commitment fee. The weighted average interest rate on outstanding borrowings was 2.7% at December 31, 2016 and 1.7% at December 31, 2015.
The Senior Secured Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on us and our subsidiaries with respect to indebtedness, restricted payments, liens, investments, mergers and acquisitions, disposition of assets, sale-leaseback transactions and transactions with affiliates. The covenants permit us to use proceeds of the credit extended under the agreement for general corporate purposes, restricted payments and acquisition needs. The Senior Secured Credit Facility also contains financial covenants that require us (i) to maintain an interest coverage ratio (i.e., consolidated adjusted EBITDA to consolidated interest expense) that is greater than 3.0 to 1.0; (ii) not to permit the total leverage ratio (i.e., total consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than 4.5 to 1.0, provided that if a certain minimum consolidated adjusted EBITDA is reached then the total leverage ratio will be increased to 5.0 to 1.0 for such periods that the minimum is maintained; and (iii) not to permit the senior secured leverage ratio (i.e. senior secured consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than 3.5 to 1.0. As of December 31, 2016, we were in compliance with all covenants under the Senior Secured Credit Facility, and substantially all of our assets continue to be pledged as collateral under the Senior Secured Credit Facility. At December 31, 2016, the financial ratios under our Senior Secured Credit Facility were as follows:
|
|
|
|
|
|
Actual
|
|
Requirement
|
Interest coverage ratio
|
7.8 to 1
|
|
> 3.0 to 1.0
|
Total leverage ratio
|
2.8 to 1
|
|
< 4.5 to 1.0
|
Senior secured leverage ratio
|
1.1 to 1
|
|
< 3.5 to 1.0
|
As of December 31,
2016
, we had $7.1 million in letter of credit commitments which reduced the total available capacity under the Senior Secured Credit Facility to $344.7 million.
5.375% Senior Unsecured Notes
On December 16, 2013, we completed an offering of $300.0 million in aggregate principal amount of 5.375% Senior Unsecured Notes that mature on December 15, 2021 (the "Initial Senior Unsecured Notes" or the "Existing Notes"). The Initial Senior Unsecured Notes were issued at par, with interest payable on June 15
th
and December 15
th
of each year. We received net proceeds of $295.0 million, after deducting underwriting fees, and used the net proceeds from the offering to repay a portion of our outstanding revolver borrowings, and accrued and unpaid interest outstanding under our (then) Third Amended and Restated Credit Agreement. In connection with the issuance, we capitalized $6.3 million of debt issuance costs which are being amortized as interest expense over the remaining term of the Initial Senior Unsecured Notes.
On December 16, 2015, we completed an additional offering of $300.0 million in aggregate principal amount of 5.375% Senior Unsecured Notes that mature on December 15, 2021 (the "Tack-on Notes"). The Tack-on Notes were issued under the December 16, 2013 Indenture governing the $300.0 million Existing Notes and form a part of the same series as the Existing Notes for purposes of the Indenture. The Tack-on Notes were issued at 101% with interest payable on June 15
th
and December 15
th
of each year. We received net proceeds of $299.0 million, after deducting underwriting fees and used the net proceeds from the offering to repay outstanding revolver borrowings along with accrued and unpaid interest outstanding under the Senior Secured Credit Facility. In connection with the issuance, we capitalized $4.7 million of debt issuance costs which are being amortized as interest expense over the remaining term of the Tack-on Notes.
Upon completion of this Tack-on Notes offering, the aggregate principal amount of the outstanding notes under this series is $600.0 million (collectively the "Senior Unsecured Notes"). The Tack-on Notes were offered with different CUSIP and ISIN numbers from the Existing Notes, and as a result thereof, did not trade fungibly until they were assigned the same CUSIP and ISIN numbers. On December 15, 2016 the Tack-on Notes were exchanged into the unrestricted CUSIP and ISIN numbers assigned to the Existing Notes.
Both series of the Senior Unsecured Notes were issued in private offerings that were exempt from registration under the Securities Act of 1933, as amended, and are senior unsecured obligations. The total Senior Unsecured Notes are guaranteed by each of our domestic subsidiaries that guarantee our Senior Secured Credit Facility and will rank equally with our existing and future senior obligations. At any time prior to December 15, 2016, we could have redeemed all or part of the total Senior Unsecured
Notes at a price equal to 100% of the principal amount of the notes redeemed plus a "make-whole" premium, together with accrued and unpaid interest and additional interest, if any, to the redemption date. On or after December 15, 2016, we may redeem all or part of the Senior Unsecured Notes at a redemption price of 104.0% which gradually reduces to par by 2019.
Contractual Obligations
Our commitments to make future payments as of December 31,
2016
, are estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018-2019
|
|
2020-2021
|
|
Thereafter
|
|
Total
|
Dividends
|
$
|
21.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.8
|
|
Big Fish Games earnout
|
68.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68.4
|
|
Big Fish Games deferred payment
|
28.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28.4
|
|
Senior Secured Credit Facility
|
—
|
|
|
—
|
|
|
148.1
|
|
|
—
|
|
|
148.1
|
|
Interest on Senior Secured Credit Facility
(1)
|
3.9
|
|
|
7.9
|
|
|
4.5
|
|
|
—
|
|
|
16.3
|
|
Term Loan
|
14.2
|
|
|
42.5
|
|
|
122.7
|
|
|
—
|
|
|
179.4
|
|
Interest on Term Loan
(1)
|
4.7
|
|
|
8.0
|
|
|
3.4
|
|
|
—
|
|
|
16.1
|
|
Senior Unsecured Notes
|
—
|
|
|
—
|
|
|
600.0
|
|
|
—
|
|
|
600.0
|
|
Interest on Senior Unsecured Notes
|
32.3
|
|
|
64.5
|
|
|
63.2
|
|
|
—
|
|
|
160.0
|
|
Operating leases
|
11.9
|
|
|
17.6
|
|
|
19.1
|
|
|
85.0
|
|
|
133.6
|
|
Total
|
$
|
185.6
|
|
|
$
|
140.5
|
|
|
$
|
961.0
|
|
|
$
|
85.0
|
|
|
$
|
1,372.1
|
|
|
|
(1)
|
Interest includes the estimated contractual payments under our Senior Secured Credit Facility assuming no change in the weighted average borrowing rate of 2.7% which was the rate in place as of December 31, 2016.
|
As of
December 31, 2016
, we had approximately
$3.1 million
of unrecognized tax benefits. As of
December 31, 2016
, the fair value of the Big Fish Games earnout liability is $67.9 million and the fair value of the Big Fish Games deferred payment to the founders is $27.8 million, both of which will be paid in 2017.
Our Critical Accounting Policies
Our financial statements have been prepared in conformity with U.S. GAAP and are based upon certain critical accounting policies. These policies may require management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.
Our critical accounting policies are:
|
|
•
|
goodwill and indefinite intangible assets;
|
|
|
•
|
property and equipment; and
|
Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2 to the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Revenue recognition
Racing and TwinSpires
Racing and TwinSpires revenue is generated by pari-mutuel wagering on live and simulcast racing content. Additionally, we also generate revenue through sponsorships, admissions, television rights, concessions, programs and parking.
Our Racing and TwinSpires revenue and income are influenced by our racing calendar. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first
quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby.
Pari-mutuel revenue is recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective state’s racing regulatory body. Other operating revenue such as sponsorships, admissions, television rights, concessions, programs and parking revenue are recognized once delivery of the product or service has occurred.
Live racing handle includes patron wagers made on live races at our racetracks and also wagers made on imported simulcast signals by patrons at our racetracks during live meets. Import simulcasting handle includes wagers on imported signals at our racetracks when the respective tracks are not conducting live racing meets, at our OTBs and through our advance deposit wagering providers throughout the year. Export handle includes all patron wagers made on live racing signals sent to other tracks, OTBs and advance deposit wagering providers. Advance deposit wagering consists of patron wagers through an advance deposit account. We retain as revenue a pre-determined percentage or commission on the total amount wagered, and the balance is distributed to the winning patrons. The gross percentages earned in
2016
approximated
19.0%
of handle for TwinSpires and
10.9%
of handle for Racing.
Casinos
Casinos revenue represents net casino wins which is the difference between casino wins and losses. Other operating revenue, such as concession revenue, is recognized once delivery of the product or service has occurred.
Big Fish Games
Our Big Fish Games segment derives its revenue from the sale of in-app purchases within our free-to-play games and sales of our premium paid games. We offer social casino and casual and mid-core free-to-play games that customers can play at no cost. Customers can purchase virtual currency that can be used to buy virtual items to enhance the game playing experience. These games are distributed primarily through third party mobile platform providers, including but not limited to, Apple and Google.
The proceeds from the sale of virtual goods are initially recorded as deferred revenue and recognized as revenue when persuasive evidence of an arrangement exists, the service has been provided to the user, the price paid by the user is fixed or determinable and collectability is reasonably assured. Determining whether and when some of these criteria have been satisfied requires judgments that may have a significant impact on the timing and amount of revenue we report in each period. For the purpose of determining when the service has been provided to the player, we have determined that an implied obligation exists to the paying user to continue to make available the purchased virtual goods within the game over the estimated life of the virtual goods. For casino games, the life of the virtual goods is estimated to be the time period over which virtual goods are consumed, approximating three days. For all other casual games, the average playing period of paying players of approximately four months represents our best estimate of the average life of virtual goods. The proceeds from the sale of virtual goods are recorded as deferred revenue and recognized as revenue over the estimated life of the virtual goods.
Premium game revenue is derived from our PC subscription business, the Big Fish Game Club, and from the sale of individual games on PC, Mac and mobile devices. Subscribers receive a game credit each month with subscription. The value of the game credit is recognized when a customer redeems the game credit.
We record breakage revenue related to outstanding premium game credits. For credits that are subject to expiration, breakage revenue is recorded when the credits have legally expired. Breakage revenue is recorded for game credits with no legal expiration when we have determined the likelihood of redemption is remote based on historical game credit redemption patterns.
We estimate revenue from digital storefronts, such as Apple and Google, in the current period when reasonable estimates of these amounts can be made. The digital storefronts provide reliable interim preliminary sale reporting data within a reasonable time frame following the end of each month which, when validated against our internal data, allows us to make reasonable estimates of revenue and therefore to recognize revenue during the reporting period. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates. When we receive the final reports, to the extent not received within a reasonable time frame following the end of each month, we record any differences between estimated revenue and actual revenue in the reporting period when we determine the actual amounts. Historically, the revenue on the final revenue report has not differed significantly from the reported revenue for the period.
We evaluate our digital storefront agreements in order to determine whether or not we are acting as the principal or as an agent when selling our games which we consider in determining if revenue should be reported gross or net. We primarily use digital storefronts for distributing our social casino and casual free-to-play games. Key indicators that we evaluate in order to reach this determination include:
|
|
•
|
the terms and conditions of our contracts with the digital storefronts;
|
|
|
•
|
the party responsible for billing and collecting fees from the end-users, including the resolution of billing disputes;
|
|
|
•
|
whether we are paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game;
|
|
|
•
|
the party which sets the pricing with the end-user, has the credit risk and provides customer support; and
|
|
|
•
|
the party responsible for the fulfillment of the game and that determines the specifications of the game.
|
Based on the evaluation of the above indicators, we have determined that we are generally acting as a principal and are the primary obligor to end-users for games distributed through digital storefronts; therefore, we recognize revenue related to these arrangements on a gross basis.
Goodwill and indefinite intangible assets
We perform an annual review for impairment of goodwill and indefinite-lived intangible assets as of March 31 of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues which are triggering events requiring the testing of an asset’s carrying value for recoverability. Goodwill is allocated among and evaluated for impairment at the reporting unit level which is defined as an operating segment or one level below an operating segment.
Goodwill and intangible assets can or may be required to be tested using a two-step impairment test. We assess qualitative factors to determine whether it is necessary to complete the two-step impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than its carrying value, including goodwill, the two-step test can be bypassed. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, among others. These factors require significant judgment and estimates, and application of alternative assumptions could produce significantly different results. Evaluations of possible impairment utilizing the two-step approach require us to estimate, among other factors, forecasts of future operating results, revenue growth, EBITDA margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values and fair market values of our reporting units and assets.
We completed step one of the two-step test during the first quarter of 2016, and there were no impairments to our goodwill. The goodwill impairment test, particularly as it relates to our Big Fish reporting unit, is subject to uncertainties arising from such events as changes in competitive conditions, the current general economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows; changes in the discount rate; and the impact of strategic decisions. If any of these factors were to materially change it may require a reevaluation of our goodwill. Changes in estimates or the application of alternative assumptions could produce significantly different results.
Our slots gaming rights and casinos' trade names are considered indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities and use the trade names indefinitely, and our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions. Our Big Fish Games trade name is also considered an indefinite intangible asset. These indefinite intangible assets are tested annually, or more frequently, if indicators of impairment exist, by comparing the fair value of the recorded assets to the carrying amount. If the carrying amount of the slots gaming rights and trade name intangible assets exceed fair value, an impairment loss is recognized. There were no impairments to our indefinite-lived intangible assets in 2016.
Property and equipment
We have a significant investment in long-lived property and equipment. Property and equipment are recorded at cost. Judgments are made in determining the estimated useful lives of assets, the salvage values to be assigned to assets and if or when an asset has been impaired. The accuracy of these estimates affects the amount of depreciation expense recognized in the financial results and whether to record a gain or loss on disposition of an asset.
We review the carrying value of our property and equipment used in our operations whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from its use and eventual disposition. Adverse industry or economic trends, lower projections of profitability, or a significant adverse change in legal factors or in the business climate, among other items, may be indications of potential impairment issues. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, an impairment is recorded based on the fair value of the asset.
There are three generally accepted approaches available in developing an opinion of value: 1) the cost approach which is the price a prudent investor would pay to produce or construct a similar new item; 2) the market approach which is typically used for land valuations by analyzing recent sales transactions of similar sites; and 3) the income approach which is based on a discounted cash flow model using the estimated future results of the relevant reporting unit discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If necessary, we solicit third-party valuation expertise to assist in the valuation of our assets. We apply the most indicative approach to the overall valuation, or in some cases, a weighted analysis of any or all of these methods. The determination of fair value uses accounting judgments and
estimates, including market conditions, and the reliability is dependent upon the availability and comparability of the market data uncovered, as well as the decision making criteria used by marketing participants when evaluating a property. Changes in estimates or application of alternative assumptions could produce significantly different results.
In 2016, there were no impairments to our property and equipment. In 2015, we recorded a $12.7 million non-cash impairment charge related to the Calder grandstand.
Income Taxes
We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.
Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our assets and liabilities and measured by enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
48.7
|
|
|
$
|
74.5
|
|
Restricted cash
|
34.3
|
|
|
29.7
|
|
Accounts receivable, net of allowance for doubtful accounts of $3.5 in 2016 and $3.8 in 2015
|
81.4
|
|
|
67.8
|
|
Receivable from escrow
|
13.6
|
|
|
—
|
|
Income taxes receivable
|
7.6
|
|
|
1.0
|
|
Game software development, net
|
9.6
|
|
|
7.1
|
|
Other current assets
|
50.8
|
|
|
39.5
|
|
Total current assets
|
246.0
|
|
|
219.6
|
|
Property and equipment, net
|
574.4
|
|
|
573.2
|
|
Game software development, net
|
6.3
|
|
|
3.2
|
|
Investment in and advances to unconsolidated affiliates
|
139.1
|
|
|
129.7
|
|
Goodwill
|
832.2
|
|
|
841.7
|
|
Other intangible assets, net
|
445.7
|
|
|
496.2
|
|
Other assets
|
10.7
|
|
|
13.8
|
|
Total assets
|
$
|
2,254.4
|
|
|
$
|
2,277.4
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
53.2
|
|
|
$
|
39.1
|
|
Purses payable
|
12.5
|
|
|
12.1
|
|
Account wagering deposit liabilities
|
25.0
|
|
|
20.4
|
|
Accrued expense
|
100.1
|
|
|
97.9
|
|
Tax refund due to Big Fish Games former equity holders
|
—
|
|
|
0.4
|
|
Deferred revenue - Big Fish Games
|
81.3
|
|
|
81.3
|
|
Deferred revenue - all other
|
64.3
|
|
|
46.0
|
|
Big Fish Games deferred payment, current
|
27.8
|
|
|
28.1
|
|
Big Fish Games earnout liability, current
|
67.9
|
|
|
279.5
|
|
Current maturities of long-term debt
|
14.2
|
|
|
16.2
|
|
Dividends payable
|
21.8
|
|
|
19.1
|
|
Total current liabilities
|
468.1
|
|
|
640.1
|
|
Long-term debt (net of current maturities and loan origination fees of $0.5 in 2016 and $0.6 in 2015
|
312.8
|
|
|
171.9
|
|
Notes payable (including premium of $2.5 in 2016 and $3.0 in 2015 and net of debt issuance costs of $7.8 in 2016 and $9.3 in 2015)
|
594.7
|
|
|
593.7
|
|
Big Fish Games deferred payment, net of current amount due
|
—
|
|
|
26.7
|
|
Big Fish Games earnout liability, net of current amount due
|
—
|
|
|
65.7
|
|
Deferred revenue - all other
|
24.4
|
|
|
16.1
|
|
Deferred income taxes
|
153.1
|
|
|
127.9
|
|
Other liabilities
|
16.3
|
|
|
18.1
|
|
Total liabilities
|
1,569.4
|
|
|
1,660.2
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
Preferred stock, no par value; 0.3 shares authorized; no shares issued
|
—
|
|
|
—
|
|
Common stock, no par value; 50.0 shares authorized; 16.5 shares issued in 2016 and 16.6 shares issued in 2015
|
116.5
|
|
|
134.0
|
|
Retained earnings
|
569.7
|
|
|
483.8
|
|
Accumulated other comprehensive loss
|
(1.2
|
)
|
|
(0.6
|
)
|
Total shareholders' equity
|
685.0
|
|
|
617.2
|
|
Total liabilities and shareholders' equity
|
$
|
2,254.4
|
|
|
$
|
2,277.4
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
2016
|
|
2015
|
|
2014
|
Net revenue:
|
|
|
|
|
|
Racing
|
$
|
251.1
|
|
|
$
|
248.0
|
|
|
$
|
261.4
|
|
Casinos
|
332.8
|
|
|
332.9
|
|
|
328.3
|
|
TwinSpires
|
220.6
|
|
|
200.2
|
|
|
191.0
|
|
Big Fish Games
|
486.2
|
|
|
413.7
|
|
|
13.9
|
|
Other Investments
|
16.9
|
|
|
16.6
|
|
|
16.5
|
|
Corporate
|
1.0
|
|
|
0.9
|
|
|
1.1
|
|
Total net revenue
|
1,308.6
|
|
|
1,212.3
|
|
|
812.2
|
|
Operating expense:
|
|
|
|
|
|
Racing
|
187.7
|
|
|
189.9
|
|
|
216.3
|
|
Casinos
|
241.3
|
|
|
241.1
|
|
|
243.3
|
|
TwinSpires
|
146.7
|
|
|
135.4
|
|
|
138.2
|
|
Big Fish Games
|
398.9
|
|
|
340.1
|
|
|
16.0
|
|
Other Investments
|
16.5
|
|
|
16.3
|
|
|
17.6
|
|
Corporate
|
1.9
|
|
|
0.1
|
|
|
1.9
|
|
Selling, general and administrative expense
|
100.2
|
|
|
90.8
|
|
|
76.0
|
|
Research and development
|
39.0
|
|
|
39.4
|
|
|
—
|
|
Gain on Calder land sale
|
(23.7
|
)
|
|
—
|
|
|
—
|
|
Calder exit costs
|
2.5
|
|
|
13.9
|
|
|
2.3
|
|
Acquisition expenses, net
|
3.4
|
|
|
21.7
|
|
|
10.2
|
|
Total operating expense
|
1,114.4
|
|
|
1,088.7
|
|
|
721.8
|
|
Operating income
|
194.2
|
|
|
123.6
|
|
|
90.4
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense
|
(43.7
|
)
|
|
(28.6
|
)
|
|
(20.8
|
)
|
Equity in income of unconsolidated investments
|
17.4
|
|
|
11.2
|
|
|
6.3
|
|
Miscellaneous, net
|
0.2
|
|
|
5.9
|
|
|
0.6
|
|
Total other expense
|
(26.1
|
)
|
|
(11.5
|
)
|
|
(13.9
|
)
|
Income from operations before provision for income taxes
|
168.1
|
|
|
112.1
|
|
|
76.5
|
|
Income tax provision
|
(60.0
|
)
|
|
(46.9
|
)
|
|
(30.1
|
)
|
Net income
|
$
|
108.1
|
|
|
$
|
65.2
|
|
|
$
|
46.4
|
|
|
|
|
|
|
|
Net income per common share data:
|
|
|
|
|
|
Basic net income
|
$
|
6.52
|
|
|
$
|
3.75
|
|
|
$
|
2.67
|
|
Diluted net income
|
$
|
6.42
|
|
|
$
|
3.71
|
|
|
$
|
2.64
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
16.4
|
|
|
17.2
|
|
|
17.3
|
|
Diluted
|
16.8
|
|
|
17.6
|
|
|
17.6
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
Foreign currency translation, net of tax
|
0.2
|
|
|
(0.5
|
)
|
|
(0.1
|
)
|
Change in pension benefits, net of tax
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
Other comprehensive loss
|
(0.6
|
)
|
|
(0.5
|
)
|
|
(0.1
|
)
|
Comprehensive income
|
$
|
107.5
|
|
|
$
|
64.7
|
|
|
$
|
46.3
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the years ended December 31,
2016
,
2015
and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total Shareholders' Equity
|
(in millions, except per common share data)
|
Shares
|
|
Amount
|
|
|
|
Balance, December 31, 2013
|
17.9
|
|
|
$
|
296.0
|
|
|
$
|
408.8
|
|
|
$
|
—
|
|
|
$
|
704.8
|
|
Net income
|
|
|
|
|
46.4
|
|
|
|
|
46.4
|
|
Issuance of common stock
|
0.4
|
|
|
23.3
|
|
|
|
|
|
|
23.3
|
|
Tax windfall from stock-based compensation
|
|
|
7.7
|
|
|
|
|
|
|
7.7
|
|
Repurchase of common stock
|
(0.8
|
)
|
|
(76.6
|
)
|
|
|
|
|
|
(76.6
|
)
|
Stock-based compensation
|
|
|
11.9
|
|
|
|
|
|
|
11.9
|
|
Cash & restricted stock dividends, $1.00 per share
|
|
|
|
|
(17.3
|
)
|
|
|
|
(17.3
|
)
|
Foreign currency translation adjustment, net of ($0.1) tax
|
|
|
|
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Balance, December 31, 2014
|
17.5
|
|
|
262.3
|
|
|
437.9
|
|
|
(0.1
|
)
|
|
700.1
|
|
Net income
|
|
|
|
|
65.2
|
|
|
|
|
65.2
|
|
Issuance of common stock
|
—
|
|
|
3.5
|
|
|
|
|
|
|
3.5
|
|
Tax windfall from stock-based compensation
|
|
|
5.5
|
|
|
|
|
|
|
5.5
|
|
Repurchase of common stock
|
(1.1
|
)
|
|
(151.1
|
)
|
|
|
|
|
|
(151.1
|
)
|
Grants of restricted stock, net of forfeitures
|
0.2
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
13.8
|
|
|
|
|
|
|
13.8
|
|
Cash & restricted stock dividends, $1.15 per share
|
|
|
|
|
(19.3
|
)
|
|
|
|
(19.3
|
)
|
Foreign currency translation adjustment, net of ($0.2) tax
|
|
|
|
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Balance, December 31, 2015
|
16.6
|
|
|
134.0
|
|
|
483.8
|
|
|
(0.6
|
)
|
|
617.2
|
|
Net income
|
|
|
|
|
|
|
108.1
|
|
|
|
|
108.1
|
|
Issuance of common stock
|
0.1
|
|
|
2.6
|
|
|
|
|
|
|
2.6
|
|
Repurchase of common stock
|
(0.3
|
)
|
|
(39.0
|
)
|
|
|
|
|
|
(39.0
|
)
|
Grants of restricted stock, net of forfeitures
|
0.1
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
|
18.9
|
|
|
|
|
|
|
18.9
|
|
Cash & restricted stock dividends, $1.32 per share
|
|
|
|
|
|
|
(22.2
|
)
|
|
|
|
(22.2
|
)
|
Foreign currency translation, net of ($0.1) tax
|
|
|
|
|
|
|
0.2
|
|
|
0.2
|
|
Change in pension benefits, net of ($0.5) tax
|
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
Balance, December 31, 2016
|
16.5
|
|
|
$
|
116.5
|
|
|
$
|
569.7
|
|
|
$
|
(1.2
|
)
|
|
$
|
685.0
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
108.1
|
|
|
$
|
65.2
|
|
|
$
|
46.4
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
108.6
|
|
|
109.7
|
|
|
68.3
|
|
Game software development amortization
|
17.2
|
|
|
9.7
|
|
|
—
|
|
Acquisition expenses, net
|
3.4
|
|
|
34.7
|
|
|
7.1
|
|
Gain on sale of equity investments
|
—
|
|
|
(5.8
|
)
|
|
—
|
|
Distributed earnings from equity investments
|
15.6
|
|
|
15.2
|
|
|
—
|
|
Earnings from equity investments, net
|
(17.4
|
)
|
|
(11.2
|
)
|
|
(6.3
|
)
|
Stock-based compensation
|
18.9
|
|
|
13.8
|
|
|
11.9
|
|
Deferred tax provision (benefit)
|
35.4
|
|
|
(3.4
|
)
|
|
14.8
|
|
(Gain) loss on sale of assets
|
(23.6
|
)
|
|
0.3
|
|
|
(0.4
|
)
|
Big Fish Games earnout payment
|
(19.7
|
)
|
|
—
|
|
|
—
|
|
Big Fish Games deferred payment
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
Other
|
2.0
|
|
|
4.6
|
|
|
0.6
|
|
Increase (decrease) in cash resulting from changes in operating assets and liabilities, net of business acquisitions:
|
|
|
|
|
|
Other current assets and liabilities
|
(10.2
|
)
|
|
(15.3
|
)
|
|
(3.3
|
)
|
Game software development
|
(22.1
|
)
|
|
(19.8
|
)
|
|
—
|
|
Income taxes
|
(6.6
|
)
|
|
28.5
|
|
|
0.2
|
|
Deferred revenue
|
17.9
|
|
|
38.3
|
|
|
0.6
|
|
Other assets and liabilities
|
1.3
|
|
|
—
|
|
|
1.7
|
|
Net cash provided by operating activities
|
226.8
|
|
|
264.5
|
|
|
141.6
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital maintenance expenditures
|
(30.9
|
)
|
|
(31.1
|
)
|
|
(22.7
|
)
|
Capital project expenditures
|
(23.8
|
)
|
|
(12.4
|
)
|
|
(31.8
|
)
|
Receivable from escrow
|
(13.6
|
)
|
|
—
|
|
|
—
|
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(0.9
|
)
|
|
(366.0
|
)
|
Acquisition of gaming licenses
|
(2.5
|
)
|
|
(2.3
|
)
|
|
(2.3
|
)
|
Distributions of capital from equity investments
|
0.7
|
|
|
—
|
|
|
—
|
|
Investment in joint ventures
|
(8.0
|
)
|
|
(25.0
|
)
|
|
(18.5
|
)
|
Proceeds from sale of equity investment
|
1.8
|
|
|
6.0
|
|
|
—
|
|
Proceeds from sale of assets
|
25.6
|
|
|
0.2
|
|
|
1.0
|
|
Net cash used in investing activities
|
(50.7
|
)
|
|
(65.5
|
)
|
|
(440.3
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings on bank line of credit
|
727.1
|
|
|
704.2
|
|
|
805.0
|
|
Repayments of bank line of credit
|
(588.4
|
)
|
|
(985.8
|
)
|
|
(403.8
|
)
|
Big Fish Games earnout payment
|
(261.9
|
)
|
|
—
|
|
|
—
|
|
Big Fish Games deferred payment
|
(26.4
|
)
|
|
(28.5
|
)
|
|
—
|
|
Tax refund payments to Big Fish Games equity holders
|
(0.4
|
)
|
|
(17.7
|
)
|
|
—
|
|
Proceeds from note issuance
|
—
|
|
|
300.0
|
|
|
—
|
|
Payment of dividends
|
(19.1
|
)
|
|
(17.4
|
)
|
|
(15.2
|
)
|
Repurchase of common stock
|
(39.0
|
)
|
|
(147.6
|
)
|
|
(76.6
|
)
|
Common stock issued
|
2.2
|
|
|
1.2
|
|
|
7.4
|
|
Windfall tax provision from stock-based compensation
|
—
|
|
|
5.6
|
|
|
7.7
|
|
Loan origination fees and debt issuance costs
|
(1.4
|
)
|
|
(4.6
|
)
|
|
(2.1
|
)
|
Other
|
5.4
|
|
|
—
|
|
|
(0.4
|
)
|
Net cash (used in) provided by financing activities
|
(201.9
|
)
|
|
(190.6
|
)
|
|
322.0
|
|
Net (decrease) increase in cash and cash equivalents
|
(25.8
|
)
|
|
8.4
|
|
|
23.3
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
(1.8
|
)
|
|
(0.1
|
)
|
Cash and cash equivalents, beginning of year
|
74.5
|
|
|
67.9
|
|
|
44.7
|
|
Cash and cash equivalents, end of year
|
$
|
48.7
|
|
|
$
|
74.5
|
|
|
$
|
67.9
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
40.0
|
|
|
$
|
25.2
|
|
|
$
|
17.5
|
|
Income taxes
|
32.4
|
|
|
41.5
|
|
|
17.0
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Issuance of common stock for acquisition of Big Fish Games
|
—
|
|
|
—
|
|
|
15.8
|
|
Earnout liability for acquisition of Big Fish Games
|
—
|
|
|
—
|
|
|
324.7
|
|
Deferred payment for acquisition of Big Fish Games
|
—
|
|
|
—
|
|
|
97.1
|
|
Issuance of common stock in connection with the Company LTIP, the New Company LTIP and other restricted stock plans
|
19.0
|
|
|
27.7
|
|
|
3.0
|
|
Dividends payable
|
21.8
|
|
|
19.1
|
|
|
17.4
|
|
Repurchase of common stock in payment of income taxes on stock-based compensation
|
6.4
|
|
|
3.6
|
|
|
—
|
|
Property and equipment additions included in accounts payable and accrued expense
|
4.2
|
|
|
1.5
|
|
|
1.3
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Churchill Downs Incorporated (the "Company", "we", "us", "our") is an industry-leading racing, gaming and online entertainment company anchored by our iconic flagship event -
The Kentucky Derby
. We are a leader in brick-and-mortar casino gaming with approximately
9,030
gaming positions in
seven
states, and we are the largest, legal online account wagering platform for horseracing in the U.S. We are also one of the world's largest producers and distributors of mobile games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
We conduct our business through our operating segments and report our net revenue and operating expense associated with our operating segments in our accompanying Consolidated Statements of Comprehensive Income. Our operating segments are defined as follows:
Racing
: primarily commissions earned on wagering at our racetracks, off-track betting facilities ("OTBs"), simulcast fees earned from other wagering sites, and the operations include admissions, sponsorships and licensing rights, food and beverage services and alternative uses of our pari-mutuel facilities.
Casinos
: slot machines, table games, video poker ancillary food and beverage services and hotel and other miscellaneous operations. In addition, we include our
50%
joint venture in Miami Valley Gaming ("MVG") and our
25%
equity investment in Saratoga Casino Holdings LLC ("SCH").
TwinSpires
: mobile and online pari-mutuel wagering business on TwinSpires.com; high dollar wagering by international customers ("Velocity"); and horseracing statistical data generated by our information business that provides data information and processing services to the equine industry.
Big Fish Games
: social casino, casual and mid-core free to play, and premium paid games for PC, Mac, and mobile devices.
Other Investments
: pari-mutuel wagering systems for racetracks and an Internet real-money gaming operation.
Corporate
: other revenue and general and administrative expense not allocated to our other operating segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Our financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") and are based upon certain critical accounting policies. These policies may require management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates. Our most critical estimates relate to revenue recognition, goodwill and other intangible assets, property and equipment and income taxes.
Reclassifications
We have reclassified certain items in the accompanying Consolidated Financial Statements for prior years to be comparable with 2016 classifications. On January 1, 2016, we realigned our Churchill Downs Interactive Gaming ("I-Gaming") and Bluff Media ("Bluff") operations from our Other Investments segment to our TwinSpires segment to correspond with internal management reporting changes.
There was no impact from these reclassifications on net income or cash flows.
Revenue Recognition
Racing and TwinSpires
Racing and TwinSpires revenue is generated by pari-mutuel wagering on live and simulcast racing content. Additionally, we also generate revenue through sponsorships, admissions, television rights, concessions, programs and parking.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Our Racing and TwinSpires revenue and income are influenced by our racing calendar. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby.
Pari-mutuel revenue is recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective state’s racing regulatory body. Other operating revenue from sponsorships, admissions, television rights, concessions, programs and parking are recognized once delivery of the product or service has occurred.
Live racing handle includes patron wagers made on live races at our racetracks and also wagers made on imported simulcast signals by patrons at our racetracks during live meets. Import simulcasting handle includes wagers on imported signals at our racetracks when the respective tracks are not conducting live racing meets, at our OTBs and through our advance deposit wagering providers throughout the year. Export handle includes all patron wagers made on live racing signals sent to other tracks, OTBs and advance deposit wagering providers. Advance deposit wagering consists of patron wagers through an advance deposit account. The pari-mutuel revenue earned in 2016 approximated
18.4%
of handle for the TwinSpires segment and
11.0%
of handle for the Racing segment.
Deferred revenue includes advance sales related to the Kentucky Oaks and Kentucky Derby races and other advance billings on racing events. Revenue from these advance billings are recognized when the related event occurs. Deferred revenue also includes advance sales of Personal Seat Licenses ("PSLs") and luxury suites. PSLs represent the ownership of a specific seat for the Kentucky Oaks, Kentucky Derby and, in certain cases, Breeders’ Cup races at Churchill Downs Racetrack ("Churchill Downs") and have a contractual life between
one
and
thirty
years.
Revenue from PSLs is recognized when the Kentucky Oaks, Kentucky Derby and Breeders’ Cup races occur on a ratable basis over the term of the contract. Luxury suites are sold for specific racing events as well as for a predetermined contractual term. Revenue related to the sale of luxury suites is recognized as they are utilized when the related event occurs.
Casinos
Casino revenue represents net casino wins which is the difference between casino wins and losses. Other operating revenue, such as concession revenue, is recognized once delivery of the product or service has occurred.
Big Fish Games
Big Fish Games revenue is primarily derived from the sale of in-app purchases within our free-to-play games and sales of our premium paid games. We offer social casino and casual and mid-core free-to-play games that customers can play at no cost. Customers can purchase virtual currency that can be used to buy virtual items to enhance the game playing experience. These games are distributed primarily through third party mobile platform providers, including but not limited to, Apple and Google.
The proceeds from the sale of virtual goods are initially recorded as deferred revenue and recognized as revenue when persuasive evidence of an arrangement exists, the service has been provided to the user, the price paid by the user is fixed or determinable, and collectability is reasonably assured. Determining whether and when some of these criteria have been satisfied requires judgments that may have a significant impact on the timing and amount of revenue we report in each period. For the purpose of determining when the service has been provided to the player, we have determined that an implied obligation exists to the paying user to continue to make available the purchased virtual goods within the game over the estimated life of the virtual goods. For social casino games, the life of the virtual goods is estimated to be the time period over which virtual goods are consumed, approximating
three
days. For all other casual games, the average playing period of paying players of approximately
four
months represents our best estimate of the average life of virtual goods. The proceeds from the sale of virtual goods are recorded as deferred revenue and recognized as revenue over the estimated life of the virtual goods.
Premium game revenue is derived from our PC subscription business, the Big Fish Game Club and from the sale of individual games on PC, Mac and mobile devices. Subscribers receive a game credit each month with their subscription. The value of the game credit is recognized when a customer redeems the game credit.
We record breakage revenue related to outstanding premium game credits. For credits that are subject to expiration, breakage revenue is recorded when the credits have legally expired. Breakage revenue is recorded for game credits with no legal expiration when we have determined the likelihood of redemption is remote based on historical game credit redemption patterns.
Other Estimates and Judgments
We estimate revenue from digital storefronts, such as Apple and Google, in the current period when reasonable estimates of these amounts can be made. The digital storefronts provide reliable interim preliminary sales reporting data within a reasonable time frame following the end of each month, which, when validated against our internal data, allows us to make reasonable estimates
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
of revenue and therefore to recognize revenue during the reporting period. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates. When we receive the final reports, to the extent not received within a reasonable time frame following the end of each month, we record any differences between estimated revenue and actual revenue in the reporting period when we determine the actual amounts. Historically, the revenue on the final revenue report has not differed significantly from the reported revenue for the period.
Principal Agent Considerations
We evaluate our digital storefront agreements in order to determine whether or not we are acting as the principal or as an agent when selling our games, which we consider in determining if revenue should be reported gross or net. We primarily use digital storefronts for distributing our social casino and casual free-to-play games. Key indicators that we evaluate in order to reach this determination include:
|
|
•
|
the terms and conditions of our contracts with the digital storefronts;
|
|
|
•
|
the party responsible for billing and collecting fees from the end-users, including the resolution of billing disputes;
|
|
|
•
|
whether we are paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game;
|
|
|
•
|
the party which sets the pricing with the end-user, has the credit risk and provides customer support; and
|
|
|
•
|
the party responsible for the fulfillment of the game and that determines the specifications of the game.
|
Based on the evaluation of the above indicators, we have determined that we are generally acting as a principal and are the primary obligor to end-users for games distributed through digital storefronts; and therefore, we recognize revenue related to these arrangements on a gross basis.
Goodwill and Indefinite Intangible Assets
We perform an annual review for impairment of goodwill and indefinite-lived intangible assets as of March 31 of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues, which are triggering events requiring the testing of an asset’s carrying value for recoverability. Goodwill is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.
Goodwill and intangible assets can or may be required to be tested using a two-step impairment test. We assess qualitative factors to determine whether it is necessary to complete the two-step impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than its carrying value, including goodwill, the two-step process can be bypassed. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, among others. These factors require significant judgments and estimates, and application of alternative assumptions could produce significantly different results. Evaluations of possible impairment utilizing the two-step approach require us to estimate, among other factors, forecasts of future operating results, revenue growth, EBITDA margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values and fair market values of our reporting units and assets. Changes in estimates or the application of alternative assumptions could produce significantly different results. There were
no
impairments to our goodwill in 2016.
Our slots gaming rights and casinos' trade names are considered indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities and use the trade names indefinitely and our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions. Our Big Fish Games trade name is also considered an indefinite-lived intangible asset. These indefinite intangible assets are tested annually, or more frequently, if indicators of impairment exist, by comparing the fair value of the recorded assets to their carrying amount. If the carrying amount of the slots gaming rights and trade name intangible assets exceed fair value, an impairment loss is recognized. There were
no
impairments to our indefinite-lived intangible assets in 2016.
Property and Equipment
We have a significant investment in long-lived property and equipment. Property and equipment are recorded at cost. Judgments are made in determining the estimated useful lives of assets, the salvage values to be assigned to assets and if or when an asset has been impaired. The accuracy of these estimates affects the amount of depreciation expense recognized in the financial results and whether to record a gain or loss on disposition of an asset.
We review the carrying value of our property and equipment used in our operations whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
result from its use and eventual disposition. Adverse industry or economic trends, lower projections of profitability, or a significant adverse change in legal factors or in the business climate, among other items, may be indications of potential impairment issues. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, an impairment is recorded based on the fair value of the asset.
There are three generally accepted approaches available in developing an opinion of value: 1) the cost approach which is the price a prudent investor would pay to produce or construct a similar new item; 2) the market approach which is typically used for land valuations by analyzing recent sales transactions of similar sites; and 3) the income approach which is based on a discounted cash flow model using the estimated future results of the relevant reporting unit discounted using our weighted-average cost of capital and market indicators of terminal year free cash flow multiples. If necessary, we solicit third-party valuation expertise to assist in the valuation of our assets. We apply the most indicative approach to the overall valuation, or in some cases, a weighted analysis of any or all of these methods. The determination of fair value uses accounting judgments and estimates, including market conditions and the reliability is dependent upon the availability and comparability of the market data uncovered, as well as the decision making criteria used by market participants when evaluating a property. Changes in estimates or application of alternative assumptions could produce significantly different results.
Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows: 10 to 40 years for grandstands and buildings, 2 to 10 years for equipment, 2 to 10 years for furniture and fixtures and 10 to 20 years for tracks and other improvements.
Income Taxes
We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns.
Adjustments to deferred taxes are determined based upon the changes in differences between the book basis and tax basis of our assets and liabilities and measured using enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.
When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that will be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet, along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Cash and Cash Equivalents
We consider investments with original maturities of three months or less to be cash equivalents. We have, from time to time, cash in the bank in excess of federally insured limits. Checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are classified as a current liability in the accompanying Consolidated Balance Sheets.
Restricted Cash and Account Wagering Deposit Liabilities
Restricted cash represents amounts due to horsemen for purses, stakes and awards as well as customer deposits collected for advance deposit wagering. Account wagering deposit liabilities consist of deposits received from TwinSpires.com and Velocity customers to be used to fund wagering through the TwinSpires players' accounts.
Foreign Currency Transactions
The functional currency of our international subsidiaries is the U.S. dollar, with the exception of the Big Fish Games Luxembourg subsidiary, whose functional currency is the Euro. For subsidiaries with a functional currency of the U.S. dollar, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency denominated nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Foreign currency denominated revenue and expense are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in other income and expense. For the Luxembourg subsidiary, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of a reporting period. Income and expense accounts are translated into U.S. dollars using
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
average rates of exchange. The net gain or loss resulting from translation is recorded as foreign currency translation adjustment and included in accumulated other comprehensive income in shareholders' equity.
Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance is maintained at a level considered appropriate based on historical and other factors that affect collectability. Uncollectible accounts receivable are written off against the allowance for doubtful accounts receivable when management determines that the probability of payment is remote and collection efforts have ceased.
Game Software Development
Game software development costs for Big Fish Games includes costs for internally developed and purchased third party software for free-to-play games and premium game software purchased from third parties.
Costs associated with internally developed online only free-to-play game software are capitalized according to the accounting guidance governing computer software developed or obtained for internal use. Costs associated with internally developed free-to-play game software that allows the user to access content in both an online and offline mode are capitalized as game software development once technological feasibility of the software has been established.
Any costs incurred during the preliminary project stage are expensed; costs incurred during the application development stage are capitalized as game software development and costs incurred during the post-implementation/operation stage are expensed. Any costs incurred prior to the establishment of technological feasibility are expensed when incurred as research and development costs.
Once the software is placed in operation, we amortize the capitalized software cost as an operating expense over its estimated economic useful life, which is typically
18
months to
three
years. In addition, enhancements to existing games that increase the functionality of the game are capitalized as game software development and amortized as an operating expense over the game’s estimated economic useful life which is typically
18
months.
Purchased third party free-to-play game software is capitalized as game software development and amortized, once placed into service, over the game’s estimated economic useful life, which is typically
18
months.
Purchased third party software for premium games is capitalized as game software development, and amortized, once placed into service, over the game’s estimated economic useful life, which is typically
12
months.
Internal Use Software and Research & Development
Internal use software costs for TwinSpires, I-Gaming and Big Fish Games software are capitalized in property and equipment, in accordance with accounting guidance governing computer software developed or obtained for internal use. Once the software is placed in operation, we amortize the capitalized software over its estimated economic useful life, which is generally
three
years.
We capitalized internal use software in accordance with accounting guidance governing computer software developed or obtained for internal use primarily related to TwinSpires and I-Gaming of approximately
$12.2 million
in 2016,
$8.9 million
in 2015 and
$7.4 million
in 2014. The estimated useful life of capitalized software is generally
three
years, once a project has commenced. We incurred amortization expense of approximately
$8.9 million
in 2016,
$7.0 million
in 2015 and
$6.0 million
in 2014 for projects which had been placed in service. Capitalized internal use software is included in property and equipment, net.
Research and development expenditures are expensed as incurred. We incurred research and development expense of
$39.0 million
in 2016 and
$39.4 million
in 2015.
Fair Value of Assets and Liabilities
We adhere to a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities; Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and Level 3: Unobservable inputs for the asset or liability. We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
Investments in and Advances to Unconsolidated Affiliates
We have investments in unconsolidated affiliates accounted for under the equity method. Under the equity method, carrying value is adjusted for our share of the investees' income and losses, amortization of certain basis differences as well as capital contributions to and distributions from these companies. Distributions in excess of equity method income are recognized as a return of investment
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
and recorded as investing cash inflows in the accompanying Consolidated Statements of Cash Flows. We classify income and losses as well as gains and impairments related to our investments in unconsolidated affiliates as a component of other income (expense) in the accompanying Consolidated Statements of Comprehensive Income.
We evaluate our investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may have experienced an "other-than-temporary" decline in value. If such conditions exist, we compare the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determine whether the impairment is "other-than-temporary" based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss. We estimate fair value using a discounted cash flow analysis based on estimated future results of the investee.
Debt Issuance Costs and Loan Origination Fees
We incurred debt issuance costs and loan origination fees associated with our long-term debt and notes payable, which are being amortized as interest expense over the remaining term of the credit facility. These amounts are presented as a direct deduction from the carrying amount of the associated liability.
Casino and Pari-mutuel Taxes
We recognize casino and pari-mutuel tax expense based on the statutorily determined percentage of revenue that is required to be paid to state and local jurisdictions in the states in which wagering occurs. Individual states and local jurisdictions set tax rates which range from
1.5%
to
46%
of net casino revenue and from
0.5%
to
10%
of the total pari-mutuel handle wagered by patrons.
Purse Expense
We recognize purse expense based on the statutorily determined percentage of revenue that is required to be paid out in the form of purses to the qualifying finishers of horseraces run at our racetracks in the period in which wagering occurs. We incur a liability for all unpaid purses to be paid out. We may pay out purses in excess of statutorily determined amounts resulting in purse overpayments, which are expensed as incurred. Recoveries of purse overpayments are recognized in the period they are realized.
Self-insurance Accruals
We are self-insured up to certain limits for costs associated with general liability, workers’ compensation and employee health coverage, and we purchase insurance for claims that exceed our self-insurance retention or deductible levels. We record self-insurance reserves that include accruals of estimated settlements for known claims ("Case Reserves"), as well as accruals of third-party actuarial estimates for claims incurred but not yet reported ("IBNR"). Case Reserves represent estimated liabilities for unpaid losses, based on a claims administrator's estimates of future payments on individual reported claims, including allocated loss adjustment expense, which generally include claims settlement costs such as legal fees. IBNR includes the provision for unreported claims, changes in case reserves and future payments on reopened claims.
Key variables and assumptions include, but are not limited to, loss development factors and trend factors such as changes in workers' compensation laws, medical care costs and wages. These loss development factors and trend factors are developed using our actual historical losses. It is possible that reasonable alternative selections would produce materially different reserve estimates. We believe the estimates of future liability are reasonable based upon this methodology; however, changes in key variables and assumptions, or generally in health care costs, accident frequency and severity could materially affect the estimate for these reserves.
Advertising and Marketing
We expense the costs of general advertising, marketing and associated promotional expenditures at the time the costs are incurred. We incurred advertising and marketing expense of approximately
$151.0 million
in 2016,
$130.7 million
in 2015 and
$28.8 million
in 2014.
Stock-Based Compensation
All stock-based payments to employees, including grants of employee stock options and restricted stock, are recognized as compensation expense over the service period based on the fair value on the date of grant.
Computation of Net Income per Common Share
Net income per common share is presented for both basic earnings per common share ("Basic EPS") and diluted earnings per common share ("Diluted EPS"). Earnings attributable to securities that are deemed to be participating securities are excluded from the calculation of Basic EPS using the two-class method. We have determined that employee restricted stock grants, including awards granted under our long-term incentive plans, are participating securities. Basic EPS is based upon the weighted average number of common shares outstanding during the period, excluding unvested restricted stock and stock options held by employees. Diluted EPS is based upon the weighted average number of common and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding stock options as well as unvested restricted stock, the
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. For periods in which we report a net loss, all potential common shares are considered anti-dilutive and are excluded from calculations of Diluted EPS. For periods in which we report net income, potential common shares with exercise prices in excess of our average common stock fair value for the related period are considered anti-dilutive and are excluded from calculations of Diluted EPS.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to share-based payments. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded as an increase to shareholders' equity. Under the new ASU, windfalls are recorded as a component of income tax expense. ASU 2016-09 also requires that tax-related cash flows resulting from share-based payments be reported as a part of cash flows from operating activities. We early adopted this guidance, prospectively, as of January 1, 2016 and during the year ended December 31, 2016 recognized an income tax benefit of
$4.9 million
which was recorded as a component of income taxes in cash flows provided by operating activities in the accompanying Consolidated Statements of Cash Flows. Prior to adoption of this ASU, windfalls were presented as a component of cash flows from financing activities. Upon the adoption of this ASU, we elected to account for forfeitures when incurred under a modified retrospective approach which did not impact our financial statements. The adoption of this ASU did not have a material impact on diluted earnings per share.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which explicitly requires management to assess our ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. Management is required to assess, in each interim and annual period, if there is substantial doubt of an entity's ability to continue as a going concern as evidenced by relevant known or knowable conditions including an entity's ability to meet its future obligations. Management is required to provide disclosures regardless of whether substantial doubt is alleviated by management's plans. We adopted this new standard as of December 31, 2016. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Adopted
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance will become effective for us in 2017. The adoption of the new accounting guidance is not expected to have a material impact on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance will become effective for us in 2018 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We anticipate this standard may have a material impact on our Consolidated Financial Statements. While we are continuing to assess all potential impacts of the standard, we believe the most significant impact primarily relates to our accounting for breakage revenue for our outstanding premium game credits for Big Fish Games.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for us in 2019 on a modified retrospective basis with earlier adoption permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our Consolidated Financial Statements, and we expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The guidance will become effective for us in 2020. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
3. ACQUISITIONS AND NEW VENTURES
California Internet Gaming
During May 2015, our Internet real-money gaming operation, I-Gaming, entered into an agreement with a licensed card room operator to provide Internet-based interactive gaming services within California, should enabling legislation be enacted in California which would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager and will then continue for a
ten
-year period. Under the agreement, I-Gaming and the licensed operator will jointly provide a platform for operations, obtain and maintain required licenses and regulatory approvals and operate Internet-based interactive gaming services that will be marketed to California residents and may include poker and other real-money gaming activities. At this time, it is difficult to assess whether this legislation will be enacted into law and the effect it would have on our business.
Big Fish Games
On December 16, 2014, we completed the acquisition of Big Fish Games, a global producer and distributor of social casino, casual and mid-core free-to-play and premium paid games for PC, Mac and mobile devices. Big Fish Games is headquartered in Seattle, Washington and has locations in Oakland, California and Luxembourg. We acquired Big Fish Games to leverage its social casino and casual game experience, assembled workforce and to position ourselves in the mobile and online game industry. We financed the acquisition with borrowings under our Fourth Amended and Restated Credit Agreement (the "Senior Secured Credit Facility") and the addition of a
$200.0 million
Term Loan Facility ("Term Loan") to the existing Senior Secured Credit Facility.
The purchase price consideration was
$838.4 million
, composed of
$401.7 million
in cash, a deferred payment to the founder of Big Fish Games of
$85.3 million
, payable over
three
years and recorded at fair value of
$78.0 million
as of the acquisition date, an estimated payable to the Big Fish Games equity holders related to an income tax refund of
$18.1 million
and
$15.8 million
payable in
157,115
shares of our common stock. In addition, we are required to pay additional variable cash consideration based upon the achievement of certain performance milestones of Big Fish Games through December 31, 2015, limited to a maximum of
$350.0 million
based on achievement of certain non-GAAP earnings targets before interest and tax. In 2015, Big Fish Games achieved its earnout milestones, and in March 2016, we made our first earnout payment of
$281.6 million
. The remaining deferred earnout payment of
$68.4 million
will be made in 2017.
The estimated fair value of the earnout liability at the acquisition date was
$324.7 million
. We estimated the fair value of the deferred payment and the earnout liability using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate based on our cost of debt. The cost of debt as of the closing date was based on the observed market yields of our Senior Unsecured Notes issued in December of 2013 and was adjusted for the difference in seniority and term of the deferred payment and the earnout liability. Refer to Note 16, Fair Value of Assets and Liabilities, for further discussion of the fair value measurement of the deferred payment and the earnout liability.
Goodwill of
$540.3 million
arising from the acquisition consisted largely of projected future revenue and profit growth, including benefits from Big Fish Games’ expertise in the mobile and online games industry, particularly social casinos. All of the goodwill was assigned to Big Fish Games, which remains a stand-alone business for purposes of segment reporting. None of the goodwill recognized will be deducted for tax purposes.
The acquisition of Big Fish Games is included in acquisition of businesses, net of cash acquired, in the investing section of the accompanying Consolidated Statements of Cash Flows in the amount of
$366.0 million
, net of cash acquired of
$34.7 million
. Included in non-cash investing activities for the year ended December 31, 2014 is common stock issued in connection with the acquisition of
$15.8 million
, earnout liability of
$324.7 million
and deferred payments of
$97.1 million
.
Acquisition-related costs in the amount of
$6.4 million
were charged directly to operations and were included in selling, general and administrative expense in the accompanying Consolidated Statements of Comprehensive Income. Acquisition-related costs included legal, advisory, valuation, accounting and other fees incurred.
During 2015, we obtained additional information to assist us in determining the values of the liabilities assumed at the acquisition date and changes which occurred during the measurement period. A measurement period adjustment was recorded related to estimated payroll taxes associated with the earnout liability. We retroactively adjusted the December 31, 2014 Consolidated Balance Sheet and increased deferred tax assets by
$0.8 million
, increased goodwill by
$1.4 million
and increased accrued expense by
$2.2 million
. We completed our valuation during the fourth quarter of 2015. During 2015, we made payments of
$18.7 million
to Big Fish Games former equity holders for the receipt of federal and state income tax refunds and working capital adjustments related to the acquisition and we made a scheduled deferred founder payment of
$28.4 million
.
The following table summarizes the final fair value of the assets acquired and liabilities assumed, net of cash acquired of
$34.7 million
, at the date of acquisition:
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
(in millions)
|
Total
|
Accounts receivable
|
$
|
19.4
|
|
Income taxes receivable
|
18.1
|
|
Prepaid expense
|
9.7
|
|
Deferred income taxes
|
1.7
|
|
Other assets
|
1.8
|
|
Property and equipment
|
14.6
|
|
Goodwill
|
540.3
|
|
Other intangible assets
|
362.9
|
|
Total assets acquired
|
968.5
|
|
Accounts payable
|
9.1
|
|
Accrued expense
|
19.2
|
|
Income taxes payable
|
0.2
|
|
Deferred revenue
|
37.3
|
|
Deferred income taxes
|
96.2
|
|
Other liabilities
|
2.8
|
|
Total liabilities assumed
|
164.8
|
|
Purchase price, net of cash acquired
|
$
|
803.7
|
|
The final fair value of other intangible assets consists of the following:
|
|
|
|
|
|
|
(in millions)
|
Fair Value Recognized
|
|
Weighted-Average Useful Life
|
Tradename
|
$
|
200.0
|
|
|
N/A
|
Customer relationships
|
32.7
|
|
|
2.3 years
|
Developed Technology
|
87.0
|
|
|
3.9 years
|
In-Process Research & Development
|
12.7
|
|
|
5.0 years
|
Strategic Developer Relationships
|
30.5
|
|
|
4.8 years
|
Total intangible assets
|
$
|
362.9
|
|
|
|
We engaged a third-party valuation firm to assist in our analysis of the fair value of tangible and intangible assets acquired. All estimates, key assumptions and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation firm, the fair value analysis and related valuation represents the conclusions of management and not the conclusions of any third party.
Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the related assets as follows: 1 to 5 years for computer hardware and software and 2 to 10 years for office furniture, fixtures and equipment. The estimated useful lives for leasehold improvements is 3 to 10 years based on the shorter of the estimated useful life of the improvement or the lease term.
The tradename was valued using the relief-from-royalty valuation technique, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset. A royalty rate of
5.0%
was used based on a review of third-party licensing agreements given Big Fish Games’ brand recognition and competitive position in the market. The tradename was assigned an indefinite life based on our intention to keep the Big Fish Games name for an indefinite period of time.
In valuing the customer relationships, the replacement cost valuation technique was used. The value was determined based on the number of paying customers and average cost per customer. Developed technology was valued using the relief-from-royalty valuation technique based upon revenue derived from games within the premium paid, social casino and casual and mid-core free-to-play categories. Big Fish Games pays royalties of
10.0%
to
25.0%
to its developers and these rates were used in the valuation.
As of the valuation date, Big Fish Games had a portfolio of free-to-play games expected to launch in 2015 and
one
game expected to launch in 2016. We estimated that the majority of the revenue associated with games launched in 2015 would be
five
years and
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
the game launched in 2016 would be
six
years. The fair value was calculated using the relief-from-royalty valuation technique and a royalty rate of
10.0%
was used in the valuation.
Strategic developers are third-party alliance partners that develop content exclusively for Big Fish Games. In the valuation of strategic developer relationships, the comparative valuation technique was used to calculate the fair value. In estimating the fair value, the analysis considered the differences in the present value of the cash flows associated with the strategic developers and without the strategic developers.
As of the valuation date, the fair value of Big Fish Games’ deferred revenue was
$37.3 million
, which reflects the costs including network and delivery, royalties, third party platform fees, game operations and corporate expense, plus a market participant margin.
During the period from December 16, 2014 through December 31, 2014, Big Fish Games contributed revenue of
$13.9 million
and loss from operations before provision for income taxes of
$2.9 million
.
Pro Forma Information (unaudited)
The following table illustrates the impact on net revenue and earnings from operations as if we had acquired Big Fish Games as of the beginning of 2014. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisition of Big Fish Games been consummated at the beginning of 2014.
|
|
|
|
|
|
Year ended December 31,
|
(in millions)
|
2014
|
Net revenue
|
$
|
1,126.6
|
|
Income from operations before provision from income taxes
|
$
|
64.1
|
|
4. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Trade receivables
|
$
|
31.6
|
|
|
$
|
33.0
|
|
Derby-related receivables
|
27.2
|
|
|
17.6
|
|
Simulcast and mobile and online wagering receivables
|
21.1
|
|
|
14.8
|
|
Other receivables
|
5.0
|
|
|
6.2
|
|
|
84.9
|
|
|
71.6
|
|
Allowance for doubtful accounts
|
(3.5
|
)
|
|
(3.8
|
)
|
Total
|
$
|
81.4
|
|
|
$
|
67.8
|
|
Big Fish Games' accounts receivable was
$24.7 million
in 2016 and
$25.7 million
in 2015. These amounts were included within trade receivables and primarily represent amounts due from mobile, retail and publishing partners.
We recognized bad debt expense of
$1.1 million
in 2016,
$0.9 million
in 2015 and
$0.7 million
in 2014 in our TwinSpires segment associated with customer wagering on TwinSpires.com.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Grandstands and buildings
|
$
|
414.3
|
|
|
$
|
412.4
|
|
Equipment
|
275.5
|
|
|
252.1
|
|
Tracks and other improvements
|
157.3
|
|
|
142.8
|
|
Land
|
117.5
|
|
|
118.7
|
|
Furniture and fixtures
|
57.4
|
|
|
52.1
|
|
Construction in progress
|
27.4
|
|
|
22.8
|
|
Artwork
|
2.1
|
|
|
2.1
|
|
|
1,051.5
|
|
|
1,003.0
|
|
Accumulated depreciation
|
(477.1
|
)
|
|
(429.8
|
)
|
Total
|
$
|
574.4
|
|
|
$
|
573.2
|
|
Depreciation expense was $
55.7 million
in
2016
, $
53.6 million
in
2015
and $
55.0 million
in
2014
and is classified in operating expense in the accompanying Consolidated Statements of Comprehensive Income.
In 2014, we recognized accelerated depreciation expense of
$2.4 million
, primarily related to Calder's barns which were not utilized subsequent to December 31, 2014.
On November 4, 2014, we ceased operations of Luckity and recorded an impairment charge of
$3.2 million
in our TwinSpires segment for property and equipment specifically associated with Luckity.
On November 8, 2016, we completed the sale of
61
acres of excess, undeveloped land at Calder for which we received total proceeds of
$25.6 million
. We recognized a gain of
$23.7 million
on the sale of the Calder land, which is included in operating expenses in the accompanying Consolidated Statement of Comprehensive Income.
The Company received proceeds from the Calder land sale of
$25.6 million
, of which
$14.0 million
was placed in a qualified intermediary trust, which will purchase previously identified real property during the first half of 2017. As of December 31, 2016, we had a receivable from escrow of
$13.6 million
from the qualified intermediary trust, which is included in our accompanying Consolidated Balance Sheets.
6. CALDER EXIT COSTS
On July 1, 2014, we finalized an agreement with The Stronach Group ("TSG") that expires on December 31, 2020 under which we permit TSG to operate and manage Calder's racetrack and certain other racing and training facilities and to provide live horseracing under Calder’s racing permits. During the term of the agreement, TSG pays Calder a racing services fee and is responsible for the direct and indirect costs of maintaining the racing premises, including the training facilities and applicable barns, and TSG receives the associated revenue from the operation.
In late 2014 and into 2015, we assessed potential alternative uses of the Calder property that are not associated with the TSG lease agreement. Based on our analysis, we razed the barns that were not associated with the TSG agreement and commenced the demolition of the grandstand and certain ancillary facilities. The Company recognized Calder exit costs of
$2.5 million
in 2016,
$13.9 million
in 2015, and
$2.3 million
in 2014 in our accompanying Consolidated Statements of Comprehensive Income related to demolition costs for the removal of the grandstand. The Calder exit costs recognized in 2015 included a non-cash impairment charge of
$12.7 million
to reduce the net book value of the grandstand assets to zero.
Refer to Note 5, Property and Equipment, for the description of the gain on the Calder land sale of
$23.7 million
.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
7. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summarized below is financial information for our equity investments:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2016
|
|
2015
|
Assets
|
|
|
|
Current assets
|
$
|
38.8
|
|
|
$
|
34.2
|
|
Noncurrent assets
|
363.0
|
|
|
339.5
|
|
Total assets
|
$
|
401.8
|
|
|
$
|
373.7
|
|
|
|
|
|
Liabilities and Members' Equity
|
|
|
|
Current liabilities
|
$
|
77.5
|
|
|
$
|
44.4
|
|
Noncurrent liabilities
|
69.3
|
|
|
79.7
|
|
Members' equity
|
255.0
|
|
|
249.6
|
|
Total liabilities and members' equity
|
$
|
401.8
|
|
|
$
|
373.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net revenue:
|
|
|
|
|
|
Net revenue
|
$
|
216.1
|
|
|
$
|
195.2
|
|
|
$
|
147.3
|
|
Operating expense
|
161.3
|
|
|
152.4
|
|
|
124.0
|
|
Operating income
|
54.8
|
|
|
42.8
|
|
|
23.3
|
|
Interest and other expense, net
|
(6.9
|
)
|
|
(6.2
|
)
|
|
(5.0
|
)
|
Net income
|
$
|
47.9
|
|
|
$
|
36.6
|
|
|
$
|
18.3
|
|
Miami Valley Gaming Joint Venture
We acquired a
50%
joint venture in MVG, which has a harness racetrack and video lottery terminal ("VLT") gaming facility in Lebanon, Ohio, with Delaware North Companies Gaming & Entertainment Inc. ("DNC") in 2012. Total consideration was
$60.0 million
, of which
$10.0 million
was funded at closing with the remainder funded through a
$50.0 million
note payable with a
six
year term effective upon the commencement of gaming operations.
Since both we and DNC have participating rights over MVG, and both must consent to MVG's operating, investing and financing decisions, we account for MVG using the equity method.
The joint venture's long-term debt consists of a
$50.0 million
secured note payable from MVG payable quarterly over
6
years through August 2019 at a
5.0%
interest rate for which it has funded
$25.0 million
in principal repayments. We received distributions from MVG of
$15.0 million
in 2015 and in 2016.
Our accompanying Consolidated Statements of Comprehensive Income include our
50%
share of MVG's results as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Equity in income of unconsolidated investments
|
$
|
14.2
|
|
|
$
|
10.6
|
|
|
$
|
8.9
|
|
SHRI Equity Investment
On October 2, 2015, we completed the acquisition of a
25%
equity investment in Saratoga Casino Holdings LLC ("SCH") which owns Saratoga Casino and Raceway ("Saratoga's New York facility") in Saratoga Springs, New York, for
$24.5 million
from Saratoga Harness Racing, Inc. ("SHRI"). Saratoga's New York facility has a casino with approximately
1,700
VLTs, a
1/2
-mile harness racetrack with a racing simulcast center, and
three
dining facilities. Saratoga's New York facility has a
50%
interest in a joint venture with DNC to manage the Gideon Putnam Hotel and Resort. We signed a
five
-year management agreement with SCH to manage Saratoga's New York facility for which we receive management fee revenue.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
On July 6, 2016, Saratoga's New York facility completed a significant expansion which included a
117
-room hotel, additional dining facilities and a
3,000
square-foot multi-functional event space.
On November 21, 2016, we completed the acquisition of a
25%
equity investment in Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga's Colorado facility") for
$6.5 million
from SHRI. Saratoga's Colorado facility has a casino with approximately
600
slot machines,
seven
table games,
three
lounges and
two
dining facilities.
Our investment in SCH recorded under the equity method includes our share of the basis difference between the fair value of property and equipment and definite-lived intangible assets of
$3.7 million
and
$2.7 million
, respectively. These basis differences are charged to expense over the remaining estimated useful lives of the property and equipment and intangible assets and are recorded as a component of equity in income of unconsolidated investments. Basis differences related to non-depreciable assets, such as land and indefinite lived-intangible assets, are not being amortized. In 2016, we received distributions from SCH of
$1.2 million
.
Saratoga Harness Racing Inc.
In 2014, we entered into a
50%
joint venture with SHRI which unsuccessfully bid on the development of a destination casino and resort in the Capital Region of New York. As part of the bidding process, we incurred
$1.0 million
in equity losses in our Other Investments segment associated with the license application process and funded
$3.3 million
to the joint venture. As a result of the bid decision, we recorded an impairment loss of
$1.6 million
to reduce our investment in the joint venture to its fair value. In 2016, the joint venture disposed of its remaining asset reducing our investment to
zero
.
8. GOODWILL
Goodwill is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Racing
|
|
Casinos
|
|
TwinSpires
|
|
Big Fish Games
|
|
Total
|
Balance as of December 31, 2014
|
$
|
51.7
|
|
|
$
|
117.6
|
|
|
$
|
131.3
|
|
|
$
|
540.3
|
|
|
$
|
840.9
|
|
Additions
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Balance as of December 31, 2015
|
51.7
|
|
|
117.6
|
|
|
132.1
|
|
|
540.3
|
|
|
841.7
|
|
Adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
(9.5
|
)
|
|
(9.5
|
)
|
Balance as of December 31, 2016
|
$
|
51.7
|
|
|
$
|
117.6
|
|
|
$
|
132.1
|
|
|
$
|
530.8
|
|
|
$
|
832.2
|
|
We performed our annual goodwill impairment analysis for 2016 in accordance with ASU No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment.
This analysis included an assessment of quantitative factors to determine whether it is more likely than not that the fair values of the reporting units are less than the carrying amounts. We assessed our goodwill by performing step one fair value calculations on a quantitative basis for each of our reporting units. We concluded that the fair values of our reporting units exceeded the carrying values and therefore step two of the assessment was not required. We concluded that goodwill had
no
t been impaired based on the annual goodwill impairment analysis.
In the fourth quarter of 2016, the Company recorded an out-of-period adjustment to increase deferred tax assets and decrease goodwill by
$9.5 million
to correct errors that originated in the purchase price allocation for Big Fish Games. The Company determined that the error was not material to any of the Company's prior annual and interim period financial statements.
The carrying amount of our reporting segments has been retrospectively adjusted to conform to the 2016 presentation as discussed in Note 2, Significant Accounting Policies.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
9. OTHER INTANGIBLE ASSETS
Other intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(in millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
$
|
87.0
|
|
|
$
|
(45.6
|
)
|
|
$
|
41.4
|
|
|
$
|
87.0
|
|
|
$
|
(23.3
|
)
|
|
$
|
63.7
|
|
Customer relationships
|
43.0
|
|
|
(33.3
|
)
|
|
9.7
|
|
|
75.1
|
|
|
(46.6
|
)
|
|
28.5
|
|
Strategic development
|
25.0
|
|
|
(7.3
|
)
|
|
17.7
|
|
|
30.5
|
|
|
(6.6
|
)
|
|
23.9
|
|
In-process research & development
|
12.7
|
|
|
(5.1
|
)
|
|
7.6
|
|
|
12.7
|
|
|
(2.6
|
)
|
|
10.1
|
|
Favorable contracts
|
11.0
|
|
|
(6.2
|
)
|
|
4.8
|
|
|
11.0
|
|
|
(5.5
|
)
|
|
5.5
|
|
Other
|
3.7
|
|
|
(1.0
|
)
|
|
2.7
|
|
|
3.7
|
|
|
(0.9
|
)
|
|
2.8
|
|
Table games license
|
2.7
|
|
|
(0.4
|
)
|
|
2.3
|
|
|
2.5
|
|
|
(0.3
|
)
|
|
2.2
|
|
Slots gaming license
|
2.3
|
|
|
(1.1
|
)
|
|
1.2
|
|
|
2.3
|
|
|
(1.1
|
)
|
|
1.2
|
|
|
$
|
187.4
|
|
|
$
|
(100.0
|
)
|
|
$
|
87.4
|
|
|
$
|
224.8
|
|
|
$
|
(86.9
|
)
|
|
$
|
137.9
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
225.7
|
|
|
|
|
|
|
225.7
|
|
Slots gaming rights
|
|
|
|
|
128.9
|
|
|
|
|
|
|
128.9
|
|
Illinois Horseracing Equity Trust
|
|
|
|
|
3.3
|
|
|
|
|
|
|
3.3
|
|
Other
|
|
|
|
|
0.4
|
|
|
|
|
|
|
0.4
|
|
Total
|
|
|
|
|
$
|
445.7
|
|
|
|
|
|
|
$
|
496.2
|
|
Amortization expense for definite-lived intangible assets was approximately
$52.9 million
in 2016,
$56.1 million
in 2015 and
$13.3 million
in 2014 and is classified in operating expense. We submitted payments of
$2.3 million
for 2016 and 2015 for annual license fees for Calder Casino, which are being amortized to expense over the annual license period.
Indefinite-lived intangible assets consist primarily of state gaming licenses in Maine, Mississippi and Florida, rights to participate in the Horse Racing Equity Fund and trademarks.
In 2016, we reduced our customer relationships intangible assets and accumulated amortization for TwinSpires by
$4.6 million
,
$10.8 million
for Harlow's and Big Fish Games by
$16.7 million
as these amounts were fully amortized, and we reduced our strategic development intangible assets and accumulated amortization by
$5.5 million
as these amounts were fully amortized. In addition, we submitted a payment of
$0.2 million
to the State of Maine for table game fees that are being amortized over a
20
-year license period.
In 2015, we reduced our customer relationships intangible asset and accumulated amortization for TwinSpires by
$14.0 million
as this amount was fully amortized.
We performed our annual indefinite-lived intangible asset impairment analysis for 2016 in accordance with ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. This analysis included an assessment of quantitative factors to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying amounts. We assessed our indefinite-lived intangible assets by performing fair value calculations for each of our indefinite-lived intangible assets. We concluded that the fair values of our indefinite-lived intangible assets exceeded the carrying values. Based on the annual indefinite-lived intangible asset impairment analysis, we concluded that indefinite-lived intangible assets were
no
t impaired.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Future estimated aggregate amortization expense on existing definite-lived intangible assets for each of the next five fiscal years is as follows (in millions):
|
|
|
|
|
|
Years Ended December 31,
|
|
Estimated Amortization Expense
|
2017
|
|
$
|
36.8
|
|
2018
|
|
$
|
18.7
|
|
2019
|
|
$
|
16.6
|
|
2020
|
|
$
|
4.6
|
|
2021
|
|
$
|
4.3
|
|
Future estimated amortization expense does not include additional payments of
$2.3 million
in
2017
and in each year thereafter for the ongoing amortization of future expected annual Florida slots gaming license fees not yet incurred or paid.
10. INCOME AND OTHER TAXES
Income Taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Current provision:
|
|
|
|
|
|
Federal
|
$
|
22.0
|
|
|
$
|
46.1
|
|
|
$
|
13.2
|
|
State and local
|
2.6
|
|
|
3.8
|
|
|
2.0
|
|
Foreign
|
—
|
|
|
0.4
|
|
|
0.1
|
|
|
24.6
|
|
|
50.3
|
|
|
15.3
|
|
Deferred:
|
|
|
|
|
|
Federal
|
34.4
|
|
|
(1.8
|
)
|
|
19.7
|
|
State and local
|
1.6
|
|
|
—
|
|
|
—
|
|
Foreign
|
(0.6
|
)
|
|
(1.6
|
)
|
|
(4.9
|
)
|
|
35.4
|
|
|
(3.4
|
)
|
|
14.8
|
|
|
$
|
60.0
|
|
|
$
|
46.9
|
|
|
$
|
30.1
|
|
Income from operations before provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
168.7
|
|
|
$
|
114.4
|
|
|
$
|
76.0
|
|
Foreign
|
(0.6
|
)
|
|
(2.3
|
)
|
|
0.5
|
|
|
$
|
168.1
|
|
|
$
|
112.1
|
|
|
$
|
76.5
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Our income tax expense is different from the amount computed by applying the federal statutory income tax rate to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Federal statutory tax on earnings before income taxes
|
$
|
58.8
|
|
|
$
|
39.2
|
|
|
$
|
26.8
|
|
State income taxes, net of federal income tax benefit
|
3.5
|
|
|
1.8
|
|
|
1.4
|
|
Non-deductible expense
|
3.3
|
|
|
2.6
|
|
|
1.0
|
|
Non-deductible acquisition-related charges
|
1.7
|
|
|
6.6
|
|
|
1.3
|
|
Manufacturing deduction
|
—
|
|
|
(2.0
|
)
|
|
—
|
|
Valuation allowance
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
Windfall deduction from equity compensation
|
(4.9
|
)
|
|
—
|
|
|
—
|
|
Other
|
(2.2
|
)
|
|
(1.3
|
)
|
|
(0.4
|
)
|
|
$
|
60.0
|
|
|
$
|
46.9
|
|
|
$
|
30.1
|
|
Components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Deferred compensation plans
|
$
|
13.3
|
|
|
$
|
34.1
|
|
Deferred income
|
6.3
|
|
|
14.3
|
|
Allowance for uncollectible receivables
|
1.2
|
|
|
1.3
|
|
Deferred liabilities
|
3.7
|
|
|
1.9
|
|
Net operating losses and credit carryforward
|
9.4
|
|
|
11.7
|
|
Deferred tax assets
|
33.9
|
|
|
63.3
|
|
Valuation allowance
|
(0.5
|
)
|
|
(1.1
|
)
|
Net deferred tax asset
|
33.4
|
|
|
62.2
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets in excess of tax basis
|
135.0
|
|
|
143.0
|
|
Property and equipment in excess of tax basis
|
35.3
|
|
|
31.2
|
|
Other
|
16.2
|
|
|
15.9
|
|
Deferred tax liabilities
|
186.5
|
|
|
190.1
|
|
Net deferred tax liability
|
$
|
(153.1
|
)
|
|
$
|
(127.9
|
)
|
As of December 31, 2016, we have federal net operating losses of
$5.1 million
which were acquired in conjunction with the acquisitions of Youbet.com. The utilization of these losses, which expire between 2023 and 2030, is limited on an annual basis pursuant to Internal Revenue Code ("IRC") § 382. We believe that we will be able to fully utilize all of these losses. In addition, we have
$1.6 million
of state net operating losses,
$0.8 million
of which was acquired in conjunction with the acquisitions of Youbet.com. These losses, which expire between 2017 and 2034, may be subject to annual limitations similar to IRC § 382. We have recorded a valuation allowance of
$0.2 million
against the state net operating losses due to the fact that it is unlikely that we will generate income in certain states which is necessary to utilize the assets.
The Internal Revenue Service ("IRS") has audited us through 2012. Subsequent years are open to examination. Big Fish Games was audited by the IRS for the tax year ended December 16, 2014 which is the last tax year prior to our acquisition of Big Fish Games. State and local tax years open for examination vary by jurisdiction.
As of December 31, 2016, we have approximately
$3.1 million
of total gross unrecognized tax benefits, excluding interest of less than
$0.1 million
. Of this amount,
$1.0 million
was related to tax positions acquired in the Big Fish Games acquisition. If the total gross unrecognized tax benefits were recognized, there would be a
$2.6 million
effect to the annual effective tax rate. We anticipate a decrease in our unrecognized tax positions of approximately
$0.8 million
during the next twelve months primarily due to the expiration of statutes of limitation.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Balance as of January 1
|
$
|
2.5
|
|
|
$
|
2.9
|
|
|
$
|
0.6
|
|
Additions for tax positions related to the current year
|
0.7
|
|
|
0.3
|
|
|
0.5
|
|
Additions for tax positions of prior years
|
0.1
|
|
|
0.3
|
|
|
2.1
|
|
Reductions for tax positions of prior years
|
(0.2
|
)
|
|
(1.0
|
)
|
|
(0.3
|
)
|
Balance as of December 31
|
$
|
3.1
|
|
|
$
|
2.5
|
|
|
$
|
2.9
|
|
Other Taxes
For the year ended December 31, 2016, we accrued a liability and recognized a
$1.5 million
selling, general and administrative expense in our accompanying Consolidated Statements of Comprehensive Income related to potential liability for the untimely submission of informational tax returns related to the years 2012 to 2015 for certain casino customers. We have not received any notification of a potential penalty nor remitted any payment, but believe an expense is probable.
On July 18, 2016, we were notified of an IRS matter under review in which we are potentially liable for non-filing of federal withholding tax information for certain TwinSpires customers, subsequent to the acquisition of YouBet in 2010. The potential civil penalty plus interest approximates
$1.6 million
. We believe that we have a strong case for the abatement of the potential penalty, and since it is not deemed probable that this amount will be paid, an accrual was not recorded at December 31, 2016.
11. SHAREHOLDERS’ EQUITY
Stock Repurchase Program
On April 23, 2013, our Board of Directors authorized the repurchase of up to
$100.0 million
of our stock in a stock repurchase program. In 2014, we repurchased
691,000
shares for
$61.6 million
in a privately negotiated transaction. The shares were retired, and the cost of the shares acquired was treated as a deduction from shareholders' equity. We funded this repurchase using available cash and borrowings under our Senior Secured Credit Facility.
On October 28, 2015, our Board of Directors authorized the repurchase of up to
$150.0 million
of our stock in a stock repurchase program. This amount included and was not in addition to any unspent amounts remaining under the prior authorization which would have expired at the end of 2015. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program had no time limit and may be suspended for periods or discontinued at any time.
On November 19, 2015, we repurchased approximately
945,000
common shares for
$138.1 million
in a privately negotiated transaction with a related party, The Duchossois Group, our largest shareholder. The aggregate purchase price for the transaction was based on a share price of
$146.13
which was the average of the
twenty
-day trailing closing price for our common stock through November 18, 2015. The shares were retired, and the cost of the shares acquired was treated as a deduction from shareholders' equity. We funded this repurchase using available cash and borrowings under our Senior Secured Credit Facility.
On February 24, 2016, our Board of Directors authorized the repurchase of up to
$150.0 million
of our common stock in a stock repurchase program. The new program replaced the prior
$150.0 million
plan which was in effect at December 31, 2015 and had unused authorization of
$11.9 million
. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended for periods or discontinued at any time. During 2016, we repurchased
211,790
shares of our common stock in conjunction with our stock repurchase program at a total cost of
$27.6 million
based on settlement date. We have approximately
$122.4 million
of repurchase authority remaining under this program at December 31, 2016 based on settlement date.
Shareholder Rights Plan
On March 13, 2008, our Board of Directors approved a shareholder rights plan which granted each shareholder the right, in certain circumstances, to purchase a fraction of a share of Series A Junior Participating Preferred Stock at the rate of
one
right for each share of our common stock. If a person or group, together with its affiliates and associates, become an acquiring person, defined as the beneficial owner of
15%
or more of our common stock, each holder of a right (other than the person or group who has become an acquiring person) will have the right to receive, upon exercise, shares of our common stock having a value equal to
two
times the exercise price of the right. Certain persons and transactions are exempted from the definition of acquiring person. In the event that, at any time following the date such person or group becomes an acquiring person, (i) we engage in a merger or other business combination transaction in which we are not the surviving corporation (other than with an entity that acquired the shares pursuant to an offer for all outstanding shares of common stock that a majority of the independent directors determines to
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
be fair and not inadequate and to otherwise be in the best interests of us and our shareholders, after receiving advice from
one
or more investment banking firms (a "Qualifying Offer") ), (ii) we engage in a merger or other business combination transaction (other than with an entity that acquired the shares pursuant to a Qualifying Offer) in which we are the surviving corporation and our common stock is changed or exchanged, or (iii)
50%
or more of our assets, cash flow or earnings power is sold or transferred, each holder of a right (other than the person or group who has become an acquiring person) shall thereafter have the right to receive, upon exercise, common stock of the surviving entity having a value equal to
two
times the exercise price of the right. At any time after a person or group becomes an acquiring person, and prior to the acquisition by such person or group of fifty percent
(50)%
or more of the outstanding common stock, the Board of Directors may exchange the rights (other than rights owned by such acquiring person), in whole or in part, for common stock at an exchange ratio of
one
share of common stock, or one one-thousandth of a share of preferred stock (or of a share of a class or series of our preferred stock having equivalent rights, preferences and privileges), per right (subject to adjustment).
12. DIRECTOR AND EMPLOYEE BENEFIT PLANS
Directors and Officers Retirement Plan
We provide eligible executives and directors an opportunity to defer to a future date the receipt of base and bonus compensation for services as well as director’s fees through the 2005 Deferred Compensation Plan (the "Deferred Plan"). Our matching contribution on base compensation deferral of executives equals the matching contribution of our profit-sharing plan with certain limits.
Our directors may elect to invest the deferred director fee compensation into our common stock within the Deferred Plan. Investments in our common stock are credited as hypothetical shares of common stock based on the market price of the stock at the time the compensation was earned. Upon the end of the director's service, common stock shares are issued to the director.
Other Retirement Plans
We have a profit-sharing plan that covers all employees not otherwise participating in an associated profit-sharing plan, with three months or more of service. We will match contributions made by employees up to
3%
of the employee’s annual compensation and match at
50%
contributions made by the employee up to an additional
2%
of compensation with certain limits. We may also contribute a discretionary amount determined annually by the Board of Directors as well as a year-end discretionary match not to exceed
4%
of compensation. Our cash contribution to the plan was approximately
$4.0 million
in 2016,
$3.4 million
in 2015, and
$2.5 million
in 2014.
We are a member of a noncontributory defined benefit multi-employer retirement plan for all members of the Pari-mutuel Clerk’s Union of Kentucky and several other collectively bargained retirement plans, which are administered by unions. Cash contributions are made in accordance with negotiated labor contracts. Retirement plan expense was
$0.6 million
in 2016,
$0.6 million
in 2015 and
$0.7 million
in 2014. Our policy is to fund this expense as accrued, and we currently estimate that future contributions to these plans will not increase significantly from prior years.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
13. TOTAL DEBT
The following table presents our total debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Unamortized Premium, Debt Issuance Costs and Loan Origination Fees
|
|
|
(in millions)
|
Outstanding Principal
|
|
Premium
|
|
Issuance Costs and Fees
|
|
Long-Term Debt, Net
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
Senior Secured Credit Facility due 2021
|
$
|
135.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
135.0
|
|
Term Loan due 2021
|
179.3
|
|
|
—
|
|
|
0.5
|
|
|
178.8
|
|
Swing line of credit
|
13.2
|
|
|
—
|
|
|
—
|
|
|
13.2
|
|
Total Senior Secured Credit Facility
|
327.5
|
|
|
—
|
|
|
0.5
|
|
|
327.0
|
|
5.375% Senior Unsecured Notes due 2021
|
600.0
|
|
|
2.5
|
|
|
7.8
|
|
|
594.7
|
|
Total debt
|
927.5
|
|
|
2.5
|
|
|
8.3
|
|
|
921.7
|
|
Current maturities of long-term debt
|
14.2
|
|
|
—
|
|
|
—
|
|
|
14.2
|
|
Total debt, net of current maturities
|
$
|
913.3
|
|
|
$
|
2.5
|
|
|
$
|
8.3
|
|
|
$
|
907.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
Unamortized Premium, Debt Issuance Costs and Loan Origination Fees
|
|
|
(in millions)
|
Outstanding Principal
|
|
Premium
|
|
Issuance Costs and Fees
|
|
Long-Term Debt, Net
|
Senior Secured Credit Facility:
|
|
|
|
|
|
|
|
Senior Secured Credit Facility due 2021
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan due 2021
|
188.7
|
|
|
—
|
|
|
0.6
|
|
|
188.1
|
|
Swing line of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Senior Secured Credit Facility
|
188.7
|
|
|
—
|
|
|
0.6
|
|
|
188.1
|
|
5.375% Senior Unsecured Notes due 2021
|
600.0
|
|
|
3.0
|
|
|
9.3
|
|
|
593.7
|
|
Total debt
|
788.7
|
|
|
3.0
|
|
|
9.9
|
|
|
781.8
|
|
Current maturities of long-term debt
|
16.2
|
|
|
—
|
|
|
—
|
|
|
16.2
|
|
Total debt, net of current maturities
|
$
|
772.5
|
|
|
$
|
3.0
|
|
|
$
|
9.9
|
|
|
$
|
765.6
|
|
Senior Secured Credit Facility
On February 17, 2016, we entered into an amendment to our Fourth Amended and Restated Credit Agreement (the "New Agreement") which amends certain provisions of the credit agreement including extending the maturity of both the Senior Secured Credit Facility and the Term Loan (collectively the "Facilities") through February 2021, coterminous with one another. The maximum aggregate commitment for the Senior Secured Credit Facility remains at
$500.0 million
, and the unamortized Term Loan of
$188.7 million
was refinanced as part of this amendment.
On December 1, 2014, we executed the Fourth Amended and Restated Credit Agreement (the "Senior Secured Credit Facility") whereby it added a
$200.0 million
Term Loan Facility ("Term Loan") to the existing Senior Secured Credit Facility and amended certain definitions and provisions of the credit agreement including consolidated funded indebtedness, EBITDA and calculation of the total leverage ratio.
Following the execution of the New Agreement, the new maturity date for both the Senior Secured Credit Facility and the Term Loan is February 17, 2021.
Regarding the Term Loan, we were required to make quarterly principal payments that commenced on March 31, 2015, per the amortization schedule laid out in the Fourth Amended and Restated Credit Agreement. Upon the execution of the New Agreement, the amortization schedule was modified based on
$188.7 million
outstanding on the Term Loan balance. Payments are set to occur
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
on the last day of each quarter through the new maturity date with annual paydown requirements of
5%
,
7.5%
,
10%
,
12.5%
,
15%
and a bullet payment due at maturity. The new amortization schedule calls for quarterly principal payments of
$2.4 million
that commenced on March 31, 2016 and increases in increments of
$1.2 million
on March 31 of each year to reach final year quarterly payment amounts of
$7.1 million
. If no additional payments are made, the balance due at termination will be
$94.4 million
.
Generally, borrowings made pursuant to the Senior Secured Credit Facility bear interest at a
LIBOR
-based rate per annum plus an applicable percentage ranging from
1.125%
to
2.5%
depending on our total leverage ratio. In addition, under the Senior Secured Credit Facility, we agreed to pay a commitment fee at rates that range from
0.15%
to
0.35%
of the available aggregate commitment, depending on our total leverage ratio. The Term Loan is not subject to, nor included in the calculation of, the commitment fee. The weighted average interest rate on outstanding borrowings was
2.70%
at December 31, 2016 and
1.70%
at December 31, 2015.
The Senior Secured Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including limitations on us and our subsidiaries with respect to indebtedness, restricted payments, liens, investments, mergers and acquisitions, disposition of assets, sale-leaseback transactions and transactions with affiliates. The covenants permit us to use proceeds of the credit extended under the agreement for general corporate purposes, restricted payments and acquisition needs. The Senior Secured Credit Facility also contains financial covenants that require us (i) to maintain an interest coverage ratio (i.e., consolidated adjusted EBITDA to consolidated interest expense) that is greater than
3.0
to 1.0; (ii) not to permit the total leverage ratio (i.e., total consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than
4.5
to 1.0, provided that if a certain minimum consolidated adjusted EBITDA is reached then the total leverage ratio will be increased to
5.0
to 1.0 for such periods that the minimum is maintained; and (iii) not to permit the senior secured leverage ratio (i.e. senior secured consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than
3.5
to 1.0. As of December 31, 2016, we were in compliance with all covenants under the Senior Secured Credit Facility, and substantially all of our assets continue to be pledged as collateral under the Senior Secured Credit Facility.
On December 31, 2016, we had
$344.7 million
of borrowing capacity under the Senior Secured Credit Facility.
5.375% Senior Unsecured Notes
On December 16, 2013, we completed an offering of
$300.0 million
in aggregate principal amount of
5.375%
Senior Unsecured Notes that mature on December 15, 2021 (the "Initial Senior Unsecured Notes" or the "Existing Notes"). The Initial Senior Unsecured Notes were issued at par, with interest payable on June 15
th
and December 15
th
of each year. We received net proceeds of
$295.0 million
, after deducting underwriting fees, and used the net proceeds from the offering to repay a portion of our outstanding borrowings, and accrued and unpaid interest outstanding under our (then) Third Amended and Restated Credit Agreement ("Senior Secured Credit Facility"). In connection with the issuance, we capitalized
$6.3 million
of debt issuance costs which are being amortized as interest expense over the remaining term of the Initial Senior Unsecured Notes.
On December 16, 2015, we completed an additional offering of
$300.0 million
in aggregate principal amount of
5.375%
Senior Unsecured Notes that mature on December 15, 2021 (the "Tack-on Notes"). The Tack-on Notes were issued under the December 16, 2013 Indenture governing the
$300.0 million
Existing Notes, and form a part of the same series as the Existing Notes for purposes of the Indenture. The Tack-on Notes were issued at
101%
with interest payable on June 15
th
and December 15
th
of each year. We received net proceeds of
$299.0 million
, after deducting underwriting fees, and used the net proceeds from the offering to repay our outstanding revolver borrowings along with accrued and unpaid interest outstanding under the Senior Secured Credit Facility. In connection with the issuance, we capitalized
$4.7 million
of debt issuance costs which are being amortized as interest expense over the remaining term of the Tack-on Notes.
Upon completion of this Tack-on Notes offering, the aggregate principal amount of the outstanding notes under this series is
$600.0 million
(collectively the "Senior Unsecured Notes.") The Tack-on Notes were offered with different CUSIP and ISIN numbers from the Existing Notes and as a result thereof, will not trade fungibly until they have been assigned the same CUSIP and ISIN numbers. It is expected that the Tack-on Notes will be exchanged into the unrestricted CUSIP and ISIN numbers currently assigned to the Existing Notes one year from the date of issuance.
Both series of the Senior Unsecured Notes were issued in private offerings that were exempt from registration under the Securities Act of 1933, as amended, and are senior unsecured obligations. The total Senior Unsecured Notes are guaranteed by each of our domestic subsidiaries that guarantee our Senior Secured Credit Facility and will rank equally with our existing and future senior obligations. At any time prior to December 15, 2016, we could have redeemed all or part of the total Senior Unsecured Notes at a price equal to
100%
of the principal amount of the notes redeemed plus a "make-whole" premium, together with accrued and unpaid interest and additional interest, if any, to the redemption date. On or after December 15, 2016, we may redeem all or part of the Senior Unsecured Notes at a redemption price of
104.0%
which gradually reduces to par by 2019.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Future aggregate maturities of total debt are as follows:
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
|
|
2017
|
|
$
|
14.2
|
|
2018
|
|
18.9
|
|
2019
|
|
23.6
|
|
2020
|
|
28.3
|
|
2021
|
|
842.5
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
927.5
|
|
14. OPERATING LEASES
Future minimum operating lease payments on non-cancelable leases are as follows, not including the variable portion of contingent leases:
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
|
|
2017
|
|
$
|
11.9
|
|
2018
|
|
7.8
|
|
2019
|
|
9.8
|
|
2020
|
|
9.1
|
|
2021
|
|
10.0
|
|
Thereafter
|
|
85.0
|
|
Total
|
|
$
|
133.6
|
|
We also lease totalisator equipment, audio/visual equipment and operate certain facilities that are partially contingent on handle revenue, bandwidth usage or race days. Total annual rent expense for contingent lease payments, including totalisator equipment, audio/visual equipment, land and facilities, was approximately
$3.4 million
in 2016,
$3.5 million
in 2015 and
$3.6 million
in
2014
. Our total rent expense for all operating leases, including the contingent lease payments, was
$24.7 million
in 2016,
$25.4 million
in 2015 and
$20.2 million
in
2014
. During 2015, the increase in total rent expense primarily reflects a full year of Big Fish Games lease expense.
In 2002, as part of financing improvements to the Churchill Downs facility, we transferred title of the Churchill Downs facility to the City of Louisville, Kentucky and leased back the facility. Subject to the terms of the lease, we can re-acquire the facility at any time for
$1.00
.
15. STOCK-BASED COMPENSATION PLANS
On December 31, 2016, we have stock-based employee compensation plans as described below. Our total compensation expense, which includes expense related to restricted stock awards, restricted stock unit awards, restricted performance units awards, stock option awards, and stock options associated with our employee stock purchase plan was
$18.9 million
in 2016,
$13.8 million
in 2015 and
$11.9 million
in 2014.
Retirement of Executive Chairman of the Board of Directors
Our former Executive Chairman of the Board of Directors and Chief Executive Officer, Robert L. Evans, retired effective September 30, 2015. Mr. Evans continues as a member of the Board of Directors. In conjunction with Mr. Evans' retirement, we amended his previous Change in Control, Severance, and Indemnity Agreement and upon his retirement, we accelerated vesting on
29,218
shares of restricted stock which were previously awarded and recognized compensation expense of
$1.3 million
in 2015 for the acceleration of the restricted stock awards.
2016 Omnibus Stock Incentive Plan
On February 24, 2016, we replaced our previous stock compensation program, the Churchill Downs Incorporated 2007 Omnibus Stock Incentive Plan (the "2007 Incentive Plan") with a new program, the Churchill Downs Incorporated 2016 Omnibus Stock
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Incentive Plan ("the 2016 Incentive Plan"). The 2016 Incentive Plan is intended to advance our long-term success by encouraging stock ownership among key employees and the Board of Directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or performance cash. The 2016 Incentive Plan has a minimum vesting period of
one
year for awards granted. During 2016, we awarded stock compensation under both the 2007 Incentive Plan and the 2016 Incentive Plan.
Employee Stock Options
We have stock options outstanding under the 2007 Incentive Plan. The 2007 Incentive Plan provides that the exercise price of any incentive stock option may not be less than the fair market value of the common stock on the date of grant. Outstanding stock options under the 2007 Incentive Plan have contractual terms of
ten
years and generally vest ratably on each anniversary of the grant date over a
three
year period.
No
stock options have been awarded under the 2016 Incentive Plan.
Activity for our stock options outstanding is presented below:
|
|
|
|
|
|
|
|
(in thousands, except per average exercise price)
|
Number of Shares Under Option
|
|
Weighted Average Exercise Price
|
Balance as of December 31, 2013
|
193
|
|
|
$
|
36.04
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Exercises
|
(182
|
)
|
|
$
|
35.26
|
|
Canceled/forfeited
|
(1
|
)
|
|
$
|
49.95
|
|
Balance as of December 31, 2014
|
10
|
|
|
$
|
48.63
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Exercises
|
(1
|
)
|
|
$
|
49.95
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
Balance as of December 31, 2015
|
9
|
|
|
$
|
48.37
|
|
Granted
|
—
|
|
|
|
|
Exercises
|
(5
|
)
|
|
$
|
52.58
|
|
Canceled/forfeited
|
—
|
|
|
|
|
Balance as of December 31, 2016
|
4
|
|
|
$
|
43.74
|
|
During 2014, Mr. Evans, our non-executive Chairman of the Board of Directors, exercised options for
180,000
shares of our common stock which were granted at
$35.19
per share, for common stock prices ranging from
$85.00
to
$91.33
per share.
On December 31, 2016, all outstanding options were vested and exercisable. The following table summarizes information about stock options outstanding on December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except contractual life and per share data)
|
Shares Under
Option
|
|
Remaining
Contractual
Life (Years)
|
|
Average
Exercise Price
Per Share
|
|
Intrinsic
Value per
Share
(1)
|
|
Aggregate
Intrinsic
Value
|
Options exercisable and vested at December 31, 2016
|
4
|
|
|
1.8
|
|
$
|
43.74
|
|
|
$
|
106.71
|
|
|
$
|
437
|
|
|
|
(1)
|
Computed based upon the amount by which the fair market value of our common stock on December 31, 2016 of
$150.45
per share exceeded the weighted average exercise price.
|
The total intrinsic value of stock options exercised was
$0.4 million
in 2016,
$0.1 million
in 2015 and
$9.6 million
in 2014. Cash received from stock option exercises totaled
$0.2 million
in 2016,
$0.1 million
in 2015 and
$6.4 million
in 2014.
Restricted Shares and Restricted Stock Units
The 2016 Incentive Plan and the 2007 Incentive Plan (collectively "the 2016 and 2007 Plans") permit the award of restricted shares or restricted stock units to directors and key employees, including our officers who are from time to time responsible for the management, growth and protection of our business. Restricted shares granted under the 2016 and 2007 Plans generally vest either in full upon
three
years from the date of grant, on a pro-rata basis over a
three
year term or upon retirement at or after age 60. The fair value of restricted shares that vest solely based on continued service under the 2016 and 2007 Plans is determined by the product of the number of shares granted and the grant date market price of our common stock.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
On September 22, 2015, the Board of Directors approved the adoption of the Executive Long-Term Incentive Compensation Plan (the "ELTI Plan"), pursuant to which certain named executive officers ("NEOs") and other key executives ("Grantees") may earn variable equity payouts based upon us achieving certain key performance metrics over a specified period. The ELTI Plan was adopted pursuant to 2016 and 2007 Plans, which were previously approved by our shareholders.
2016 Awards
On February 23, 2016, certain NEOs received the following:
|
|
•
|
24,677
restricted stock units ("RSU") vesting equally over
three
service periods ending December 31, 2016, December 31, 2017 and December 31, 2018; and
|
|
|
•
|
29,633
performance share units ("PSU") with vesting contingent on financial performance measures at the end of a
34
-month performance period ending December 31, 2018.
|
The performance criteria for the 2016 PSU awards are a cumulative Adjusted EBITDA target that was set at the beginning of the plan performance period for the entire
three
year period, and a cash flow metric that is the aggregate of the cash flow targets for the
three
individual years that is set annually at the beginning of each year. The cash flow metric is defined as cash flow from operating activities plus distributions of capital from equity investments less capital maintenance expenditures. The Compensation Committee can make adjustments as it may deem appropriate to these metrics. Measurement against these criteria will be determined against a payout curve which provides up to
200%
of performance share units based on the original award.
The performance criteria also includes a relative total shareholder return ("TSR") component. Our TSR will be ranked versus the companies in the Russell 2000 index and will be calculated based on our relative placement within the Russell 2000 index. The PSU awards may be adjusted based on the Company’s TSR, by increasing the PSU awards by
25%
if the Company’s TSR is in the top quartile, decreasing the PSU awards by
25%
if the Company’s TSR is in the bottom quartile, and providing no change to the PSU awards if the Company’s TSR is in the middle two quartiles.
The total compensation cost we will recognize under the PSUs will be determined using the Monte Carlo valuation methodology and will be based upon an equal performance weighting for the two financial measures and then adjusted based on the Company’s TSR performance within the Russell 2000 index. The maximum number of PSUs that can be earned for a performance period is
250%
of the original award.
In 2016, we recognized compensation expense of
$7.7 million
related to the 2016 grants for RSUs, PSUs and other employee grants made during 2016. At December 31, 2016, compensation expense that has not been amortized attributable to unvested 2016 RSU and PSU awards was
$4.3 million
and
$4.9 million
for 2016 other awards.
2015 Awards
On September 22, 2015, certain NEOs received the following:
|
|
•
|
22,142
RSUs vesting equally over
two
service periods ending December 31, 2016 and December 31, 2017; and
|
|
|
•
|
27,282
PSUs with vesting contingent on financial performance measures at the end of a
30
-month performance period ending December 31, 2017.
|
The performance criteria for the 2015 PSUs are consistent with the 2016 Awards described above.
In 2016, we recognized compensation expense of $
3.8 million
related to the 2015 RSU and PSU grants and at December 31, 2016, unrecognized compensation expense related to these awards was
$2.6 million
. In 2015, we recognized compensation expense of
$0.9 million
related to the 2015 grants for RSUs and PSUs.
Other Awards
In 2016, we awarded
72,529
of restricted stock shares to other employees, the majority of which vest equally over
three
service periods ending in the first quarter of 2019. In 2016, we recognized
$4.4 million
of compensation expense related to these awards. On December 31, 2016, unrecognized compensation expense attributable to all unvested service period awards was
$7.7 million
. The weighted average period over which we expect to recognize the remaining compensation expense under the service period awards approximates
1.3
years.
In 2015, we awarded NEOs, Grantees and certain other employees
167,800
restricted shares of our common stock vesting over service periods ranging from
seven
months to
three
years. In 2016, we recognized
$4.7 million
of compensation expense and in 2015, we recognized
$6.2 million
of compensation expense related to these awards. On December 31, 2016, unrecognized compensation expense attributable to all unvested service period awards was
$3.0 million
. The weighted average period over which we expect to recognize the remaining compensation expense under the service period awards approximates
13
months.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Activity for the ELTI Plan, the 2013 New Company LTIP, the 2016 and 2007 Plans and awards made outside of stock-based compensation plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Condition & Performance-Based Awards
|
|
Service Period Awards
|
|
Total
|
(in thousands, except grant date values)
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance as of December 31, 2013
|
324
|
|
|
$
|
53.71
|
|
|
349
|
|
|
$
|
53.58
|
|
|
673
|
|
|
$
|
53.64
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
26
|
|
|
$
|
88.58
|
|
|
26
|
|
|
$
|
88.58
|
|
Vested
|
(239
|
)
|
|
$
|
53.49
|
|
|
(107
|
)
|
|
$
|
54.15
|
|
|
(346
|
)
|
|
$
|
53.70
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(12
|
)
|
|
$
|
60.41
|
|
|
(12
|
)
|
|
$
|
60.41
|
|
Balance as of December 31, 2014
|
85
|
|
|
$
|
54.32
|
|
|
256
|
|
|
$
|
56.24
|
|
|
341
|
|
|
$
|
55.77
|
|
Granted
|
27
|
|
|
$
|
154.90
|
|
|
190
|
|
|
$
|
102.09
|
|
|
217
|
|
|
$
|
108.73
|
|
Vested
|
(85
|
)
|
|
$
|
48.31
|
|
|
(150
|
)
|
|
$
|
64.87
|
|
|
(235
|
)
|
|
$
|
58.91
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(9
|
)
|
|
$
|
93.04
|
|
|
(9
|
)
|
|
$
|
93.04
|
|
Balance as of December 31, 2015
|
27
|
|
|
$
|
154.90
|
|
|
287
|
|
|
$
|
80.90
|
|
|
314
|
|
|
$
|
87.31
|
|
Granted
|
30
|
|
|
$
|
141.02
|
|
|
97
|
|
|
$
|
132.64
|
|
|
127
|
|
|
$
|
134.60
|
|
Vested
|
—
|
|
|
$
|
—
|
|
|
(186
|
)
|
|
$
|
70.81
|
|
|
(186
|
)
|
|
$
|
70.81
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(6
|
)
|
|
$
|
100.31
|
|
|
(6
|
)
|
|
$
|
100.31
|
|
Balance as of December 31, 2016
|
57
|
|
|
$
|
147.67
|
|
|
192
|
|
|
$
|
114.33
|
|
|
249
|
|
|
$
|
121.95
|
|
On December 31, 2016, there was
$15.6 million
of unrecognized stock-based compensation expense related to nonvested restricted share awards, RSU and PSU awards that we expect to recognize over a weighted average period of
1.3
years.
On December 31, 2016, NEOs held
56,915
restricted shares subject to performance-based vesting criteria (all of which are considered performance based restricted shares), which were issued during 2016 and 2015. The number of these shares that vest is based upon established performance-based targets that will be assessed on an ongoing basis.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "ESP Plan"), we are authorized to sell, pursuant to short-term stock options, shares of our common stock to our full-time and qualifying part-time employees at a discount from our common stock’s fair market value. The ESP Plan operates on the basis of recurring, consecutive
one
-year periods. Each period commences on August 1 and ends on the following July 31.
Each August 1, we offer eligible employees the opportunity to purchase common stock. Employees who elect to participate for each period have a designated percentage of their after-tax compensation withheld and applied to the purchase of shares of common stock on the last day of the period, July 31. The ESP Plan allows withdrawals, terminations and reductions on the amounts being deducted. The purchase price for the common stock is
85%
of the lesser of the fair market value of the common stock on (i) the first day of the period, or (ii) the last day of the period. No employee may purchase common stock under the ESP Plan valued at more than
$25 thousand
for each calendar year.
On July 31, 2016, employees purchased approximately
18 thousand
shares of common stock pursuant to options granted on August 1, 2015. Because the plan year overlaps our fiscal year, the number of shares to be sold pursuant to options granted on August 1, 2016, can only be estimated because the 2016 plan year is not yet complete. Our estimate of options granted in 2016 under the ESP Plan is based on the number of shares sold to employees under the ESP Plan for the 2015 plan year, adjusted to reflect the change in the number of employees participating in the ESP Plan in 2016. We recognized compensation expense related to the ESP Plan of
$0.7 million
in 2016,
$0.6 million
in 2015 and
$0.4 million
in 2014.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
16. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following tables present our assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(in millions)
|
Level 1
|
|
Level 3
|
Cash equivalents and restricted cash
|
$
|
34.1
|
|
|
$
|
—
|
|
Big Fish Games deferred payments
|
—
|
|
|
27.8
|
|
Big Fish Games earnout liability
|
—
|
|
|
67.9
|
|
Total
|
$
|
34.1
|
|
|
$
|
95.7
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(in millions)
|
Level 1
|
|
Level 3
|
Cash equivalents and restricted cash
|
$
|
30.1
|
|
|
$
|
—
|
|
Big Fish Games deferred payments
|
—
|
|
|
54.8
|
|
Big Fish Games earnout liability
|
—
|
|
|
345.2
|
|
Bluff contingent consideration liability
|
—
|
|
|
2.3
|
|
Total
|
$
|
30.1
|
|
|
402.3
|
|
The following table presents the change in fair value of our instruments classified within Level 3:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
(in millions)
|
Big Fish Games Deferred Payments
|
|
Big Fish Games Earnout Liability
|
|
Bluff Contingent Consideration
|
|
Total
|
Balance as of December 31, 2015
|
$
|
54.8
|
|
|
$
|
345.2
|
|
|
$
|
2.3
|
|
|
$
|
402.3
|
|
Payments
|
(28.4
|
)
|
|
(281.6
|
)
|
|
—
|
|
|
(310.0
|
)
|
Change in fair value
|
1.4
|
|
|
4.3
|
|
|
(2.3
|
)
|
|
3.4
|
|
Balance as of December 31, 2016
|
$
|
27.8
|
|
|
$
|
67.9
|
|
|
$
|
—
|
|
|
$
|
95.7
|
|
Our cash equivalents and restricted cash, which are held in interest-bearing accounts, qualify for Level 1 in the fair value hierarchy which includes unadjusted quoted market prices in active markets for identical assets.
We estimated the fair values of the Big Fish Games deferred payment and earnout liability as of December 31, 2016 using a discounted cash flows analysis over the period in which the obligations are expected to be settled, and applied a discount rate of
2.3%
based on our cost of debt. The cost of debt was based on the observed market yields of our Senior Unsecured Notes, a Level 3 fair value measurement, and was adjusted for the difference in seniority and term of the deferred payments and earnout liability. The increase in fair values of the Big Fish Games deferred payment and earnout liability of
$5.7 million
in 2016 and
$21.7 million
in 2015 was recorded as acquisition expense in the accompanying Consolidated Statements of Comprehensive Income. In December 2016 and 2015, we paid our deferred founder’s payment totaling
$28.4 million
each year. Changes to our cost of debt could lead to different fair value estimates for the deferred payments and earnout liability. A one-percentage point change in the discount rate would increase or decrease the fair values of the Big Fish Games deferred payment and earnout liability by
$1.0 million
.
Our accrued liability for a contingent consideration recorded in conjunction with the Bluff acquisition was based on significant inputs not observed in the market and represent a Level 3 fair value measurement. The estimate of the contingent consideration liability used an income approach and was based on the probability of achieving enabling legislation which permits Internet poker gaming and the probability-weighted discounted cash flows. During the fourth quarter of 2016, the Company eliminated the contingent liability as the legislation did not pass and thus the contingency period expired in February 2017. Therefore, the Company recorded a
$2.3 million
reduction of acquisition expenses, net, in the accompanying Consolidated Statements of Comprehensive Income in 2016.
We currently have no other assets or liabilities subject to fair value measurement on a recurring basis. Our
$600.0 million
par value Senior Unsecured Notes are disclosed at fair value which is based on unadjusted quoted prices for similar liabilities in
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
markets that are not active. The fair value of the Senior Unsecured Notes was
$622.5 million
at December 31, 2016 and
$604.1 million
at December 31, 2015.
The following methods and assumptions were used in estimating our fair value disclosures for financial instruments:
Cash equivalents—The carrying amount reported in the balance sheet for cash equivalents approximates our fair value due to the short-term maturity of these instruments.
Long-term debt: Senior Secured Credit Facility—The carrying amounts of the borrowings under the Senior Secured Credit Facility approximate fair value, based upon current interest rates, representing a Level 2 fair value measurement.
We did not measure any assets at fair value on a non-recurring basis for 2015 and 2016.
17. CONTINGENCIES
We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results of operations, or cash flows. Legal fees are expensed as incurred.
If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
18. NET INCOME PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the net income per common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except per share data)
|
2016
|
|
2015
|
|
2014
|
Numerator for basic income per common share:
|
|
|
|
|
|
Net income
|
$
|
108.1
|
|
|
$
|
65.2
|
|
|
$
|
46.4
|
|
Net income allocated to participating securities
|
(1.0
|
)
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Numerator for basic net income per common share
|
$
|
107.1
|
|
|
$
|
64.6
|
|
|
$
|
46.1
|
|
|
|
|
|
|
|
Numerator for diluted income per common share
|
$
|
108.1
|
|
|
$
|
65.2
|
|
|
$
|
46.4
|
|
|
|
|
|
|
|
Denominator for net income per common share:
|
|
|
|
|
|
Basic
|
16.4
|
|
|
17.2
|
|
|
17.3
|
|
Plus dilutive effect of stock options and restricted stock
|
0.2
|
|
|
0.1
|
|
|
0.1
|
|
Plus dilutive effect of participating securities
|
0.2
|
|
|
0.3
|
|
|
0.2
|
|
Diluted
|
16.8
|
|
|
17.6
|
|
|
17.6
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
Basic
|
$
|
6.52
|
|
|
$
|
3.75
|
|
|
$
|
2.67
|
|
Diluted
|
$
|
6.42
|
|
|
$
|
3.71
|
|
|
$
|
2.64
|
|
19. SEGMENT INFORMATION
We manage our operations through
six
operating segments:
|
|
•
|
Racing, which includes Churchill Downs, Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds") and Calder;
|
|
|
•
|
Casinos, which includes Oxford Casino ("Oxford"), Riverwalk Casino ("Riverwalk"), Harlow's Casino ("Harlow’s"), Calder Casino, Fair Grounds Slots, Video Services, LLC ("VSI"),
50%
of EBITDA from our joint venture, MVG, and
25%
of EBITDA from our equity investment, SCH, which includes investments in Saratoga's New York facility and Saratoga's Colorado facility;
|
|
|
•
|
TwinSpires, which includes TwinSpires.com, Fair Grounds Account Wagering ("FAW"), Velocity, Bloodstock Research Information Services ("BRIS"), Bluff and I-Gaming;
|
|
|
•
|
Big Fish Games, which is a global producer and distributor of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices;
|
|
|
•
|
Other Investments, which includes United Tote and Capital View Casino & Resort Joint Venture ("Capital View"); and
|
|
|
•
|
Corporate, which includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocated to our other operating segments.
|
Eliminations include the elimination of intersegment transactions. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
|
|
•
|
Acquisition expense, net which includes:
|
|
|
•
|
Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and
|
|
|
•
|
Transaction expense, including legal, accounting, and other deal-related expense;
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
•
|
Stock-based compensation expense;
|
|
|
•
|
Other charges and recoveries.
|
During 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue and to exclude depreciation and amortization from our equity investments. The prior year amounts were reclassified to conform to this presentation. We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.
We utilize the Adjusted EBITDA metric because we believe the inclusion or exclusion of certain non-recurring items is necessary to provide a more accurate measure of our core operating results and enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with U.S. generally accepted accounting principles. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying Consolidated Statements of Comprehensive Income.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The tables below present net revenue from external customers and intercompany revenue from each of our operating segments, Adjusted EBITDA by segment and reconciles Comprehensive Income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Net revenue from external customers:
|
|
|
|
|
|
Racing:
|
|
|
|
|
|
Churchill Downs
|
$
|
155.2
|
|
|
$
|
151.1
|
|
|
$
|
143.2
|
|
Arlington
|
55.3
|
|
|
54.4
|
|
|
60.3
|
|
Fair Grounds
|
38.0
|
|
|
39.8
|
|
|
38.6
|
|
Calder
|
2.6
|
|
|
2.7
|
|
|
19.3
|
|
Total Racing
|
251.1
|
|
|
248.0
|
|
|
261.4
|
|
Casinos:
|
|
|
|
|
|
Oxford Casino
|
84.6
|
|
|
80.4
|
|
|
76.5
|
|
Riverwalk Casino
|
46.1
|
|
|
49.8
|
|
|
50.1
|
|
Harlow’s Casino
|
48.4
|
|
|
49.0
|
|
|
50.2
|
|
Calder Casino
|
79.1
|
|
|
77.4
|
|
|
77.0
|
|
Fair Grounds Slots
|
36.9
|
|
|
39.0
|
|
|
40.8
|
|
VSI
|
36.9
|
|
|
36.9
|
|
|
33.7
|
|
Saratoga
|
0.8
|
|
|
0.4
|
|
|
—
|
|
Total Casinos
|
332.8
|
|
|
332.9
|
|
|
328.3
|
|
TwinSpires
|
220.6
|
|
|
200.2
|
|
|
191.0
|
|
Big Fish Games:
|
|
|
|
|
|
Social casino
|
182.5
|
|
|
193.4
|
|
|
7.6
|
|
Casual and mid-core free-to-play
|
212.7
|
|
|
125.3
|
|
|
2.1
|
|
Premium
|
91.0
|
|
|
95.0
|
|
|
4.2
|
|
Total Big Fish Games
|
486.2
|
|
|
413.7
|
|
|
13.9
|
|
Other Investments
|
16.9
|
|
|
16.6
|
|
|
16.5
|
|
Corporate
|
1.0
|
|
|
0.9
|
|
|
1.1
|
|
Net revenue from external customers
|
$
|
1,308.6
|
|
|
$
|
1,212.3
|
|
|
$
|
812.2
|
|
Intercompany net revenue:
|
|
|
|
|
|
Racing:
|
|
|
|
|
|
Churchill Downs
|
$
|
10.0
|
|
|
$
|
7.8
|
|
|
$
|
7.0
|
|
Arlington
|
5.5
|
|
|
5.1
|
|
|
5.8
|
|
Fair Grounds
|
1.5
|
|
|
1.3
|
|
|
1.1
|
|
Calder
|
—
|
|
|
—
|
|
|
0.7
|
|
Total Racing
|
17.0
|
|
|
14.2
|
|
|
14.6
|
|
TwinSpires
|
1.3
|
|
|
1.1
|
|
|
1.0
|
|
Other Investments
|
3.9
|
|
|
3.5
|
|
|
4.1
|
|
Eliminations
|
(22.2
|
)
|
|
(18.8
|
)
|
|
(19.7
|
)
|
Intercompany net revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Adjusted EBITDA by segment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
(in millions)
|
Racing
|
|
Casinos
|
|
TwinSpires
|
|
Big Fish
Games
|
|
Other Investments
|
|
Corporate
|
Net revenue
|
$
|
268.1
|
|
|
$
|
332.8
|
|
|
$
|
221.9
|
|
|
$
|
486.2
|
|
|
$
|
20.8
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes & purses
|
(64.2
|
)
|
|
(110.9
|
)
|
|
(11.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Platform & development fees
|
—
|
|
|
—
|
|
|
—
|
|
|
(179.9
|
)
|
|
—
|
|
|
—
|
|
Marketing & advertising
|
(4.6
|
)
|
|
(12.7
|
)
|
|
(6.3
|
)
|
|
(127.9
|
)
|
|
—
|
|
|
—
|
|
Salaries & benefits
|
(40.9
|
)
|
|
(50.8
|
)
|
|
(9.4
|
)
|
|
(25.0
|
)
|
|
(10.9
|
)
|
|
—
|
|
Content expense
|
(15.6
|
)
|
|
—
|
|
|
(107.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
SG&A expense
|
(16.2
|
)
|
|
(21.2
|
)
|
|
(11.9
|
)
|
|
(18.5
|
)
|
|
(3.4
|
)
|
|
(8.6
|
)
|
Research & development
|
—
|
|
|
—
|
|
|
—
|
|
|
(39.0
|
)
|
|
—
|
|
|
—
|
|
Other operating expense
|
(47.4
|
)
|
|
(39.1
|
)
|
|
(19.8
|
)
|
|
(15.9
|
)
|
|
(4.1
|
)
|
|
(0.6
|
)
|
Other income (expense)
|
0.5
|
|
|
27.7
|
|
|
—
|
|
|
(0.9
|
)
|
|
0.3
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
79.7
|
|
|
$
|
125.8
|
|
|
$
|
55.2
|
|
|
$
|
79.1
|
|
|
$
|
2.7
|
|
|
$
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
(in millions)
|
Racing
|
|
Casinos
|
|
TwinSpires
|
|
Big Fish
Games
|
|
Other Investments
|
|
Corporate
|
Net revenue
|
$
|
262.2
|
|
|
$
|
332.9
|
|
|
$
|
201.3
|
|
|
$
|
413.7
|
|
|
$
|
20.1
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes & purses
|
(63.6
|
)
|
|
(109.9
|
)
|
|
(10.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Platform & development fees
|
—
|
|
|
—
|
|
|
—
|
|
|
(143.6
|
)
|
|
—
|
|
|
—
|
|
Marketing & advertising
|
(6.1
|
)
|
|
(12.4
|
)
|
|
(4.8
|
)
|
|
(107.7
|
)
|
|
—
|
|
|
—
|
|
Salaries & benefits
|
(39.2
|
)
|
|
(49.7
|
)
|
|
(9.9
|
)
|
|
(22.3
|
)
|
|
(11.1
|
)
|
|
—
|
|
Content expense
|
(14.6
|
)
|
|
—
|
|
|
(97.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
SG&A expense
|
(16.6
|
)
|
|
(24.1
|
)
|
|
(11.5
|
)
|
|
(16.8
|
)
|
|
(2.5
|
)
|
|
(6.3
|
)
|
Research & development
|
—
|
|
|
—
|
|
|
—
|
|
|
(39.4
|
)
|
|
—
|
|
|
—
|
|
Other operating expense
|
(50.9
|
)
|
|
(41.3
|
)
|
|
(18.0
|
)
|
|
(14.8
|
)
|
|
(3.8
|
)
|
|
1.1
|
|
Other income (expense)
|
0.6
|
|
|
19.4
|
|
|
—
|
|
|
(0.6
|
)
|
|
0.2
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
71.8
|
|
|
$
|
114.9
|
|
|
$
|
48.6
|
|
|
$
|
68.5
|
|
|
$
|
2.9
|
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
(in millions)
|
Racing
|
|
Casinos
|
|
TwinSpires
|
|
Big Fish
Games
|
|
Other Investments
|
|
Corporate
|
Net revenue
|
$
|
276.0
|
|
|
$
|
328.3
|
|
|
$
|
192.0
|
|
|
$
|
13.9
|
|
|
$
|
20.6
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes & purses
|
(72.7
|
)
|
|
(108.0
|
)
|
|
(9.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Platform & development fees
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.1
|
)
|
|
—
|
|
|
—
|
|
Marketing & advertising
|
(6.1
|
)
|
|
(12.5
|
)
|
|
(4.7
|
)
|
|
(5.7
|
)
|
|
—
|
|
|
—
|
|
Salaries & benefits
|
(45.1
|
)
|
|
(49.1
|
)
|
|
(11.5
|
)
|
|
(2.6
|
)
|
|
(11.8
|
)
|
|
(0.2
|
)
|
Content expense
|
(19.0
|
)
|
|
—
|
|
|
(92.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
SG&A expense
|
(18.4
|
)
|
|
(25.5
|
)
|
|
(13.0
|
)
|
|
(0.8
|
)
|
|
(2.8
|
)
|
|
(5.3
|
)
|
Research & development
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other operating expense
|
(54.1
|
)
|
|
(43.5
|
)
|
|
(21.2
|
)
|
|
(0.4
|
)
|
|
(4.5
|
)
|
|
(0.7
|
)
|
Other income (expense)
|
0.6
|
|
|
17.5
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
61.2
|
|
|
$
|
107.2
|
|
|
$
|
39.8
|
|
|
$
|
(0.7
|
)
|
|
$
|
1.6
|
|
|
$
|
(5.0
|
)
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Reconciliation of Comprehensive Income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
107.5
|
|
|
$
|
64.7
|
|
|
$
|
46.3
|
|
Foreign currency translation, net of tax
|
(0.2
|
)
|
|
0.5
|
|
|
0.1
|
|
Net change in pension benefits, net of tax
|
0.8
|
|
|
—
|
|
|
—
|
|
Net income
|
108.1
|
|
|
65.2
|
|
|
46.4
|
|
Additions:
|
|
|
|
|
|
Depreciation and amortization
|
108.6
|
|
|
109.7
|
|
|
68.3
|
|
Interest expense
|
43.7
|
|
|
28.6
|
|
|
20.8
|
|
Income tax provision
|
60.0
|
|
|
46.9
|
|
|
30.1
|
|
EBITDA
|
$
|
320.4
|
|
|
$
|
250.4
|
|
|
$
|
165.6
|
|
|
|
|
|
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
Stock-based compensation expense
|
18.9
|
|
|
13.8
|
|
|
11.9
|
|
Other charges
|
2.5
|
|
|
—
|
|
|
(0.4
|
)
|
TwinSpires operating expense
|
—
|
|
|
—
|
|
|
3.2
|
|
Other income, expense:
|
|
|
|
|
|
Interest, depreciation and amortization expense related to equity investments
|
10.0
|
|
|
8.5
|
|
|
8.7
|
|
Other charges and recoveries, net
|
0.5
|
|
|
(5.8
|
)
|
|
2.6
|
|
Acquisition expense, net
|
3.4
|
|
|
21.7
|
|
|
10.2
|
|
Gain on Calder land sale
|
(23.7
|
)
|
|
—
|
|
|
—
|
|
Calder exit costs
|
2.5
|
|
|
13.9
|
|
|
2.3
|
|
Total adjustments to EBITDA
|
14.1
|
|
|
52.1
|
|
|
38.5
|
|
Adjusted EBITDA
|
$
|
334.5
|
|
|
$
|
302.5
|
|
|
$
|
204.1
|
|
|
|
|
|
|
|
Adjusted EBITDA by segment:
|
|
|
|
|
|
Racing
|
$
|
79.7
|
|
|
$
|
71.8
|
|
|
$
|
61.2
|
|
Casinos
|
125.8
|
|
|
114.9
|
|
|
107.2
|
|
TwinSpires
|
55.2
|
|
|
48.6
|
|
|
39.8
|
|
Big Fish Games
|
79.1
|
|
|
68.5
|
|
|
(0.7
|
)
|
Other Investments
|
2.7
|
|
|
2.9
|
|
|
1.6
|
|
Corporate
|
(8.0
|
)
|
|
(4.2
|
)
|
|
(5.0
|
)
|
Adjusted EBITDA
|
$
|
334.5
|
|
|
$
|
302.5
|
|
|
$
|
204.1
|
|
The table below presents information about earnings (losses) from equity investments, net included in our reported segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Casinos
|
$
|
17.4
|
|
|
$
|
10.9
|
|
|
$
|
8.9
|
|
TwinSpires
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Other Investments
|
—
|
|
|
0.3
|
|
|
(2.5
|
)
|
|
$
|
17.4
|
|
|
$
|
11.2
|
|
|
$
|
6.3
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The table below presents total asset information for each of our operating segments:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2016
|
|
2015
|
Total assets:
|
|
|
|
Racing
|
$
|
454.6
|
|
|
$
|
437.1
|
|
Casinos
|
628.7
|
|
|
631.3
|
|
TwinSpires
|
209.9
|
|
|
202.4
|
|
Big Fish Games
|
893.8
|
|
|
947.1
|
|
Other Investments
|
11.1
|
|
|
12.2
|
|
Corporate
|
56.3
|
|
|
47.3
|
|
|
$
|
2,254.4
|
|
|
$
|
2,277.4
|
|
The table below presents total capital expenditures for each of our operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Capital expenditures:
|
|
|
|
|
|
Racing
|
$
|
26.1
|
|
|
$
|
12.3
|
|
|
$
|
33.9
|
|
Casinos
|
13.9
|
|
|
18.8
|
|
|
7.7
|
|
TwinSpires
|
7.0
|
|
|
4.3
|
|
|
5.8
|
|
Big Fish Games
|
5.5
|
|
|
6.4
|
|
|
0.1
|
|
Other Investments
|
1.0
|
|
|
0.8
|
|
|
5.3
|
|
Corporate
|
1.2
|
|
|
0.9
|
|
|
1.7
|
|
|
$
|
54.7
|
|
|
$
|
43.5
|
|
|
$
|
54.5
|
|
20. HRTV EQUITY INVESTMENT DIVESTITURE
As part of the TSG agreement related to the cessation of Calder pari-mutuel operations in 2014, we modified our HRTV, LLC ("HRTV") operating and ownership agreement with TSG resulting in the divestiture of our interest in HRTV effective January 2, 2015. In January 2015, we received
$6.0 million
in proceeds from the sale of the ownership interest and we recorded a gain of
$5.8 million
in our Other Investments segment, which has been excluded from Adjusted EBITDA and is included in other charges and recoveries in the reconciliation of Comprehensive Income to Adjusted EBITDA.
21. RELATED PARTY TRANSACTIONS
Directors and employees may from time to time own or have interests in horses racing at our racetracks. All such races are conducted, as applicable, under the regulations of each state’s respective regulatory agency, and no director receives any extra or special benefit with regard to having his or her horses selected to run in races or in connection with the actual running of races. There is no material financial statement impact attributable to directors who may have interests in horses racing at our racetracks.
In the ordinary course of business, we may enter into transactions with certain of our officers and directors for the sale of personal seat licenses and suite accommodations at its racetracks, and tickets for its live racing events. We believe that each such transaction has been on terms no less favorable for us than could have been obtained in a transaction with a third party, and no such person received any extra or special benefit in connection with such transactions.
On November 19, 2015, we repurchased approximately
945,000
common shares for
$138.1 million
in a privately negotiated transaction with a related party, The Duchossois Group, our largest shareholder. The aggregate purchase price for the transaction was based on a share price of
$146.13
, which was the average of the
twenty
-day trailing closing price for our common stock through November 18, 2015. The shares were retired, and the cost of the shares acquired was treated as a deduction from shareholders' equity. We funded this repurchase using available cash and borrowings under our Senior Secured Credit Facility.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
22. SUBSEQUENT EVENTS
Ocean Downs
In August 2016, we signed a limited liability company operating agreement with SCH, with each entity having a
50%
interest, and formed Old Bay Gaming and Racing LLC (“Old Bay”). The Old Bay agreement provides both the Company and SCH equal participating rights, and both entities must consent to Old Bay’s operating, investing and financing decisions.
On January 3, 2017, Old Bay acquired all of the equity interests of Ocean Enterprise 589 LLC, Ocean Downs LLC and Racing Services LLC (collectively, “Ocean Downs”). Ocean Downs, located near Ocean City, Maryland, owns and operates video lottery terminals ("VLT") at the Casino at Ocean Downs and conducts harness racing at Ocean Downs Racetrack. The Company’s
25%
interest in SCH provides an additional
12.5%
interest, resulting in an effective
62.5%
interest in Ocean Downs. Since both the Company and SCH have participating rights and both must consent to Old Bay’s operating, investing and financing decisions, the Company will account for Ocean Downs using the equity method of accounting.
23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
For the Year Ended December 31, 2016
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net revenue
|
$
|
288.4
|
|
|
$
|
438.5
|
|
|
$
|
303.4
|
|
|
$
|
278.3
|
|
Income from operations
|
2.8
|
|
|
69.8
|
|
|
8.7
|
|
|
26.8
|
|
Basic net income per common share
|
$
|
0.17
|
|
|
$
|
4.16
|
|
|
$
|
0.52
|
|
|
$
|
1.62
|
|
Diluted net income per common share
|
$
|
0.16
|
|
|
$
|
4.11
|
|
|
$
|
0.52
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
For the Year Ended December 31, 2015
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net revenue
|
$
|
250.9
|
|
|
$
|
409.2
|
|
|
$
|
279.8
|
|
|
$
|
272.4
|
|
(Loss) income from operations
|
(1.6
|
)
|
|
55.1
|
|
|
4.2
|
|
|
7.5
|
|
Basic net (loss) income per common share
|
$
|
(0.09
|
)
|
|
$
|
3.12
|
|
|
$
|
0.24
|
|
|
$
|
0.44
|
|
Diluted net (loss) income per common share
|
$
|
(0.09
|
)
|
|
$
|
3.10
|
|
|
$
|
0.24
|
|
|
$
|
0.43
|
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Churchill Downs Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Churchill Downs Incorporated and its subsidiaries
at December 31, 2016
and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016
in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
February 28, 2017