Churchill Downs Inc 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), which provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this report are made pursuant to the Act. The reader is cautioned that such forward-looking statements are based on information available at the time and / or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date that the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “seek,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations include the following: • the impact of the novel coronavirus (COVID-19) pandemic and related economic matters on our results of operations, financial conditions and prospects; • the effect of economic conditions on our consumers' confidence and discretionary spending or our access to credit; • additional or increased taxes and fees; • public perceptions or lack of confidence in the integrity of our business or any deterioration in our reputation; • loss of key or highly skilled personnel; • restrictions in our debt facilities limiting our flexibility to operate our business; • general risks related to real estate ownership, including fluctuations in market values and environmental regulations; • catastrophic events and system failures disrupting our operations; • online security risk, including cyber-security breaches; • inability to recover under our insurance policies for damages sustained at our properties in the event of inclement weather and casualty events; • increases in insurance costs and inability to obtain similar insurance coverage in the future; • inability to identify and complete acquisition, expansion or divestiture projects, on time, on budget or as planned; • difficulty in integrating recent or future acquisitions into our operations; • costs and uncertainties relating to the development of new venues and expansion of existing facilities; • risks associated with equity investments, strategic alliances and other third-party agreements; • inability to respond to rapid technological changes in a timely manner; • inadvertent infringement of the intellectual property of others; • inability to protect our own intellectual property rights; • payment-related risks, such as risk associated with fraudulent credit card and debit card use; • compliance with the Foreign Corrupt Practices Act or applicable money-laundering regulations; • risks related to pending or future legal proceedings and other actions; • inability to negotiate agreements with industry constituents, including horsemen and other racetracks; • work stoppages and labor issues; • changes in consumer preferences, attendance, wagering, and sponsorship with respect to Churchill Downs Racetrack and the Kentucky Derby; • personal injury litigation related to injuries occurring at our racetracks; • weather and other conditions affecting our ability to conduct live racing; • the occurrence of extraordinary events, such as terrorist attacks, public health threats and civil unrest; • changes in the regulatory environment of our racing operations; • increased competition in the horse racing business; • difficulty in attracting a sufficient number of horses and trainers for full field horse races; FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 31 • our inability to utilize and provide totalizator services; • changes in regulatory environment of our online horse racing wagering business; • a reduction in the number of people wagering on live horse races; • increased competition in our online horse racing wagering business; • uncertainty and changes in the legal landscape relating to our online horse racing wagering business; • continued legalization of online sports betting and iGaming in the United States and our ability to predict and capitalize on any such legalization; • inability to expand our sports betting operations and effectively compete; • failure to manage risks associated with sports betting; • failure to comply with laws requiring us to block access to certain individuals could result in penalties or impairment with respect to our mobile and online wagering products; • increased competition in our casino business; • changes in regulatory environment of our casino business; • concentration and evolution of slot machine manufacturing and other technology conditions that could impose additional costs; and • inability to collect gaming receivables from the customers to whom we extend credit. The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts assume dilution unless otherwise noted. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, including Part I - Item 1A, "Risk Factors" of our Form 10-K for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 32 Our Business Executive Overview We are an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event - The Kentucky Derby . We own and operate Derby City Gaming, a historical racing machine ("HRM") facility in Louisville, Kentucky. We also own and operate the largest online horse racing wagering platform in the U.S., TwinSpires.com, and we operate sports betting and iGaming through our BetAmerica platform in multiple states. We are also a leader in brick-and-mortar casino gaming with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games in eight states. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky. Impact of COVID-19 Pandemic In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, have resulted and continue to result in significant negative economic impacts in the United States and in relation to our business. The long-term impact of COVID-19 on the United States and world economies and continuing impact on our business remains uncertain, the duration and scope of which cannot currently be predicted. In response to the measures taken to limit the impact of COVID-19 described above, and for the protection of our employees, customers, and communities, we temporarily suspended operations at our properties in March 2020. In May 2020, we began to reopen our properties with patron capacity limitations and gaming restrictions. We also implemented other initiatives to facilitate social distancing and enhanced cleaning, such as increased frequency of cleaning and sanitizing of all high-touch surfaces, mandatory temperature checks of all guests and team members upon entry and required training for all team members on safety protocols. Certain amenities at our properties have continued to be suspended, including all of our food buffets and valet services, and certain restaurants and food outlets. Below is a summary of the temporary closures or suspended operations and the current status of each property: Churchill Downs • Churchill Downs Racetrack conducted 27 spectator-free live racing days from May 16, 2020 through June 28, 2020. Churchill Downs Racetrack suspended simulcast operations on March 15, 2020 and such operations currently remain closed. • Derby City Gaming temporarily suspended operations on March 15, 2020 and reopened on June 8, 2020. Derby City Gaming is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its gaming capacity to approximately 66%. Gaming Wholly-Owned Properties • Calder Casino and Racing ("Calder") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020. Operations were temporarily suspended again on July 2, 2020 following a Miami-Dade Emergency Order issued by the county's mayor to close all entertainment venues in Miami-Dade county. • Fair Grounds Slots, Fair Grounds Race Course and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI"): ◦ Fair Grounds Slots temporarily suspended operations on March 16, 2020 and reopened on June 13, 2020. Fair Grounds Slots is currently restricted to 25% patron capacity and has implemented social distancing measures, which has limited its gaming capacity to approximately 50%; ◦ Fair Grounds Race Course conducted spectator-free live racing from March 13, 2020 through March 21, 2020 and did not have any live race days during the second quarter of 2020; and ◦ VSI temporarily suspended operations on March 16, 2020 and reopened on May 18, 2020. VSI is currently restricted to 50% patron capacity and has implemented social distancing measures, which has limited its gaming capacity to approximately 70%. • Harlow's Casino Resort and Spa ("Harlow's") temporarily suspended operations on March 16, 2020 and reopened on May 21, 2020. Harlow’s is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its slot gaming capacity to approximately 66% and its table games capacity to approximately 60%. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 33 • Ocean Downs Casino and Racetrack ("Ocean Downs") temporarily suspended operations on March 15, 2020 and reopened on June 19, 2020. Ocean Downs is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its video lottery terminals ("VLTs") capacity to approximately 70% and its table game capacity to approximately 60%. • Oxford Casino and Hotel ("Oxford") temporarily suspended operations on March 16, 2020 and reopened on July 9, 2020. Oxford is currently restricted to 200 persons on the gaming floor and only allows slot gaming. • Presque Isle Downs and Casino ("Presque Isle") temporarily suspended operations on March 16, 2020 and reopened on June 26, 2020. Presque Isle is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its slot gaming capacity to approximately 60% and its table game capacity to approximately 60%. • Riverwalk Casino Hotel ("Riverwalk") temporarily suspended operations on March 16, 2020 and reopened on May 21, 2020. Riverwalk is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its slot gaming capacity to approximately 66% and its table games capacity to approximately 60%. Managed Properties • Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020. Lady Luck Nemacolin is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its slot gaming capacity to approximately 50% and its table game capacity to approximately 60%. Equity Investments • Rivers Casino Des Plaines ("Rivers Des Plaines") temporarily suspended operations on March 15, 2020 and reopened on July 1, 2020. Rivers Des Plaines is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its slot gaming capacity to approximately 66% and its table games capacity to approximately 60%. • Miami Valley Gaming and Racing ("MVG") temporarily suspended operations on March 14, 2020 and reopened on June 19, 2020. MVG is currently restricted to 50% of patron capacity and has implemented social distancing measures, which has limited its VLT capacity to approximately 50%. All Other • Arlington International Racecourse ("Arlington") temporarily suspended operations of its off-track betting facilities ("OTBs") and simulcast operations on March 16, 2020. Four OTBs reopened on June 5, 2020 and the remaining OTBs reopened on various dates in July 2020. Arlington is scheduled to conduct 30 spectator-free live racing days from July 23, 2020 through September 26, 2020. • Turfway Park conducted nine live racing days from March 12, 2020 through March 21, 2020 and five of these live racing days were run spectator-free. Live racing was canceled for the remaining three scheduled racing days in March 2020. Turfway Park did not have any race days scheduled in the second quarter of 2020. On March 25, 2020, as a result of the temporary closures and suspended operations described above, the Company announced the temporary furlough of employees at its wholly-owned and managed gaming properties and certain racing operations. As the Company has reopened these properties, certain employees have returned to work while others remain on temporary furlough due to the capacity restrictions at these properties. The Company is providing health, dental, vision and life insurance benefits to furloughed employees through July 31, 2020. The Company also implemented a temporary salary reduction for all remaining non-furloughed salaried employees based on a percentage that varies dependent upon the amount of each employee’s salary. The most senior level of executive management has received the largest salary decrease, based on both percentage and dollar amount. Salaries for non-furloughed employees will resume at the annual base salary beginning with their start of the employee's first full pay period subsequent to July 31, 2020. There have been a number of other aspects of our business that have been impacted by COVID-19 during the three and six months ended June 30, 2020, including the following: • The Company rescheduled the 146th Kentucky Oaks and Derby from May 1-2, 2020 to September 4-5, 2020. On June 24, 2020, the Company received approval from the Governor of Kentucky and state public health officials for its plan to allow limited spectators to attend the Kentucky Derby week events held September 1-5, 2020. • Horse racing content for wagering on our TwinSpires business ("TwinSpires") decreased, although handle increased as our customers wagered more on the content that was available. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 34 • Starting in mid-February 2020, U.S. and international sporting events were cancelled, which reduced sports betting content for our customers. Financial Status and Outlook The Company has temporarily reduced its planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and has prioritized its capital investments based on the highest near-term return opportunities in order to maintain financial flexibility. On March 16, 2020, we borrowed $675.4 million on our revolving credit facility (the "Revolver") pursuant to the Credit Agreement (defined below) to provide the Company with additional financial flexibility, which provided the Company with $649.2 million of cash and cash equivalents as of June 30, 2020. On April 28, 2020, the Company entered into a Second Amendment to its Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers its quarterly financial statements and compliance certificate for the fiscal quarter ending June 30, 2021, subject to certain exceptions (the “Financial Covenant Relief Period”), (ii) amends the definition of “Consolidated EBITDA” in the Credit Agreement with respect to the calculation of Consolidated EBITDA for the first two fiscal quarters after the termination of the Financial Covenant Relief Period, (iii) extends certain deadlines and makes certain other amendments to the Company’s financial reporting obligations, (iv) places certain restrictions on restricted payments during the Financial Covenant Relief Period, and (v) amends the definitions of “Material Adverse Effect” and “License Revocation” in the Credit Agreement to take into consideration COVID-19. During the Financial Covenant Relief Period, the Company will not be required to comply with the consolidated total secured net leverage ratio financial covenant and the interest coverage ratio financial covenant. The Company has agreed to a minimum liquidity financial covenant that requires the Company and its restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period. Although the Company was not required to meet its financial covenants under our Credit Agreement at June 30, 2020 (as a result of the Second Amendment to the Credit Agreement), the Company was in compliance with all such applicable covenants at June 30, 2020. We continue to assess the situation at our properties and operations on a daily basis; however, we are unable to determine when we will be able to reopen any properties and / or operations that are closed or that may be closed in the future, the conditions upon which we will reopen, and when the current restrictions in place for our opened properties will be removed. Our third quarter of 2020 financial results will be materially impacted by the rescheduling of the Kentucky Oaks and Derby from the second quarter of 2020 to the third quarter of 2020, by the temporary suspended operations at certain properties, and continued restrictions at the properties that have reopened. Based on our current projected operating cash flow needs, interest and debt repayments, and revised maintenance and project capital expenditures, we believe we have adequate cash to fund our business operations, meet all of our financial commitments, and invest in our prioritized key growth capital projects for well beyond the next twelve months. Kater and Thimmegowda Settlement On May 22, 2020, we entered into an agreement in principle to settle Cheryl Kater v. Churchill Downs Incorporated ("Kater litigation") and Manasa Thimmegowda v. Big Fish Games, Inc. (the “Thimmegowda litigation”). The agreement in principle remains contingent on final court approval by the U.S. District Court for the Western District of Washington (the “District Court”). Under the terms of the settlement, which will take effect only after final court approval of the proposed class settlement: (i) a total of $155.0 million will be paid into a settlement fund. CDI will pay $124.0 million pre-tax of the settlement from its available cash; Aristocrat Technologies, Inc. ("Aristocrat") will pay $31.0 million pre-tax of the settlement; (ii) all members of the nationwide settlement class who do not exclude themselves will release all claims relating to the subject matter of the lawsuits; and (iii) Aristocrat has agreed to specifically release CDI of any and all indemnification obligations under the Stock Purchase Agreement dated November 29, 2017 (the "Stock Purchase Agreement"), among the Company, Aristocrat, and Big Fish Games, Inc. ("Big Fish Games") arising from or related to the Kater and Thimmegowda litigations, including any claims of diminution of value of Big Fish Games and any claims by any person who opts out of the proposed class settlement. The $124.0 million pre-tax settlement related to the Company is included in loss from discontinued operations, net of tax in the accompanying condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2020, and on a pre-tax basis in current liabilities of discontinued operations in the accompanying condensed consolidated balance sheets at June 30, 2020. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 35 Asset Impairment During the quarter ended March 31, 2020, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of its indefinite-lived intangible assets, goodwill, or property and equipment, were impaired ("Trigger Event"), or if there were any other than temporary impairments of our equity investments. Factors considered in this evaluation included, among other things, the amount of the fair value over carrying value from the annual impairment testing performed as of April 1, 2019, changes in carrying values, changes in discount rates, and the impact of temporary property closures due to the COVID-19 pandemic on cash flows. Based on the Company's evaluation, the Company concluded that a Trigger Event occurred related to the Presque Isle gaming rights, trademark, and the reporting unit's goodwill due to the impact and uncertainty of the COVID-19 pandemic and the recent closing of the Presque Isle Transaction (as defined below) in 2019. As a result of the Trigger Event, the Company recognized an impairment in the first quarter of 2020 of $15.0 million for its Presque Isle gaming rights intangible asset and an impairment of $2.5 million for its Presque Isle trademark intangible asset. Segments We manage our operations through three reportable segments as follows: • Churchill Downs The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming. Churchill Downs Racetrack is the home of The Kentucky Derby and conducts live racing during the year. Derby City Gaming is a historical racing machine facility that operates under the Churchill Downs pari-mutuel racing license at its ancillary training facility in Louisville, Kentucky. Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming; simulcast fees earned from other wagering sites; admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services. • Online Wagering The Online Wagering segment includes the revenue and expenses for the TwinSpires business ("TwinSpires") and the online sports betting and iGaming business. TwinSpires operates our online horse racing wagering business on TwinSpires.com, BetAmerica.com and other Company platforms; facilitates high dollar wagering by international customers (Velocity); and provides the platform for horse racing statistical data generated by our information business that provides data and processing services to the equine industry (Brisnet). Our sports betting and iGaming business includes the online BetAmerica sports betting and casino gaming operations. On July 29, 2020, the Company announced a partnership to operate a retail BetAmerica sportsbook at Island Resort & Casino in Harris, Michigan, and a BetAmerica online sportsbook and online iGaming platform available throughout the state of Michigan, subject to gaming license and regulatory approvals. • Gaming The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or jai alai facilities which support the casino license. The Gaming segment has approximately 11,000 slot machines and VLTs and 200 table games located in eight states. The Gaming segment revenue and Adjusted EBITDA includes the following properties: ◦ Calder ◦ Fair Grounds and VSI ◦ Harlow's ◦ Lady Luck Nemacolin management agreement ◦ Ocean Downs ◦ Oxford ◦ Presque Isle ◦ Riverwalk FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 36 The Gaming segment Adjusted EBITDA also includes the Adjusted EBITDA related to the Company’s equity investments in the following: ◦ 61.3% equity investment in Midwest Gaming, the parent company of Rivers Des Plaines in Des Plaines, Illinois ◦ 50% equity investment in MVG The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, retail sports betting, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and / or other miscellaneous operations. We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results: • Arlington • United Tote • Oak Grove Racing and Gaming ("Oak Grove") • Turfway Park • Corporate We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying condensed consolidated statements of comprehensive income. Acquisitions of Presque Isle and Lady Luck Nemacolin On January 11, 2019, we completed the acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc. ("ERI") for cash consideration of $178.9 million (the "Presque Isle Transaction") and $1.6 million of working capital and other purchase price adjustments. On March 8, 2019, the Company assumed management and acquired certain assets related to the management of Lady Luck Nemacolin in Farmington, Pennsylvania, from ERI for cash consideration of $100,000 (the "Lady Luck Nemacolin Transaction"). Acquisition of Certain Ownership Interests of Midwest Gaming Holdings, LLC On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Des Plaines in Des Plaines, Illinois to acquire approximately 42% of Midwest Gaming from affiliates and co-investors of Clairvest Group Inc. ("Clairvest") and members of High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC and Casino Investors, LLC ("Casino Investors") for cash consideration of approximately $406.6 million and $3.5 million of certain transaction costs and working capital adjustments (the "Sale Transaction"). Following the closing of the Sale Transaction, the parties completed a recapitalization transaction on March 6, 2019 (the "Recapitalization"), pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors. As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3%. High Plaines retained ownership of 36.0% of Midwest Gaming and Casino Investors retained ownership of 2.7% of Midwest Gaming. We also recognized a $103.2 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership stake in Midwest Gaming. Turfway Park Acquisition The Company completed the acquisition of Turfway Park from Jack Entertainment LLC ("JACK") and Hard Rock International (“Hard Rock”) on October 9, 2019 for total consideration of $46.0 million in cash ("Turfway Park Acquisition"). Turfway Park is located on 197 acres in Florence, Kentucky. On July 28, 2020, the Company's Board of Directors approved the final design plans for the HRM and grandstand facility at Turfway Park. The final plans reflect a project capital of $200.0 million, which includes the Turfway Park Acquisition costs and other previously approved capital. The 155,000 square foot facility will include a grandstand, sports bar, food offerings, and up to 1,200 historical racing machines. The Turfway Park facility is expected to open in the fourth quarter of 2021. Of the $46.0 million total consideration, $36.0 million, less $0.9 million of working capital and purchase price adjustments, was accounted for as a business combination. The remaining $10.0 million was paid to Hard Rock for the assignment of the FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 37 purchase and sale agreement rights and was accounted for separately from the business combination as an intangible asset and was amortized through expense in the fourth quarter of 2019. The Company has announced plans and has begun to invest up to $38.4 million for an extension of Turfway Park, to be located in Newport, Kentucky, which will include a simulcast area including a separate VIP simulcast room, a 17,000 square foot gaming floor with 500 historical racing machines and a feature bar. The Company plans to open the extension in the fourth quarter of 2020. Key Indicators to Evaluate Business Results and Financial Condition 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 condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("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, GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following: Adjusted EBITDA includes our portion of EBITDA from our equity investments. Adjusted EBITDA excludes: • Transaction expense, net which includes: ◦ Acquisition and disposition related charges; ◦ Calder racing exit costs; and ◦ Other transaction expense, including legal, accounting and other deal-related expense; • Stock-based compensation expense; • Midwest Gaming's impact on our investments in unconsolidated affiliates from: ◦ The impact of changes in fair value of interest rate swaps; and ◦ Recapitalization and transaction costs; • Asset impairments; • Gain on Ocean Downs/Saratoga Transaction; • Legal reserves; • Pre-opening expense; and • Other charges, recoveries and expenses For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying condensed consolidated statements of comprehensive income. Refer to the reconciliation of comprehensive income to Adjusted EBITDA included in this section for additional information. Government Regulations and Legislative Actions We are subject to various federal, state and international laws and regulations that affect our businesses. The ownership, operation and management of our Churchill Downs, Online Wagering, and Gaming segments, as well as our other operations, are subject to regulation under the laws and regulations of each of the jurisdictions in which we operate. The ownership, operation and management of our businesses and properties are also subject to legislative actions at both the federal and state level. The following update on our regulatory and legislative activities should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, including Part I - Item 1, "Business," for a discussion of regulatory and legislative issues. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 38 Specific State Casino Regulations and Legislative Actions Illinois On June 30, 2020, legislation was signed into law by the Governor of Illinois that provides financial relief to the gaming industry. The legislation amends the existing law to allow the lower privilege tax on table games for existing casinos to be effective on July 1, 2020 instead of when a newly authorized casino begins operations. The legislation also provides cash flow relief for existing casinos by extending the payment deadline for new gaming positions from July 1, 2020 to July 1, 2021 and extends the payment period and waives interest for reconciliation payments related to the new gaming positions. The legislation delays the payment deadline for an initial sports wagering license from July 1, 2020 to July 1, 2021 and also establishes a lower privilege tax schedule for a new casino in Chicago, which has been authorized by not yet opened. We believe the legislation will have a positive impact on our business operations. Louisiana Effective July 15, 2020, legislation was signed into law by the Governor of Louisiana that exempts the tax on promotional play for casinos and OTBs. We believe the legislation will have a positive impact on our business operations. Consolidated Financial Results The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 Change 2020 2019 Change Net revenue $ 185.1 $ 477.4 $ (292.3) $ 438.0 $ 742.8 $ (304.8) Operating (loss) income (0.4) 156.4 (156.8) (12.0) 184.4 (196.4) Operating (loss) income margin 0 % 33 % (3) % 25 % Net (loss) income from continuing operations $ (23.6) $ 108.3 $ (131.9) $ (46.2) $ 120.2 $ (166.4) Net (loss) income attributable to Churchill Downs Incorporated (118.8) 107.1 (225.9) (142.2) 118.7 (260.9) Adjusted EBITDA 30.1 215.0 (184.9) 85.4 289.6 (204.2) Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 • Net revenue decreased $292.3 million driven by a $158.9 million decrease from Churchill Downs primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming, a $140.3 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties, and an $18.7 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases were a $25.6 million increase from Online Wagering due to an increase in handle and net revenue per active player at TwinSpires. • Operating (loss) income decreased $156.8 million due to a $116.4 million decrease from Churchill Downs due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming; a $52.7 million decrease from Gaming due to the temporary closure of all Gaming properties; and an $8.8 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases were a $13.0 million increase from Online Wagering due to an increase in handle and net revenue per active players at TwinSpires, a $7.7 million decrease in selling, general and administrative expense related to salaries and related benefits, and a $0.4 million decrease in transaction expense, net. • Net (loss) income from continuing operations decreased $131.9 million. The following items impacted comparability of the Company's second quarter of 2020 net (loss) income from continuing operations compared to the prior year quarter: a $4.8 million after-tax expense decrease related to our equity portion of the non-cash change in fair value of Midwest Gaming's interest rate swaps and a $0.6 million after-tax decrease of our equity portion of Midwest Gaming's recapitalization and transaction costs in the second quarter of 2019 that did not recur in the current year quarter. Partially offsetting these decreases were a $0.6 million non-cash tax impact related to the re-measurement of our net deferred tax liabilities in the second quarter of 2019 that did not recur in the current year quarter based on an increase in revenue related to states with higher tax rates and a $0.6 million after-tax increase in expenses related to lower transaction, pre-opening and other expenses. Excluding these items, net (loss) income from continuing operations decreased $136.1 million primarily due to a $135.2 million after-tax decrease driven by the results of our operations FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 39 and equity income from our unconsolidated affiliates and a $0.9 million after-tax increase in interest expense associated with higher outstanding debt balances. • Net (loss) income attributable to Churchill Downs Incorporated decreased $225.9 million due to a $131.9 million decrease in net (loss) income from continuing operations discussed above and a $94.0 million increase in net loss from discontinued operations. During the second quarter of 2020, we entered into a settlement for the Kater and Thimmegowda litigations for $124.0 million ($95.0 million after-tax) which increased our net loss from discontinued operations compared to the prior year quarter. • Adjusted EBITDA decreased $184.9 million driven by a $117.4 million decrease from Churchill Downs primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming; a $78.1 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties; and a $6.0 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases was a $16.6 million increase from Online Wagering from increased handle and net revenue per active players at TwinSpires. Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 • Net revenue decreased $304.8 million driven by a $161.5 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties; a $156.4 million decrease from Churchill Downs primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming; and a $16.7 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases was a $29.8 million increase from Online Wagering due to an increase in handle and net revenue per active player at TwinSpires. • Operating (loss) income decreased $196.4 million due to a $117.1 million decrease from Churchill Downs due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming; a $73.7 million decrease from Gaming due to the temporary closure of all Gaming properties; a $17.5 million non-cash impairment of the Presque Isle gaming rights and trademark intangible assets; and a $12.4 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases were a $12.2 million increase from Online Wagering due to an increase in handle and net revenue per active players at TwinSpires, an $8.5 million decrease in selling, general and administrative expense related to salaries and related benefits, and a $3.6 million decrease in transaction expense, net. • Net (loss) income from continuing operations decreased $166.4 million. The following items impacted comparability of the Company's net income from continuing operations during the six months ended June 30, 2020 compared to the prior year period: a $12.0 million non-cash after-tax impact related to our impairment of the Presque Isle intangible assets and a $3.0 million after-tax expense increase related to our equity portion of the non-cash change in fair value of Midwest Gaming's interest rate swaps. Partially offsetting these decreases were a $3.5 million after-tax decrease of our equity portion of Midwest Gaming's recapitalization and transaction costs in the second quarter of 2019 that did not recur in 2020, a $2.2 million non-cash tax impact related to the re-measurement of our net deferred tax liabilities in 2019 that did not recur in 2020 based on an increase in revenue related to states with higher tax rates, and a $1.9 million after-tax decrease in expenses related to lower transaction, pre-opening and other expenses. Excluding these items, net income from continuing operations decreased $159.0 million primarily due to a $154.1 million after-tax decrease driven by the results of our operations and equity income from our unconsolidated affiliates and a $4.9 million after-tax increase in interest expense associated with higher outstanding debt balances. • Net (loss) income attributable to Churchill Downs Incorporated decreased $260.9 million due to a $166.4 million decrease in net (loss) income from continuing operations discussed above and a $94.6 million increase in net loss from discontinued operations, partially offset by a $0.1 million increase from our net loss attributable to our noncontrolling interest. During the second quarter of 2020, we settled the Kater and Thimmegowda litigations for $124.0 million pre-tax ($95.0 million after-tax) which increased our net loss from discontinued operations compared to the prior year period. • Adjusted EBITDA decreased $204.2 million driven by a $116.9 million decrease from Churchill Downs primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at Derby City Gaming; a $93.9 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties; and an $8.1 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases was a $14.7 million increase from Online Wagering from increased handle and net revenue per active players at TwinSpires. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 40 Financial Results by Segment Net Revenue by Segment The following table presents net revenue for our segments, including intercompany revenue: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 Change 2020 2019 Change Churchill Downs: Churchill Downs Racetrack $ 22.5 $ 171.9 $ (149.4) $ 24.7 $ 174.6 $ (149.9) Derby City Gaming 7.7 21.2 (13.5) 29.3 39.9 (10.6) Total Churchill Downs 30.2 193.1 (162.9) 54.0 214.5 (160.5) Online Wagering: TwinSpires 120.3 95.9 24.4 187.3 159.2 28.1 Online Sports Betting and iGaming 1.3 0.1 1.2 2.0 0.2 1.8 Total Online Wagering 121.6 96.0 25.6 189.3 159.4 29.9 Gaming: Fair Grounds and VSI 11.1 30.9 (19.8) 44.2 69.7 (25.5) Presque Isle 2.0 37.3 (35.3) 29.6 67.0 (37.4) Calder 5.7 25.6 (19.9) 27.5 51.0 (23.5) Oxford 0.1 26.3 (26.2) 20.2 50.2 (30.0) Ocean Downs 3.1 21.9 (18.8) 17.9 40.3 (22.4) Riverwalk 7.4 14.2 (6.8) 20.1 30.5 (10.4) Harlow's 5.6 13.3 (7.7) 17.3 28.6 (11.3) Lady Luck Nemacolin 2.3 8.3 (6.0) 9.6 10.6 (1.0) Total Gaming 37.3 177.8 (140.5) 186.4 347.9 (161.5) All Other 6.2 25.4 (19.2) 23.7 40.1 (16.4) Eliminations (10.2) (14.9) 4.7 (15.4) (19.1) 3.7 Net Revenue $ 185.1 $ 477.4 $ (292.3) $ 438.0 $ 742.8 $ (304.8) Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 • Churchill Downs revenue decreased $162.9 million due to a $149.4 million decrease from Churchill Downs Racetrack primarily due to the rescheduling of the 146th Kentucky Oaks and Derby, and a $13.5 million decrease at Derby City Gaming due to the temporary suspension of operations. • Online Wagering revenue increased $25.6 million from the prior year quarter primarily due to a $24.4 million increase at TwinSpires. U.S. thoroughbred industry handle decreased 18.9% during the second quarter of 2020 compared to the prior year quarter. Although horse racing content for wagering decreased, TwinSpires handle grew $100.7 million, or 21.6%, compared to the prior year, despite the rescheduling of the 146th Kentucky Oaks and Derby, as our customers wagered more on the content that was available. Active players decreased 55.5% primarily due to the rescheduling of the 146th Kentucky Oaks and Derby; however, net revenue per active player increased 191.9%. Our online sports betting and iGaming net revenues increased $1.2 million compared to the prior year quarter primarily due to a full quarter of iGaming results in Pennsylvania for the second quarter of 2020 compared to the prior year quarter. Sports betting net revenue growth was impacted by the suspension of U.S. and international sporting events beginning in mid-February 2020. • Gaming revenue decreased $140.5 million primarily due to the temporary suspension of operations of all of our Gaming properties and the loss of revenue at each property. • All Other revenue decreased $19.2 million primarily due to a $15.4 million decrease at Arlington due to the temporary suspension of operations and a $3.9 million decrease at United Tote due to certain customers suspending services due to COVID-19. Partially offsetting these decreases was a $0.1 million increase from other sources. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 41 Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 • Churchill Downs revenue decreased $160.5 million due to a $149.9 million decrease from Churchill Downs Racetrack primarily due to the rescheduling of the 146th Kentucky Oaks and Derby, and a $10.6 million decrease at Derby City Gaming due to the temporary suspension of operations. • Online Wagering revenue increased $29.9 million from the prior year period primarily due to a $28.1 million increase at TwinSpires. U.S. thoroughbred industry handle decreased 10.9% during the six months ended June 30, 2020 compared to the prior year period. Although horse racing content for wagering decreased, TwinSpires handle grew $126.1 million, or 16.3%, compared to the prior year period, despite the rescheduling of the 146th Kentucky Oaks and Derby, as our customers wagered more on the content that was available. Active players decreased 52.1% due to the rescheduling of the 146th Kentucky Oaks and Derby; however, net revenue per active player increased 153.2%. Our online sports betting and iGaming net revenues increased $1.8 million compared to the prior year period primarily due to a full six months of iGaming results in Pennsylvania and New Jersey for 2020 compared to the prior year period. Sports betting net revenue growth was impacted by the suspension of U.S. and international sporting events beginning in mid-February 2020. • Gaming revenue decreased $161.5 million primarily due to the temporary suspension of operations of all of our Gaming properties and the loss of revenue at each property. • All Other revenue decreased $16.4 million primarily due to a $17.2 million decrease at Arlington due to the temporary suspension of operations and a $4.6 million decrease at United Tote due to certain customers suspending services due to COVID-19. Partially offsetting these decreases was a $5.4 million increase from the Turfway Park Acquisition in October 2019. Consolidated Operating Expense The following table is a summary of our consolidated operating expense: Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 Change 2020 2019 Change Taxes and purses $ 36.6 $ 113.1 $ (76.5) $ 112.3 $ 191.3 $ (79.0) Salaries and benefits 20.8 47.5 (26.7) 66.2 84.3 (18.1) Content expense 50.5 41.8 8.7 82.0 73.9 8.1 Selling, general and administrative expense 22.4 30.1 (7.7) 46.5 55.0 (8.5) Depreciation and amortization 22.1 21.5 0.6 44.1 42.3 1.8 Marketing and advertising 3.8 13.7 (9.9) 13.6 20.9 (7.3) Transaction expense, net 0.2 0.6 (0.4) 0.5 4.1 (3.6) Impairment of intangible assets — — — 17.5 — 17.5 Other operating expense 29.1 52.7 (23.6) 67.3 86.6 (19.3) Total expense $ 185.5 $ 321.0 $ (135.5) $ 450.0 $ 558.4 $ (108.4) Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 Significant items affecting comparability of consolidated operating expense include: • Taxes and purses decreased $76.5 million driven by the temporary suspension of all operations at our Gaming properties and the related decrease in net revenue and the rescheduling of the 146th Kentucky Oaks and Derby. • Salaries and benefits expense decreased $26.7 million driven primarily by temporarily furloughing certain employees and reducing salaries for all remaining non-furloughed salaried employees, and rescheduling the 146th Kentucky Oaks and Derby. • Content expense increased $8.7 million primarily due to an increase in certain host fees and source market fees for TwinSpires. • Selling, general and administrative expense decreased $7.7 million primarily from a reduction in accrued bonuses and a decrease in stock-based compensation related to performance share units. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 42 • Depreciation and amortization expense increased $0.6 million primarily driven by capital expenditures placed into service for Churchill Downs Racetrack and Derby City Gaming, the Lady Luck Nemacolin Transaction, and the Turfway Park Acquisition. • Marketing and advertising expense decreased $9.9 million primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at our brick and mortar properties, partially offset by an increase in our online sports betting and iGaming marketing spend. • Other operating expenses include maintenance, utilities, food and beverage costs, property taxes, insurance, and other operating expenses. Other operating expense decreased $23.6 million primarily driven by the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at our brick and mortar properties. Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 Significant items affecting comparability of consolidated operating expense include: ◦ Taxes and purses decreased $79.0 million driven by the temporary suspension of all operations at our Gaming properties and the related decrease in net revenue and the rescheduling of the 146th Kentucky Oaks and Derby. ◦ Salaries and benefits expense decreased $18.1 million driven primarily by temporarily furloughing certain employees and reducing salaries for all remaining non-furloughed salaried employees, and rescheduling the 146th Kentucky Oaks and Derby. ◦ Content expense increased $8.1 million primarily due to an increase in certain host fees and source market fees for TwinSpires. ◦ Selling, general and administrative expense decreased $8.5 million primarily from a reduction in accrued bonuses and a decrease in stock-based compensation related to performance share units. ◦ Depreciation and amortization expense increased $1.8 million primarily driven by capital expenditures placed into service for Churchill Downs Racetrack and Derby City Gaming, the Lady Luck Nemacolin Transaction, and the Turfway Park Acquisition. ◦ Marketing and advertising expense decreased $7.3 million primarily due to the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at our brick and mortar properties, partially offset by an increase in our online sports betting and iGaming marketing spend. ◦ Transaction expense, net was nominal for the six months ended June 30, 2020. In the six months ended June 30, 2019, transaction expense, net was related to the closings of the Presque Isle and Lady Luck Nemacolin Transactions. ◦ Impairment of intangible assets increased $17.5 million driven by a $15.0 million non-cash impairment charge related to Presque Isle's gaming rights and a $2.5 million non-cash impairment charge related to Presque Isle's trademark. ◦ Other operating expenses include maintenance, utilities, food and beverage costs, property taxes, insurance, and other operating expenses. Other operating expense decreased $19.3 million primarily driven by the rescheduling of the 146th Kentucky Oaks and Derby and the temporary suspension of operations at our brick and mortar properties, partially offset by the Turfway Park Acquisition. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 43 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 GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results. Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 Change 2020 2019 Change Churchill Downs $ 4.5 $ 121.9 $ (117.4) $ 6.4 $ 123.3 $ (116.9) Online Wagering 38.8 22.2 16.6 53.8 39.1 14.7 Gaming (2.0) 76.1 (78.1) 47.0 140.9 (93.9) Total Segment Adjusted EBITDA 41.3 220.2 (178.9) 107.2 303.3 (196.1) All Other (11.2) (5.2) (6.0) (21.8) (13.7) (8.1) Total Adjusted EBITDA $ 30.1 $ 215.0 $ (184.9) $ 85.4 $ 289.6 $ (204.2) Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019 • Churchill Downs Adjusted EBITDA decreased $117.4 million due to a $111.9 million decrease from Churchill Downs Racetrack primarily due to the rescheduling of the 146th Kentucky Oaks and Derby, and a $5.5 million decrease at Derby City Gaming due to the temporary suspension of operations. • Online Wagering Adjusted EBITDA increased $16.6 million primarily due to an $18.3 million increase from TwinSpires due to an increase in handle and net revenue per active player, partially offset by a $1.7 million decrease from increased marketing spend and costs associated with the continued build-out of our online sports betting and iGaming operations. • Gaming Adjusted EBITDA decreased $78.1 million driven by a $50.2 million decrease at our wholly-owned Gaming properties from the decrease in net revenue and a $27.9 million decrease from our equity investments, both of which were due to the temporary suspension of operations of all of our Gaming properties. • All Other Adjusted EBITDA decreased $6.0 million primarily from a $4.4 million decrease from Arlington due to the temporary suspension of operations, a $2.1 million decrease from United Tote due to a decrease in net revenue, and a $0.7 million decrease due to unfavorable results from the Turfway Park Acquisition. Partially offsetting these decreases was a $1.2 million increase at our corporate operations primarily due to a reduction in accrued bonuses. Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019 • Churchill Downs Adjusted EBITDA decreased $116.9 million due to a $113.0 million decrease from Churchill Downs Racetrack primarily due to the rescheduling of the 146th Kentucky Oaks and Derby, and a $3.9 million decrease at Derby City Gaming due to the temporary suspension of operations. • Online Wagering Adjusted EBITDA increased $14.7 million primarily due to a $20.5 million increase from TwinSpires due to an increase in handle and net revenue per active player, partially offset by a $5.8 million decrease from increased marketing spend and costs associated with the continued build-out of our online sports betting and iGaming operations. • Gaming Adjusted EBITDA decreased $93.9 million driven by a $71.4 million decrease at our wholly-owned Gaming properties from the decrease in net revenue and a $22.5 million decrease from our equity investments, both of which were due to the temporary suspension of operations of all of our Gaming properties. • All Other Adjusted EBITDA decreased $8.1 million primarily from a $4.8 million decrease from Arlington due to the temporary suspension of operations, a $3.3 million decrease from United Tote due to a decrease in net revenue, and a $1.7 million decrease due to unfavorable results from the Turfway Park Acquisition. Partially offsetting these decreases was a $1.7 million increase at our corporate operations primarily due to a reduction in accrued bonuses. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 44 Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA Three Months Ended June 30, Six Months Ended June 30, (in millions) 2020 2019 Change 2020 2019 Change Net (loss) income and comprehensive (loss) income attributable to CDI $ (118.8) $ 107.1 $ (225.9) $ (142.2) $ 118.7 $ (260.9) Net loss attributable to noncontrolling interest — — — 0.1 — 0.1 Net (loss) income before noncontrolling interest (118.8) 107.1 (225.9) (142.3) 118.7 (261.0) Loss from discontinued operations, net of tax 95.2 1.2 94.0 96.1 1.5 94.6 (Loss) income from continuing operations, net of tax (23.6) 108.3 (131.9) (46.2) 120.2 (166.4) Additions: Depreciation and amortization 22.1 21.5 0.6 44.1 42.3 1.8 Interest expense 20.3 19.4 0.9 39.6 33.1 6.5 Income tax (benefit) provision (7.9) 38.6 (46.5) (19.5) 45.1 (64.6) EBITDA $ 10.9 $ 187.8 $ (176.9) $ 18.0 $ 240.7 $ (222.7) Adjustments to EBITDA: Selling, general and administrative: Stock-based compensation expense $ 6.1 $ 7.4 $ (1.3) $ 10.4 $ 12.1 $ (1.7) Other charges (0.1) — (0.1) (0.1) 0.5 (0.6) Pre-opening expense and other expense 1.9 0.9 1.0 3.6 2.2 1.4 Impairment of intangible assets — — — 17.5 — 17.5 Transaction expense, net 0.2 0.6 (0.4) 0.5 4.1 (3.6) Other income, expense: Interest, depreciation and amortization expense related to equity investments 9.8 9.7 0.1 19.3 13.2 6.1 Changes in fair value of Midwest Gaming's interest rate swaps 1.3 7.9 (6.6) 16.2 12.2 4.0 Midwest Gaming's recapitalization and transactions costs — 0.8 (0.8) — 4.7 (4.7) Other — (0.1) 0.1 — (0.1) 0.1 Total adjustments to EBITDA 19.2 27.2 (8.0) 67.4 48.9 18.5 Adjusted EBITDA $ 30.1 $ 215.0 $ (184.9) $ 85.4 $ 289.6 $ (204.2) Consolidated Balance Sheet The following table is a summary of our overall financial position: (in millions) June 30, 2020 December 31, 2019 Change Total assets $ 3,216.0 $ 2,551.0 $ 665.0 Total liabilities $ 2,893.3 $ 2,040.0 $ 853.3 Total shareholders' equity $ 322.7 $ 511.0 $ (188.3) Significant items affecting the comparability of our condensed consolidated balance sheets include: FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 45 • Total assets increased $665.0 million driven by a $553.0 million increase in cash and cash equivalents primarily due to borrowings under our Credit Agreement; a $105.9 million increase in property and equipment, net primarily due to the construction of Oak Grove; a $22.3 million increase in income taxes receivable due to current year income tax benefit; and a $21.9 million increase in all other assets. Partially offsetting these increases were a $19.1 million decrease in investment in and advances to unconsolidated affiliates due to current year equity in loss of unconsolidated affiliates and a $19.0 million decrease in other intangible assets, net primarily related to the impairment of Presque Isle's intangible assets. • Total liabilities increased $853.3 million primarily driven by a $693.1 million increase in long-term debt, net primarily due to borrowings under our Credit Agreement; a $124.0 million increase in current liabilities of discontinued operations due to the Kater and Thimmegowda litigations settlement; a $48.0 million increase in accounts payable primarily due to the construction of Oak Grove; and a $47.3 million increase in current deferred revenue due to advanced sales associated with the 2020 Kentucky Derby and Oaks. Partially offsetting these increases were a $24.8 million decrease in deferred income taxes primarily due to the Kater and Thimmegowda litigations settlement; a $23.5 million decrease in dividends payable due to the payment of our annual dividends in January 2020; and a $10.8 million decrease in all other liabilities. • Total shareholders’ equity decreased $188.3 million driven by a $142.3 million current year net loss, $27.9 million in repurchases of common stock, $15.1 million in taxes paid related to net share settlement of stock awards, and $12.7 million in cash settlement for stock awards. Partially offsetting these decreases was a $9.7 million increase from all other equity components. Liquidity and Capital Resources The following table is a summary of our liquidity and cash flows: (in millions) Six Months Ended June 30, Cash flows from: 2020 2019 Change Operating activities $ 76.9 $ 214.3 $ (137.4) Investing activities $ (131.8) $ (653.9) $ 522.1 Financing activities $ 611.4 $ 511.8 $ 99.6 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. Six Months Ended June 30, 2020, Compared to the Six Months Ended June 30, 2019 • Cash provided by operating activities decreased $137.4 million driven by a $178.9 million decrease in operating (loss) income related to continuing operations, net of the $17.5 million non-cash impairment of Presque Isle's intangible assets, a $16.1 million increase in cash paid for interest, a $6.7 million decrease in distributions from unconsolidated affiliates, and a $16.1 million decrease from all other operating activities. Partially offsetting these decreases was an $80.4 million increase in deferred revenue related to the rescheduling of the 146th Kentucky Oaks and Derby. • Cash used in investing activities decreased $522.1 million driven by a $410.1 million decrease in investments in and advances to unconsolidated affiliates related to our equity investment in Midwest Gaming in the first quarter of 2019, a $172.1 million decrease due to the Presque Isle Transaction in the first quarter of 2019, a $22.1 million decrease due to costs associated with the acquisition of our Pennsylvania gaming license in the second quarter of 2019, and a $3.3 million decrease in cash used in all other investing activities. Partially offsetting these decreases was an $85.5 million increase in capital project expenditures primarily related to the construction of Oak Grove. • Cash provided by financing activities increased $99.6 million primarily driven by a $94.7 million increase in net borrowings from long-term debt, a $17.1 million decrease in common stock repurchases, and a $0.5 million increase from all other financing activities. Partially offsetting these increases was a $12.7 million increase in cash settlement of stock awards. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 46 Credit Facilities and Indebtedness The following table presents our debt outstanding and debt issuance costs: (in millions) June 30, 2020 December 31, 2019 Change Term Loan B due 2024 $ 390.0 $ 392.0 $ (2.0) Revolver 694.6 — 694.6 2027 Senior Notes 600.0 600.0 — 2028 Senior Notes 500.0 500.0 — Total debt 2,184.6 1,492.0 692.6 Current maturities of long-term debt 4.0 4.0 — Total debt, net of current maturities 2,180.6 1,488.0 692.6 Issuance cost and fees (16.7) (18.1) 1.4 Total debt, net of current maturities $ 2,163.9 $ 1,469.9 $ 694.0 Credit Agreement On December 27, 2017, we entered into the Credit Agreement (as defined below) with a syndicate of lenders. The Credit Agreement provides for a $700.0 million revolving credit facility (the "Revolver") and a $400.0 million Senior Secured Term Loan B (the "Term Loan B" and together with the Revolver, the "Credit Agreement"). Included in the maximum borrowing of $700.0 million under the Revolver is a letter of credit sub facility not to exceed $50.0 million and a swing line commitment up to a maximum principal amount of $50.0 million. The Credit Amendment is secured by substantially all of the wholly-owned assets of the Company. The Revolver bears interest at LIBOR plus a spread as determined by the Company's consolidated total net leverage ratio and the Term Loan B bears interest at LIBOR plus 200 basis points. The Credit Agreement contains certain customary affirmative and negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, and transactions with affiliates. The Credit Agreement also contains financial covenants providing for the maintenance of a maximum consolidated secured net leverage ratio and maintenance of a minimum consolidated interest coverage ratio. Although the Company was not required to meet its financial covenants under our Credit Agreement at June 30, 2020 (as a result of the Second Amendment to the Credit Agreement), the Company was in compliance with all such applicable covenants at June 30, 2020. The Term Loan B requires quarterly payments of 0.25% of the original $400.0 million balance, or $1.0 million per quarter. The Term Loan B may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement. The Company is required to pay a commitment fee on the unused portion of the Revolver determined by a pricing grid based on the consolidated total net leverage ratio of the Company. For the period ended June 30, 2020, the Company's commitment fee rate was 0.30%. As a result of the Company's Credit Agreement, the Company capitalized $2.0 million of debt issuance costs associated with the Revolver which will be amortized as interest expense over 5 years. The Company also capitalized $5.4 million of deferred financing costs associated with the Term Loan B which will be amortized as interest expense over 7 years. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 47 On March 16, 2020, the Company entered into the First Amendment (the “First Amendment”) to its Credit Agreement. The First Amendment extends the maturity for the Revolver to at least September 27, 2024, which is 91 days prior to the latest maturity date of the Company’s term loan facility on December 27, 2024. Previously, the maturity date of the Revolver was December 27, 2022. The interest rates applicable to the Company’s borrowings under the Credit Agreement are LIBOR-based plus a spread, determined by the Company’s consolidated total net leverage ratio. The First Amendment, among other things, lowers the upper limit of the applied spreads with respect to revolving loans from 2.25% to 1.75% and for commitment fees with respect thereto from 0.35% to 0.30%, and generally offers a reduced pricing schedule for outstanding borrowings and commitment fees with respect to the Revolver across all other leverage pricing levels. The interest rates applicable to borrowings under the facilities are LIBOR-based plus a spread, determined by the Company’s consolidated total net leverage ratio. The First Amendment does not alter the Company’s borrowing capacity. The Company capitalized $2.0 million of debt issuance costs associated with the First Amendment, which are amortized as interest expense over the remaining duration of the Credit Agreement. On March 16, 2020, we borrowed $675.4 million on our Revolver to provide the Company with additional financial flexibility, which provided the Company with $649.2 million of cash and cash equivalents as of June 30, 2020. The Company was in compliance with all applicable covenants in the Credit Agreement at June 30, 2020. On April 28, 2020, the Company entered into the Second Amendment to its Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers its quarterly financial statements and compliance certificate for the fiscal quarter ending June 30, 2021, subject to certain exceptions (the “Financial Covenant Relief Period”), (ii) amends the definition of “Consolidated EBITDA” in the Credit Agreement with respect to the calculation of Consolidated EBITDA for the first two fiscal quarters after the termination of the Financial Covenant Relief Period, (iii) extends certain deadlines and makes certain other amendments to the Company’s financial reporting obligations, (iv) places certain restrictions on restricted payments during the Financial Covenant Relief Period, and (v) amends the definitions of “Material Adverse Effect” and “License Revocation” in the Credit Agreement to take into consideration COVID-19. During the Financial Covenant Relief Period, the Company will not be required to comply with the consolidated total secured net leverage ratio financial covenant and the interest coverage ratio financial covenant. The Company has agreed to a minimum liquidity financial covenant that requires the Company and its restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period. 2027 Senior Notes On March 25, 2019, we completed an offering of $600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature on April 1, 2027 (the "2027 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2027 Senior Notes were issued at par, with interest payable on April 1 st and October 1 st of each year, commencing on October 1, 2019. The Company used the net proceeds from the offering to repay our outstanding balance on the Revolver portion of our Credit Agreement. In connection with the offering, we capitalized $8.9 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes. The 2027 Senior Notes were issued pursuant to an indenture, dated March 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2027 Senior Notes at any time prior to April 1, 2022, at a price equal to 100% of the principal amount of the 2027 Senior Notes redeemed plus an applicable make-whole premium. On or after such date, the Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture. In addition, at any time prior to April 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 Senior Notes at a redemption price equal to 105.50% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2027 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates. In connection with the issuance of the 2027 Senior Notes, the Company and the Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020 48 2028 Senior Notes On December 27, 2017, we completed an offering of $500.0 million in aggregate principal amount of 4.75% Senior Unsecured Notes that mature on January 15, 2028 (the "2028 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2028 Senior Notes were issued at par, with interest payable on January 15th and July 15th of each year, commencing on July 15, 2018. The Company used the net proceeds from the offering to repay a portion of our $600.0 million 5.375% Senior Unsecured Notes. In connection with the offering, we capitalized $7.7 million of debt issuance costs which are being amortized as interest expense over the term of the 2028 Senior Notes. The 2028 Senior Notes were issued pursuant to an indenture, dated December 27, 2017 (the "2028 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2028 Senior Notes at any time prior to January 15, 2023, at a price equal to 100% of the principal amount of the 2028 Senior Notes redeemed plus an applicable make-whole premium. On or after such date the Company may redeem some or all of the 2028 Senior Notes at redemption prices set forth in the 2028 Indenture. In addition, at any time prior to January 15, 2021, the Company may redeem up to 40% of the aggregate principal amount of the 2028 Senior Notes at a redemption price equal to 104.75% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2028 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) and enter into transactions with affiliates. In connection with the issuance of the 2028 Senior Notes, the Company and the Guarantors entered into a Registration Rights Agreement to register any 2028 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from December 27, 2017. Contractual Obligations Our commitments to make future payments as of June 30, 2020, are estimated as follows: (in millions) July 1 to December 31, 2020 2021-2022 2023-2024 Thereafter Total Term Loan B $ 2.0 $ 8.0 $ 380.0 $ — $ 390.0 Interest on Term Loan B (1) 4.0 15.8 15.5 — 35.3 Revolver — — — 694.6 694.6 Interest on Revolver 7.2 28.1 28.1 2.9 66.3 2027 Senior Notes — — — 600.0 600.0 2028 Senior Notes — — — 500.0 500.0 Interest on 2027 Senior Notes 16.5 66.0 66.0 82.5 231.0 Interest on 2028 Senior Notes 11.9 47.5 47.5 83.1 190.0 Operating leases 2.9 9.7 7.6 9.1 29.3 Total $ 44.5 $ 175.1 $ 544.7 $ 1,972.2 $ 2,736.5 (1) Interest includes the estimated contractual payments under our Credit Agreement assuming no change in the weighted average borrowing rate of 3.60% which was the rate in place as of June 30, 2020. As of June 30, 2020, we had approximately $1.7 million of tax liabilities related to unrecognized tax benefits.