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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-26 · 248 added, 202 removed, 249 unchanged (64% of the section changed)

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Discussion regarding our financial condition and results of operations for 2019 as compared to 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020.

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.

The Company is an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event, the Kentucky Derby.

We own and operate three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines ("HRMs") in Kentucky.

We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing, sports and iGaming in the U.S.

and we have seven retail sportsbooks.

We are also a leader in brick-and-mortar casino gaming in eight states with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games.

We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.

During the first quarter of 2019, we realigned our operating segments to reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources.

For financial reporting purposes, we aggregate our operating segments into three reportable segments as follows:

Churchill Downs, Online Wagering and Gaming.

Our operating segments reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources.

For additional information, refer to Note 21 to the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

For financial reporting purposes, we aggregate our operating segments into three reportable segments as follows:

Impact of the COVID-19 Global Pandemic

For a discussion of the impact of the COVID-19 global pandemic on our Company, refer to "Impact of the COVID-19 Global Pandemic", in Part I.

Business section.

Below is a summary of the temporary closures and the current status and restrictions of each property:

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 an HRM facility that operates under the Churchill Downs pari-mutuel racing license at its auxiliary 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 our TwinSpires business ("TwinSpires") and our online sports betting and iGaming business.

TwinSpires operates our online horse racing wagering business on TwinSpires.com, BetAmerica.com, and other white-label platforms;

facilitates high dollar wagering by international customers ("Velocity");

and provides the Bloodstock Research Information Services ("BRIS") platform for horse racing statistical data.

Our sports betting and iGaming business operates the BetAmerica sports betting and casino iGaming platform in multiple states, including Mississippi, New Jersey, Indiana, Pennsylvania, and Arkansas.

The mobile and online BetAmerica sports betting and casino iGaming results are included in the Online Wagering segment and the retail operations are included in the Gaming segment.

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 Casino and Racing ("Calder")

• Churchill Downs Racetrack conducted 65 live racing days during 2020, including 41 spectator-free days in the second and third quarters of 2020, including the 146th Kentucky Oaks and Derby on September 4-5, 2020.

Churchill Downs Racetrack suspended simulcast operations on March 15, 2020 and reopened on October 1, 2020.

• Derby City Gaming temporarily suspended operations on March 15, 2020 and reopened on June 8, 2020.

Derby City Gaming is currently restricted to 33% of patron capacity.

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 and reopened on August 31, 2020.

Calder currently has a temporary ban on food and beverage on the gaming floor and has certain operating hour restrictions.

• Fair Grounds Slots, Fair Grounds Race Course and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI"):

◦ Harlow’s Casino Resort and Spa ("Harlow's")

◦ Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") management agreement

◦ Ocean Downs Casino and Racetrack ("Ocean Downs")

◦ Oxford Casino and Hotel ("Oxford")

◦ Presque Isle Downs and Casino ("Presque Isle")

◦ Riverwalk Casino Hotel ("Riverwalk")

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 Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois ("Rivers Des Plaines")

◦ 50% equity investment in Miami Valley Gaming and Racing ("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 International Race Course ("Arlington")

• United Tote

• Oak Grove Racing and Gaming ("Oak Grove")

• Turfway Park

We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying consolidated statements of comprehensive income.

The prior year results were reclassified to conform to this presentation.

Effective January 1, 2019, the Company does not allocate corporate and other related expenses to our segments in the accompanying consolidated statements of comprehensive income.

The prior year results in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.

Key 2019 Transactions

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").

For additional information on the Presque Isle Transaction and the Lady Luck Nemacolin Transactions, refer to Note 3 to the notes to consolidated financial statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Acquisition of Certain Ownership Interests of Rivers Des Plaines

On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines, 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.

For additional information on the Sale Transaction and Recapitalization, refer to Item 8.

Financial Statements and Supplementary Data.

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 million in cash ("Turfway Park Acquisition").

Turfway Park is located on 197 acres in Florence, Kentucky.

The Company has announced plans and has begun to invest up to $150.0 million (including the Turfway Park Acquisition total consideration of $46.0 million) in a state-of-the-art live and historical thoroughbred racing facility at Turfway Park.

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 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.

Refer to Item 8.

Financial Statements and Supplementary Data, for additional information on the Turfway Park Acquisition.

On January 25, 2019, the Company distributed the additional shares resulting from a previously announced three-for-one split (the "Stock Split") of the Company's common stock for shareholders of record as of January 11, 2019.

Our common stock began trading at the split-adjusted price on January 28, 2019.

All share and per-share amounts in the Company’s consolidated financial statements and related notes in Item 8.

Financial Statements and Supplementary Data have been retroactively adjusted for prior periods to reflect the effects of the Stock Split.

◦ Fair Grounds Slots temporarily suspended operations on March 16, 2020 and reopened on June 13, 2020, and is currently restricted to 50% of patron capacity;

◦ Fair Grounds Race Course conducted 73 live racing days during 2020, including 28 spectator-free days from March 13, 2020 through December 31, 2020;

◦ VSI temporarily suspended operations on March 16, 2020 and reopened on May 18, 2020, and is currently restricted to 50% of patron capacity.

• 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.

• 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.

• Oxford Casino and Hotel ("Oxford") temporarily suspended operations on March 16, 2020 and reopened on July 9, 2020.

Oxford has certain operating hour restrictions and is currently restricted to 200 persons on the gaming floor.

• Presque Isle Downs and Casino ("Presque Isle") temporarily suspended operations on March 16, 2020 and reopened on June 26, 2020.

Operations were temporarily suspended again on December 12, 2020 and reopened on January 4, 2021.

Presque Isle currently has a temporary ban on alcohol and smoking on the gaming floor and is currently restricted to 50% of patron capacity.

• 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.

Managed Properties

• Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020.

Operations were temporarily suspended again on December 12, 2020 and reopened on January 4, 2021.

Lady Luck Nemacolin currently has a temporary ban on alcohol and smoking on the gaming floor and is currently restricted to 50% of patron capacity.

Equity Investments

• Rivers Casino Des Plaines ("Rivers Des Plaines") temporarily suspended operations on March 15, 2020 and reopened on July 1, 2020.

Operations were temporarily suspended on November 20, 2020 and remained suspended as of December 31, 2020.

Rivers Des Plaines reopened on January 19, 2021.

Rivers Des Plaines currently has certain operating hour restrictions and temporary bans on food and beverage within the facility and is restricted to 50% of patron capacity.

• Miami Valley Gaming and Racing ("MVG") temporarily suspended operations on March 14, 2020 and reopened on June 19, 2020.

MVG is currently restricted to 63% of patron capacity.

• Arlington International Racecourse ("Arlington") temporarily suspended operations of the Company's 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 conducted 18 spectator-free live racing days and 12 live racing days with patron restrictions of 300 persons during 2020.

• Turfway Park conducted nine live racing days in March 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 also ran 13 live racing dates in December 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 the Company's 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 provided health, dental, vision and life insurance benefits to furloughed employees through July 31, 2020 and during the subsequent property closure periods.

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 received the largest salary decrease, based on both percentage and dollar amount.

Salaries for non-furloughed employees resumed at the annual base salary beginning with the start of the employee's first full pay period after July 31, 2020.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers.

The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee.

The Company qualified for the tax credit and received additional tax credits for qualified wages, and the Company recorded a $2.7 million benefit related to the CARES Employee Retention Credit in operating expense in the accompanying consolidated statement of comprehensive (loss) income for the year ended December 31, 2020.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

Approximately $5.3 million of deferred payments are recorded as liabilities within accrued expense and other current liabilities and other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2020.

Financial Status and Outlook

The Company reduced planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and prioritized capital investments based on the highest near-term return opportunities in order to maintain financial flexibility.

Refer to "Credit Facilities and Indebtedness" section within this section for additional detail of the Company's borrowings and repayments under our Credit Facility during 2020.

On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers the Company's 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 restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period.

While the Second Amendment is in effect, the Company agreed to limit Restricted Payments to $26.0 million.

On February 1, 2021, the Company entered into the Third Amendment to the Credit Agreement to increase the restricted payments capacity during the Financial Covenant Relief Period, as defined in the Second Amendment, from $26.0 million to $226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc.

The Company repurchased the shares using available cash and borrowings under the Company's Revolver.

We continue to assess the situation at our properties and operations on a daily basis;

however, we are unable to determine when the current restrictions in place for our properties will be removed.

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

Refer to Part I, Item 3, Legal Proceedings, of this Report for discussion of the settlement agreement with respect to the Kater Litigation and Thimmegowda Litigation the Company entered into during 2020.

Key Indicators to Evaluate Business Results and Financial Condition

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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 includes our portion of EBITDA from our equity investments.

Adjusted EBITDA excludes:

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– Acquisition and disposition related charges, including fair value adjustments related to earnouts and deferred payments,

◦ Calder racing exit costs;

– Calder racing exit costs, and

– Other transaction expense, including legal, accounting and other deal-related expense.

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• Midwest Gaming's impact on our investments in unconsolidated affiliates from:

◦ The impact of changes in fair value of interest rate swaps;

– The impact of changes in fair value of interest rate swaps, and

– Recapitalization and transaction costs.

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• Legal reserves,

• Pre-opening expense;

• 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 consolidated statements of comprehensive income.

See the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information.

For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the consolidated statements of comprehensive (loss) income.

See the Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA included in this section for additional information.

Business Highlights

In 2019, we delivered another year of strong performance while beginning the execution of a number of organic investments that we believe will provide long-term sustainable value creation.

• We delivered strong growth in net revenue and net income, operating income, and Adjusted EBITDA in 2019.

– Net revenue was $1.3 billion, up $320.7 million, or 31.8%;

– Operating income was $215.7 million, up $26.9 million, or 14.2%;

– Adjusted EBITDA was $451.4 million, up $122.6 million, or 37.3%.

In 2020, our executive management, leaders, and team members of our Company faced leadership challenges that were unprecedented as a result of the COVID-19 global pandemic.

The Company reacted quickly to significant threats to the Company's long-term financial health by taking the following actions:

• Property closures and re-openings:

– Implemented immediate employee, customer, and regulatory communications, safety and health protocols, return to work protocols, work-from-home practices and other facility actions to protect our team members, our customers, our communities, and our Company’s assets when governmental authorities ordered the closure and subsequent reopening of nearly all of our properties.

– Furloughed nearly all of our employees at the closed properties during the closure periods and implemented graduated salary reductions based on the level of pay for executive management and all salaried professionals who were not furloughed.

– Executed immediate operational cost reduction actions to offset the loss of revenue.

– Immediately prioritized maintenance and project capital and stopped all non-priority capital projects.

• Negotiated a waiver of our financial covenants for our Credit Agreement while retaining the ability to grow organically, make acquisitions, and pay dividends.

• Made the difficult decision – but one that our investors have applauded as the right decision - to run the Kentucky Oaks and Derby without spectators to protect the long-term value of this iconic asset.

• Consistently communicated with equity and debt investors and rating agencies on an ongoing basis regarding the status of the Company’s operations, financial health, and long-term strategy to provide reassurance on the long-term financial health and strategic direction of the Company.

Churchill Downs Segment:

– Derby Week generated an incremental $5.4 million of Adjusted EBITDA in 2019 and set all-time wagering records from all sources handle on the Kentucky Oaks Day, the Kentucky Derby Day, and the Kentucky Derby Race.

In October 2019, we announced plans to invest $300.0 million to build a hotel and HRM facility and permanent stadium seating.

– Derby City Gaming outperformed expectations for 2019, contributing significant increases in both revenue and Adjusted EBITDA.

• Churchill Downs Racetrack:

– The Governor of the Commonwealth of Kentucky had banned horse racing and other activities for the first Saturday in May.

We negotiated a new date and time frame with NBC on the first weekend in September 2020 and modified our safety protocols to conduct the 146th running of the Kentucky Derby.

– The Kentucky Oaks and Derby were held on September 4th and 5th without spectators in a challenging environment and delivered positive Adjusted EBITDA despite the loss of ticket revenue, fewer sponsorships, and lower wagering during Derby Week.

– Our team members implemented extensive COVID-19 testing and processes and procedures to hold a shortened Spring Meet with no spectators and the September Meet and Fall Meet with restrictions on patron capacity.

– The state-of-the-art equine medical center and quarantine barns on the backside area of our track were completed in April 2020 which reinforces our ongoing commitment to equine and jockey safety and supports our long-term international growth strategy.

We also implemented other equine safety initiatives led by our on-staff veterinarian including entry restrictions, medication restrictions, and other actions to improve the safety of the equine athletes and jockeys and supported federal legislation that was resulted in the Horseracing Integrity and Safety Act being signed into law on December 28, 2020.

• Derby City Gaming:

– Derby City Gaming delivered record Adjusted EBITDA in 2020 despite a temporary closure from March 15, 2020 to June 8, 2020 as a result of the COVID-19 global pandemic.

– We added a second patio to the facility that allows for smoking and provided an additional 8,000 square-feet of gaming space and 225 HRMs.

– Our team members developed partnerships with Scientific Games, IGT, and Konami to add their leading game titles on the HRMs at our Derby City Gaming, Oak Grove, Newport, and future HRM facilities.

Online Wagering Segment:

– TwinSpires handle grew to $1.5 billion, up 4.8% compared to 2018 as we outpaced the industry growth by 6.8 percentage points.

– We launched our online sports betting and iGaming operations in New Jersey in the first quarter of 2019 and in Pennsylvania and Indiana in the fourth quarter of 2019.

• Gaming Segment:

– Our wholly-owned Gaming properties delivered strong organic growth from successful marketing and promotional activities, and we were able to successfully integrate our Presque Isle and Lady Luck Nemacolin transactions during 2019.

– In March 2019, we closed on our 61.3% equity investment in Rivers Des Plaines which contributed strong Adjusted EBITDA results for the year.

Rivers Des Plaines is well positioned to grow as a result of an expanded gaming bill in Illinois.

Rivers Des Plaines has opened a new sports bar, received approval to become the first land-based casino in Illinois, is in process of building a parking garage, and is adding 800 additional positions.

MVG announced a $100 million investment in a hotel that will open by the third quarter of 2021.

Both of these investments are positioned well to provide strong growth in the coming years.

As we look to 2020 and beyond, we remain committed to delivering strong financial results and long-term sustainable growth for our shareholders.

We have strong cash flow and a solid balance sheet that supports organic growth as well as other strategic acquisitions and organic investment opportunities that we believe will create long-term value for our shareholders.

• TwinSpires Horse Racing:

– Handle grew from $1.46 billion to $1.98 billion, up $521.0 million, or 35.8%, over 2019.

Industry handle decreased 1.0%.

– Net revenue grew from $291.0 million to $405.0 million, up $114.0 million, or 39.2%, over 2019.

– The business delivered record Adjusted EBITDA of $126.8 million, up $48.4 million, or 61.7%, over 2019.

• TwinSpires Sports and Casino:

– We signed multi-year agreements with GAN Limited and Kambi Group PLC to provide player account management, casino platform, sports trading, and risk management services.

We also announced the transition from the BetAmerica brand to the TwinSpires brand.

– We opened a retail sportsbook at Bronco Billy's Casino in Cripple Creek, Colorado and at Island Resort & Casino in Harris, Michigan.

We have also launched our sportsbook and casino app in Michigan.

• The Gaming Segment delivered $176.7 million of Adjusted EBITDA, a decrease of $104.2 million, 37.1% from 2019 despite multiple property closures and ongoing patron capacity restrictions as a result of the COVID-19 global pandemic.

• The team delivered wholly-owned casino margins of 36.6% in the second half of 2020, up 690 basis points from 2019 excluding properties that were closed during part of the second half of 2020.

• Our leaders and team members developed and implemented changes to our amenities, modified our gaming floors, enhanced our cleaning and safety protocols, provided safety equipment and protective gear to our team members, and conducted extensive training to enable our properties to safely reopen with patron capacity restrictions.

• Oak Grove - We opened a simulcast and HRM facility in Oak Grove, Kentucky with approximately 1,325 HRMs, a 128-room hotel, an event center, and food and beverage venues.

The 1,200-person grandstand, 3,000-person capacity outdoor amphitheater and stage, a state-of-the-art equestrian center, and a recreational vehicle park will open in early 2021.

• Newport Racing and Gaming - We opened a pari-mutuel simulcast area, a 17,000 square foot gaming floor with approximately 500 HRMs, and a feature bar in Newport, Kentucky, as an extension of Turfway Park.

• We entered into an agreement in principle to settle the Kater Litigation and Thimmegowda Litigation where the Company will pay $124.0 million pre-tax of the settlement and Aristocrat will pay $31.0 million pre-tax.

Aristocrat released the Company of any and all indemnification obligations related to Big Fish Games.

• On March 16, 2020, we entered into the First Amendment to our Credit Agreement which extended the maturity of the Company’s Revolver, lowers the pricing schedule for all levels of the pricing grid, and reduces the commitment fee.

• We entered into a Second Amendment to our Credit Agreement to provide financial covenant relief through the financial reporting date for second quarter 2021 and limited restricted payments to $26.0 million for this period.

• We formed a Diversity Council and conducted Diversity and Inclusion training for leaders and full-time team members in our Company.

• The Company’s total shareholder return was 43% for 2020 compared to 20% for the Russell 2000 and 18% for the S&P 500.

The Company’s five-year total shareholder return for 2020 was 325% compared to 86% for the Russell 2000 and 103% for the S&P 500.

The preceding shareholder return calculations assume dividends are reinvested.

We are committed to delivering strong financial results and long-term sustainable growth.

We have strong cash flow and a solid balance sheet that supports organic growth as well as potential strategic acquisitions that we believe will create long-term value for our shareholders.

Our Operations

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Consolidated Financial Results

The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:

The following table reflects our net revenue, operating income, net (loss) income, Adjusted EBITDA, and certain other financial information:

Years Ended December 31, Change

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Net income from continuing operations 13.3 139.6 (126.3)

Net income attributable to Churchill Downs Incorporated 137.5 352.8 (215.3)

Net (loss) income attributable to Churchill Downs Incorporated (81.9) 137.5 (219.4)

Adjusted EBITDA 286.5 451.4 (164.9)

Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

• Net revenue increased $320.7 million driven by a $242.9 million increase from the Gaming segment primarily due to the Presque Isle, Lady Luck Nemacolin and Ocean Downs/Saratoga Transactions, as well as growth at our other gaming properties, a $78.4 million increase from Churchill Downs primarily due to Derby City Gaming's continued growth and a full year of results compared to the prior year with the September 2018 opening, and a $0.3 million increase in our Online Wagering segment.

Partially offsetting these increases was a $0.9 million decrease in All Other, primarily related to a decrease in handle at Arlington.

• Operating income increased $26.9 million due to a $45.8 million increase from Gaming primarily driven by the increase in net revenue;

a $30.9 million increase from Churchill Downs primarily due to Derby City Gaming's continued growth and a full year of results compared to the prior year with the September 2018 opening;

• Net revenue decreased $275.7 million driven by a $251.0 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties;

a $131.4 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators;

and a $11.1 million decrease from All Other primarily due to the temporary suspension of operations at Arlington partially offset by the opening of Oak Grove in September 2020.

Partially offsetting these decreases was a $117.8 million increase from Online Wagering due to an increase in handle from higher net revenue per active player and an increase in active players for our TwinSpires Horse Racing business.

• Operating income decreased $155.5 million due to a $109.5 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators;

a $83.3 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties;

a $17.5 million non-cash impairment of the Presque Isle gaming rights and trademark intangible assets;

and a $7.0 million decrease from All Other primarily due to the temporary suspension of operations at Arlington partially offset by the opening of Oak Grove in September 2020.

Partially offsetting these decreases were a $50.3 million increase from Online Wagering due to an increase in handle and net revenue per active player at TwinSpires;

a $7.2 million decrease in selling, general and administrative expense primarily from a reduction in salaries and associated benefits;

and a $4.3 million decrease in transaction expense, net.

Partially offsetting these increases were a $31.4 million increase in selling, general and administrative expenses driven by the Presque Isle, Lady Luck Nemacolin and Ocean Downs/Saratoga Transactions, and a full year of results for Derby City Gaming compared to the prior year with the September 2018 opening, as well as an increase in stock-based compensation;

a $14.0 million decrease in All Other primarily due to an increase in salaries and related benefits at the corporate level and a decrease in handle and lower attendance at Arlington;

and a $9.4 million decrease primarily from the Online Wagering segment for costs associated with the continued build-out of our online sports betting and iGaming operations and increased marketing spend.

• Net income from continuing operations decreased $126.3 million.

The following items impacted comparability of the Company's year ended December 31, 2019 net income from continuing operations:

a $42.3 million after-tax gain on the Ocean Downs/Saratoga Transaction in 2018 which did not recur in 2019;

a $9.3 million after-tax impact of our equity portion of Midwest Gaming's non-cash change in fair value related to interest rate swaps in 2019;

an $8.3 million non-cash tax impact related to the re-measurement of our net deferred tax liabilities based on an increase in revenue related to states with higher tax rates compared to the prior year period;

a $7.5 million after-tax impact for the accelerated amortization of the purchase and sale agreement rights related to the Turfway Park Acquisition in 2019;

a $3.5 million after-tax impact of our equity portion of Midwest Gaming's recapitalization and transaction costs in 2019;

and a $3.4 million after-tax increase in expenses due to legal reserves in 2019 compared to 2018.

Partially offsetting these increases was a $3.0 million after-tax decrease in expenses related to lower transaction, pre-opening and other expenses.

Excluding these items, net income from continuing operations increased $28.3 million primarily due to a $55.8 million after-tax increase driven by the results of our operations and equity income from our unconsolidated affiliates, partially offset by a $22.1 million after-tax increase in interest expense associated with higher outstanding debt balances and a $5.4 million tax expense related to a higher effective tax rate compared to the prior year period due to an increase in income attributable to states with higher tax rates.

• Our net income attributable to Churchill Downs Incorporated decreased $215.3 million due to a $43.0 million decrease in net income from continuing operations discussed above and a $172.6 million decrease in net income from discontinued operations driven by the after-tax gain on the sale of Big Fish Games in January 2018, partially offset by a $0.3 million decrease from our net loss attributable to our noncontrolling interest.

• Our Adjusted EBITDA increased $122.6 million driven by a $106.9 million increase from the Gaming segment primarily due to the Presque Isle, Midwest Gaming, and Ocean Downs/Saratoga Transactions, as well as strong performances of our wholly-owned Gaming properties and our equity investment in MVG, and a $35.3 million increase from the Churchill Downs segment primarily due to Derby City Gaming's continued growth and a full year of results compared to the prior year with the September 2018 opening.

Partially offsetting these increases were a $12.7

million decrease from the Online Wagering segment for costs associated with the continued build-out of our online sports betting and iGaming operations and increased marketing spend, and a $6.9 million decrease from All Other mainly due to increased salaries and related benefits at the corporate level and a decrease in handle at Arlington.

The following items impacted comparability of the Company's net income from continuing operations for the year ended December 31, 2020 compared to the prior year:

$14.4 million of after-tax expenses incurred in 2019 that did not recur in 2020, including the impact of the accelerated amortization of the purchase and sale agreement rights related to the Turfway Park Acquisition, Midwest Gaming's recapitalization and transaction costs, and legal reserves;

a $13.3 million tax benefit related to our net operating loss in the current year that the Company intends to offset prior year taxes as a result of the CARES Act;

and a $6.4 million non-cash tax decrease related to the re-measurement of our net deferred tax liabilities based on impact of revenue related to states with higher tax rates.

Partially offsetting these decreases was a $12.0 million non-cash after-tax impact related to our impairment of the Presque Isle intangible assets;

a $1.7 million after-tax increase in expenses related to higher transaction, pre-opening and other expenses;

and a $0.2 million increase from other sources.

Excluding these items, net income from continuing operations decreased $146.5 million primarily due to a $141.0 million after-tax decrease driven by the results of our operations and equity income from our unconsolidated affiliates and a $5.5 million after-tax increase in interest expense associated with higher outstanding debt balances.

• Our net income attributable to Churchill Downs Incorporated decreased $219.4 million due to a $126.3 million decrease in net income from continuing operations discussed above, a $93.0 million decrease in net loss from discontinued operations, and a $0.1 million decrease in net loss attributable to noncontrolling interest.

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.

• Our Adjusted EBITDA decreased $164.9 million driven by a $104.2 million decrease from Gaming due to the temporary suspension of all Gaming property operations;

a $99.4 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators;

and a $4.3 million decrease from All Other primarily due to the temporary suspension of operations at Arlington.

Partially offsetting these decreases was a $43.0 million increase from Online Wagering due to an increase in handle from higher net revenue per active player and an increase in active players for our TwinSpires Horse Racing business.

Financial Results by Segment

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Online Wagering:

Twin Spires 291.0 291.5 (0.5)

Online Sports Betting and iGaming 0.6 — 0.6

TwinSpires Horse Racing 405.0 291.0 114.0

TwinSpires Sports and Casino 4.9 0.6 4.3

Total Online Wagering 409.9 291.6 118.3

7 unchanged sentences

Lady Luck Nemacolin 20.7 29.3 (8.6)

Saratoga — 0.6 (0.6)

Total Gaming 443.9 694.8 (250.9)

3 unchanged sentences

Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

• Churchill Downs revenue increased $80.9 million primarily due to a $71.8 million increase from a full year of results at Derby City Gaming due to the September 2018 opening and a $9.1 million increase at Churchill Downs Racetrack primarily due to a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle.

• Online Wagering revenue increased $0.1 million from the prior year.

T winSpires revenue decreased $0.5 million from the prior year primarily due to the exit of certain existing high volume with low margin customers in the Velocity group within TwinSpires net revenue .

TwinSpires handle, which does not include handle from customers in the Velocity group, grew 4.8% during 2019 compared to the prior year and compared favorably to a 2.0% decrease in U.S.

thoroughbred industry handle.

Active players increased 16.8% for the year compared to the prior year while net revenue per active player declined 14.2%.

Our online sports betting and iGaming net revenues increased $0.6 million due to the launch in New Jersey in the first quarter of 2019 and Pennsylvania and Indiana in the fourth quarter of 2019.

• Gaming revenue increased $243.6 million driven by a $139.0 million increase due to the Presque Isle Transaction, a $60.0 million increase due a full year of results in 2019 from the Ocean Downs/Saratoga Transaction, a $29.3 million increase due to the Lady Luck Nemacolin Transaction, a $9.5 million increase from our Mississippi properties primarily due to higher attendance driven by our retail BetAmerica Sportsbooks which opened in August 2018, a $5.5 million increase at Fair Grounds and VSI primarily due to two additional off-track betting and video poker facilities and successful marketing and promotional activities, and a $1.2 million increase from Calder, primarily due to

successful marketing and promotional activities.

Partially offsetting these increases were $0.9 million decrease from other sources.

• All Other revenue decreased $0.5 million primarily due to a decrease in handle at Arlington.

• Churchill Downs revenue decreased $128.9 million primarily due to a $121.8 million decrease from Churchill Downs Racetrack from the loss of ticket revenue, fewer sponsorships, and lower wagering during Derby Week as a result of running of 146th Kentucky Oaks and Derby without spectators in a challenging environment, and a $7.1 million decrease at Derby City Gaming due to the temporary suspension of operations.

• Online Wagering revenue increased $118.3 million from the prior year primarily due to a $114.0 million increase at TwinSpires Horse Racing.

Although horse racing content for wagering decreased, TwinSpires Horse Racing handle grew $521.0 million, or 35.8%, compared to prior year, as our customers wagered more on the content that was available.

Our TwinSpires Sports and Casino net revenues increased $4.3 million compared to prior year primarily due to the launch of the casino platform in Pennsylvania and Indiana in late December 2019.

• Gaming revenue decreased $250.9 million primarily due to the temporary suspension of operations at all of our Gaming properties that reduced the net revenue generated at these properties.

• All Other revenue decreased $9.5 million primarily due to a $30.8 million decrease as a result of the temporary suspension of operations and loss of racing days at Arlington and a $4.2 million decrease as a result of the temporary

suspension of operations at the majority of United Tote customer locations.

Partially offsetting these decreases were a $16.6 million increase at Oak Grove due to the opening of the HRM facility in September 2020 and the hotel in October 2020, a $5.8 million increase primarily from the increase in Turfway Park handle, and a $3.1 million increase at Newport due to the opening in October 2020.

Consolidated Operating Expense

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Taxes and purses $ 268.3 $ 369.7 $ (101.4)

Salaries and benefits 171.2 127.5 43.7

Content expense 180.7 139.6 41.1

Salaries and benefits 140.5 171.2 (30.7)

Selling, general and administrative expense 114.8 122.0 (7.2)

1 unchanged sentence

Marketing and advertising expense 31.4 41.8 (10.4)

Impairment expense 17.5 — 17.5

Transaction expense, net 1.0 5.3 (4.3)

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Significant items affecting comparability of consolidated operating expense include:

• Taxes and purses increased $143.0 million driven by the Presque Isle, Ocean Downs/Saratoga, and Lady Luck Nemacolin Transactions, a full year of operations at Derby City Gaming due to the September 2018 opening, an increase in purse amounts at Churchill Downs Racetrack, the Turfway Park Acquisition, and the first racing meet at Oak Grove during the fourth quarter of 2019.

• Salaries and benefits expense increased $43.7 million driven by the Presque Isle, Ocean Downs/Saratoga, and Lady Luck Nemacolin Transactions, a full year operations at Derby City Gaming due to the September 2018 opening, an increase at Churchill Downs Racetrack consistent with the growth in revenue and Adjusted EBITDA, and an increase with our online sports betting and iGaming business due to the launches in New Jersey, Pennsylvania, and Indiana during 2019.

• Content expense decreased $2.5 million primarily due to a decrease in certain host fees.

• Selling, general and administrative expense increased $31.4 million primarily from an increase in salaries and related benefits, stock-based compensation, legal reserves, and legal and professional fees.

• Depreciation and amortization expense increased $32.8 million primarily driven by the amortization of the assignment of the purchase and sale agreement rights associated with the Turfway Park Acquisition, the Presque Isle Transaction, a full year operations at Derby City Gaming due to the September 2018 opening, the Ocean Downs/Saratoga Transaction, and capital expenditures placed into service for Churchill Downs Racetrack.

• Marketing and advertising expense increased $13.0 million primarily due to our online sports betting and iGaming operations, the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, and a full year of operations at Derby City Gaming due to the September 2018 opening.

• Transaction expense, net decreased $5.0 million primarily due to increased expenses associated with announced transactions in 2018 that did not recur in 2019.

• Taxes and purses decreased $101.4 million driven by the temporary suspension of all operations at our Gaming properties and the related decrease in net revenue and a decrease in purses related to the reduction of horse races from the temporary closures of our facilities, partially offset by an increase in taxes and purses driven by the opening of Oak Grove in September 2020 and Newport in October 2020.

• Content expense increased $41.1 million primarily due to an increase in certain host fees and source market fees for TwinSpires as a result of the increase in handle.

• Salaries and benefits expense decreased $30.7 million driven primarily by temporary furloughing certain employees and temporarily reducing salaries for all remaining non-furloughed salaried employees through the end of July 2020, partially offset by increased expenses due to the opening of Oak Grove in September 2020 and Newport in October 2020.

• Selling, general and administrative expense decreased $7.2 million primarily from a temporary reduction in salaries and associated benefits and a decrease in accrued bonuses compared to prior year.

• Depreciation and amortization expense decreased $3.5 million primarily driven by the amortization of the assignment of the purchase and sale agreement rights associated with the Turfway Park Acquisition that occurred in 2019 and did not recur in 2020, partially offset by capital projects placed into service for Churchill Downs Racetrack and Derby City Gaming, and Turfway Park.

• Marketing and advertising expense decreased $10.4 million primarily due to the temporary suspension of operations at our brick-and-mortar properties, partially offset by an increase in marketing and advertising spend for TwinSpires Horse Racing and our TwinSpires Sports and Casino business in the Online Wagering segment.

• 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.

• Transaction expense, net was nominal for the year ended December 31, 2020.

For the year ended December 31, 2019, transaction expense, net was related to the acquisitions of Presque Isle and Lady Luck Nemacolin.

• Other operating expense includes maintenance, utilities, food and beverage costs, property taxes and insurance and other operating expenses.

Other operating expense increased $37.4 million primarily driven by the Presque Isle, Lady Luck Nemacolin, and Ocean Downs/Saratoga Transactions, a full year of operations at Derby City Gaming due to the September 2018 opening, our online sports betting and iGaming operations, and the Turfway Park Acquisition.

Other operating expense decreased $21.3 million primarily driven by the temporary suspension of operations at our brick-and-mortar properties, partially offset by the operating expenses related to

Turfway Park and from the opening of Oak Grove in September 2020 and Newport Racing and Gaming in October 2020.

Adjusted EBITDA

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Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

• Churchill Downs Adjusted EBITDA increased $35.3 million due to a $32.9 million increase from Derby City Gaming's continued growth and a full year of results compared to the prior year with the September 2018 opening and a $2.4 million increase at Churchill Downs Racetrack, primarily due to a successful Kentucky Derby and Oaks week driven by increased ticket sales for reserved seating, sponsorship growth, and record handle.

• Online Wagering Adjusted EBITDA decreased $12.7 million driven by a $12.1 million decrease due to costs associated with the continued build-out of our online sports betting and iGaming operations and increased marketing spend.

TwinSpires Adjusted EBITDA decreased $0.6 million primarily due the decrease in net revenue.

• Gaming Adjusted EBITDA increased $106.9 million driven by a $94.3 million increase from our equity investment in Midwest Gaming and the Presque Isle and Lady Luck Nemacolin Transactions;

a $4.9 million increase from our Mississippi properties primarily due to higher attendance driven by the opening of our retail BetAmerica Sportsbooks;

a $3.7 million increase from our equity investment at MVG;

a $2.7 million increase from Ocean Downs due to the acquisition of the remaining 37.5% of Ocean Downs partially offset by the liquidation of our equity investments in Saratoga as a result of the Ocean Downs/Saratoga Transaction;

and a $2.7 million increase from Fair Grounds and VSI primarily due to two additional off-track betting facilities ("OTBs") and video poker facilities and successful marketing and promotional activities.

Partially offsetting these increases were a $1.4 million decrease at Calder associated with the May 2019 opening of the jai alai operation and favorable insurance reserve adjustments in the prior year that did not recur in 2019.

• All Other Adjusted EBITDA decreased $6.9 million primarily from a $4.2 million increase in salaries and related benefits at the corporate level, a $2.0 million decrease at Arlington due to decreased handle and lower attendance primarily related to inclement weather, a $1.6 million decrease from our initial operations due to the first live racing meet at Oak Grove in the fourth quarter of 2019, and a $0.5 million decrease as a result of the Turfway Park Acquisition.

Partially offsetting these decreases was a $1.4 million increase from United Tote primarily due to increased equipment sales and higher totalisator fees from new customers.

Reconciliation of Comprehensive Income to Adjusted EBITDA

• Churchill Downs Adjusted EBITDA decreased $99.4 million due to a $101.0 million decrease at Churchill Downs Racetrack primarily due to the decrease in net revenue as a result of running the 146th Kentucky Oaks and Derby without spectators, partially offset by a $1.6 million increase from Derby City Gaming due to increased operating efficiencies which more than offset the impact of the temporary closure of the property and ongoing capacity restrictions.

• Online Wagering Adjusted EBITDA increased $43.0 million primarily due to a $48.4 million increase driven by an increase in TwinSpires Horse Racing handle, partially offset by a $5.4 million decrease from a higher level of marketing spend and increased costs associated with the continued build-out of the TwinSpires Sports and Casino business.

• Gaming Adjusted EBITDA decreased $104.2 million driven by an $82.9 million decrease at our wholly-owned Gaming properties and a $21.3 million decrease from our equity investments, both of which were due to decreases in net revenue as a result of the temporary suspension of operations during 2020.

• All Other Adjusted EBITDA decreased $4.3 million primarily due to a $7.3 million decrease from lower revenue from Arlington and United Tote, a $1.6 million decrease from higher expenses at Turfway Park as a result of a full year of operations in 2020, and a $0.5 million decrease from other sources.

Partially offsetting these decreases was a $5.1 million increase from the opening of Oak Grove in September 2020.

Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA

Years Ended December 31, Change

(in millions) 2020 2019

Comprehensive income attributable to CDI $ 137.5 $ 353.2 $ (215.7)

Foreign currency translation, net of tax — (0.6) 0.6

Change in pension benefits, net of tax — 0.2 (0.2)

Net income attributable to CDI 137.5 352.8 (215.3)

Net (loss) income attributable to Churchill Downs Incorporated $ (81.9) $ 137.5 $ (219.4)

Net loss attributable to noncontrolling interest 0.2 0.3 (0.1)

Net income before noncontrolling interest 137.2 352.8 (215.6)

Loss (income) from discontinued operations, net of tax 2.4 (170.2) 172.6

Net (loss) income before noncontrolling interest (82.1) 137.2 (219.3)

Loss from discontinued operations, net of tax 95.4 2.4 93.0

Income from continuing operations, net of tax 13.3 139.6 (126.3)

1 unchanged sentence

Interest expense 80.0 70.9 9.1

Loss on extinguishment of debt — — —

Income tax provision (benefit) 56.8 51.3 5.5

Income tax (benefit) provision (5.3) 56.8 (62.1)

EBITDA $ 180.9 $ 363.7 $ (182.8)

10 unchanged sentences

Other charges and recoveries, net — (0.2) 0.2

Gain on Ocean Downs/Saratoga transaction — (54.9) 54.9

Transaction expense, net 1.0 5.3 (4.3)

Impairment of tangible and other intangible assets 17.5 — 17.5

Total adjustments to EBITDA 105.6 87.7 17.9

7 unchanged sentences

Total shareholders’ equity 367.1 511.0 (143.9)

• Total assets increased $825.8 million driven by a $526.4 million increase in investment in and advances to unconsolidated affiliates due to our equity investment in Midwest Gaming;

a $179.8 million increase in property and equipment, net due to the Presque Isle Transaction, the construction of Oak Grove, and the implementation of the new leasing standard;

a $105.8 million increase in other intangibles and a $29.1 million increase in goodwill both of which were due to the Presque Isle Transaction and Turfway Park Acquisition;

an $8.5 million increase in accounts

receivable driven by Churchill Downs Racetrack and the Presque Isle Transaction;

• Total assets increased $135.4 million driven by a $144.8 million increase in property and equipment, net, due to the construction of Oak Grove and Newport;

a $34.9 million increase in income taxes receivable as a result of our current year income tax benefit;

and a $3.7 million increase in all other assets.

Partially offsetting these increases was a $37.1 million decrease in cash and cash equivalents primarily due to our equity investment in Midwest Gaming, the Presque Isle Transaction, and the Turfway Park Acquisition.

• Total liabilities increased $788.1 million driven by a $592.9 million increase in notes payable, net of debt issuance costs due to the issuance of the 2027 Senior Notes (as defined below);

a $134.6 increase in deferred income taxes primarily due to our equity investment in Midwest Gaming;

a $38.2 million increase in accrued expense and other current liabilities primarily driven by the Presque Isle Transaction, the construction of Oak Grove, and an increase in interest payable due to the increase in outstanding debt;

and a $23.7 million increase in other liabilities primarily as a result of the implementation of the new leasing standard.

Partially offsetting these increases was a $28.8 million decrease in cash and cash equivalents primarily driven by our project capital expenditures related to Oak Grove and Newport;

and a $19.2 million decrease in other intangibles primarily due the impairment of Presque Isle gaming rights and trademark.

• Total liabilities increased $279.3 million driven by a $146.5 million increase in long-term debt, non-current, primarily driven by borrowings from our senior secured revolving credit facility;

a $124.0 million increase in current liabilities of discontinued operations due to the settlement of Kater and Thimmegowda litigations;

and a $12.9 million increase

in accounts payable primarily driven by timing.

Partially offsetting these increases was a $4.1 million decrease in all other liabilities.

• Total shareholders’ equity increased $37.7 million driven by $137.5 million current year net income attributable to Churchill Downs Incorporated and a $23.8 million increase resulting from stock-based compensation.

Partially offsetting these increases were $93.0 million in repurchases of common stock, $23.4 million from our annual dividend declared in December 2019, and a $7.2 million decrease in other equity components.

• Total shareholders’ equity decreased $143.9 million driven by a $81.9 million current year net loss attributable to Churchill Downs Incorporated, $27.9 million in repurchases of common stock, $31.4 million in settlement of stock awards, $25.1 million from our annual dividend declared in December 2020, and a $1.3 million decrease in other equity components.

Partially offsetting these decreases was a $23.7 million increase resulting from stock-based compensation.

Liquidity and Capital Resources

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Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019

• Cash provided by operating activities increased $91.8 million driven by a $59.7 million increase in operating income net of depreciation and amortization related to continuing operations, a $25.1 million decrease in cash taxes paid, an $18.3 million increase in distributed earnings from equity investments primarily related to Midwest Gaming, and a $19.3 million increase from all other operating activities.

Partially offsetting this increase was a $30.6 million increase in cash paid for interest as a result of higher outstanding debt balances.

• Cash provided by operating activities decreased $147.7 million driven by a $138.0 million decrease in operating income related to continuing operations, net of the $17.5 million non-cash impairment of Presque Isle's intangible assets;

a $17.9 million increase in cash interest paid;

and a $13.7 million decrease from all other operating activities.

Partially offsetting these decreases was a $21.9 million decrease in cash taxes paid.

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 increased $1,605.3 million driven by a $970.7 million decrease in cash proceeds as a result of the Big Fish Transaction occurring in 2018, a $410.1 million increase in cash used for the equity investment in Midwest Gaming, a $219.7 million increase in cash used to complete the Presque Isle Transaction and the Turfway Park Acquisition, and a $32.1 million increase in the use of funds for other intangible assets.

Partially offsetting these increases was an $18.2 million decrease in capital project expenditures and $9.1 million decrease in funds used in other investing activities.

• Cash provided by financing activities increased $1,394.1 million driven by a $842.0 million increase in net borrowings under our long-term debt obligations primarily related to the issuance of our 2027 Senior Notes and acquisition of businesses, a $436.4 million decrease in share repurchases primarily related to the Dutch Auction repurchase in 2018, a $58.2 million decrease in Big Fish Games earnout and deferred payments from 2018 that did not recur in 2019, a $54.7 million decrease related to the repayment of the Ocean Downs debt in 2018 that did not recur in 2019, and a $2.8 million decrease from other financing activities.

• Cash used in investing activities decreased $541.8 million driven by a $648.8 million decrease in cash used for our investment and acquisitions in 2019 related to the equity investment in Midwest Gaming, the Presque Isle Transaction, the Turfway Park Acquisition, and other investments in intangible assets, and a $25.3 million decrease in capital maintenance expenditures.

Partially offsetting these decreases were a $128.3 million increase for capital project expenditures and a $4.0 million increase in funds used in other investing activities.

• Cash provided by financing activities decreased $384.8 million driven by a $450.3 million decrease in net borrowings under our long-term debt obligations primarily related to the issuance of our 2027 Senior Notes in 2019, partially offset by borrowings from our senior secured revolving credit facility during 2020, and a $19.8 million increase in cash paid to settle stock awards and pay taxes related to the settlement of stock awards.

Partially offsetting these decreases was a $66.6 million decrease in share repurchases in 2020 and an $18.7 million decrease from other financing activities.

Credit Facilities and Indebtedness

3 unchanged sentences

Term Loan B due 2024 $ 388.0 $ 392.0 $ (4.0)

Revolver 149.7 — 149.7

2027 Senior Notes 600.0 600.0 —

6 unchanged sentences

Credit Agreement

On December 27, 2017, we entered into a senior secured credit agreement (the "2017 Credit Agreement") with a syndicate of lenders.

The 2017 Credit Agreement replaced our 2014 senior secured credit agreement (the "2014 Credit Agreement").

On December 27, 2017, we entered into a senior secured credit agreement (as amended, the "Credit Agreement") among the Company, the subsidiary guarantors party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders and other financial institutions party thereto.

The Credit Agreement provides for a $700.0 million senior secured revolving credit facility due 2022 (the "Revolver") and a $400.0 million senior secured term loan B due 2024 (the "Term Loan B").

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.

We had $694.4 million of available borrowing capacity, after consideration of $5.6 million in outstanding letters of credit, under the Revolver as of December 31, 2019.

The Credit Amendment is secured by substantially all 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 2017 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 2017 Credit Agreement also contains financial covenants providing for the maintenance of a maximum consolidated secured net leverage ratio and the maintenance of a minimum consolidated interest coverage ratio.

The Company was in compliance with all applicable covenants in the 2017 Credit Agreement at December 31, 2019.

At December 31, 2019, the financial ratios under our 2017 Credit Agreement were as follows:

Actual Requirement

Interest coverage ratio 5.6 to 1.0 > 2.5 to 1.0

Consolidated total secured net leverage ratio 0.6 to 1.0 < 4.0 to 1.0

The Company capitalized $1.6 million of debt issuance costs associated with the Revolver which is being amortized as interest expense over 5 years.

The Company also capitalized $5.1 million of deferred financing costs associated with the Term Loan B portion of the Credit Agreement which is being amortized as interest expense over 7 years.

The interest rates applicable to the Company’s borrowings under the Credit Agreement are LIBOR-based plus a spread, as determined by the Company’s consolidated total net leverage ratio.

The Term Loan B requires quarterly payments of 0.25% of the original $400.0 million balance, or $1.0 million per quarter.

2 unchanged sentences

For the period ended December 31, 2020, the Company's commitment fee rate was 0.30%.

As a result of the Company's 2017 Credit Agreement, the Company capitalized $1.6 million of debt issuance costs associated with the Revolver which will be amortized as interest expense over 5 years.

The Company also capitalized $5.1 million of deferred financing costs associated with the Term Loan B which will be amortized as interest expense over 7 years.

The Company had an outstanding balance of $149.7 million and had $545.8 million available on the Revolver on December 31, 2020.

The Company had $67.4 million of cash and cash equivalents on December 31, 2020.

On March 16, 2020, we borrowed $675.4 million on the Revolver to provide the Company with additional financial flexibility.

On December 31, 2020, we repaid $545.0 million of the borrowings on the Revolver.

On March 16, 2020, the Company entered into the First Amendment (the “First Amendment”) to the Credit Agreement.

The First Amendment extended the maturity of the Company’s Revolver from December 27, 2022 to at least September 27, 2024, which is 91 days prior to the latest maturity date of the term loan facility on December 27, 2024.

The First Amendment also lowered 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 provides a reduced pricing schedule for outstanding borrowings and commitment fees with respect to the Revolver across all other leverage pricing levels.

The First Amendment did not alter the Company’s borrowing capacity.

The Company capitalized $2.0 million of debt issuance costs associated with the First Amendment which are being amortized as interest expense over the remaining duration of the Revolver.

While the Second Amendment is in effect, the Company agreed to limit restricted payments to $26.0 million.

The Company repurchased the shares using available cash and borrowings under the Company's Revolver.

Although the Company was not required to meet the Company's financial covenants under the Credit Agreement on December 31, 2020 (as a result of the Second Amendment), the Company was compliant with all applicable covenants on December 31, 2020.

2027 Senior Notes

2 unchanged sentences

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 2017 Credit Agreement.

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.

27 unchanged sentences

(i) incur additional debt and issue preferred stock;

(ii) pay dividends or make other restricted payments;

(ii) pay dividends or make other restricted

(iii) make certain investments;

12 unchanged sentences

8.3 16.6 8.1 — 33.0

Revolver — — 149.7 — 149.7

Interest on Revolver (2)

2.8 5.7 2.8 — 11.3

2027 Senior Notes — — — 600.0 600.0

3 unchanged sentences

Operating Leases 5.5 8.1 7.4 5.5 26.5

Minimum Guarantees (3)

9.0 19.0 19.0 13.2 60.2

Total $ 111.3 $ 170.9 $ 676.5 $ 1,227.6 $ 2,186.3

(1) Interest includes the estimated contractual payments under our Credit Facility assuming no change in the weighted average borrowing rate of 2.15%, which was the rate in place as of December 31, 2020.

(2) Assumes no change in the weighted average borrowing rate of 1.90%, which was the rate in place as of December 31, 2020.

(3) Includes the maximum estimated exposure where we are contractually obligated to make future minimum payments.

As of December 31, 2020, we had approximately $3.9 million of unrecognized tax benefits.

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We use various valuation methods to determine initial fair value of our indefinite-lived intangible assets, including the Greenfield method and relief-from-royalty method of the income approach, all of which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

The use of these valuation methods requires us to make significant estimates and assumptions about future revenue and operating expenses, expected start-up costs, royalty rate and the discount rate.

The fair values of gaming rights are generally determined using the Greenfield method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream.

The use of these valuation methods requires us to make significant

estimates and assumptions about future revenue and operating expenses, expected start-up costs, capital expenditures, royalty rate, and the discount rate.

The fair values of gaming rights are generally determined using the Greenfield method, which is an income approach methodology that calculates the present value based on a projected cash flow stream.

This method assumes that the gaming rights provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights.

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Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired.

An entity may first 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 quantitative impairment test can be bypassed.

Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the two-step quantitative impairment test.

An entity may first assess qualitative factors to determine whether it is necessary to complete the 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 the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed.

Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.

If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield method for gaming rights and relief-from-royalty method of the income approach for trademarks.

Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others.

These factors require significant judgments and estimates, and application of alternative assumptions could produce materially 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 values of our reporting units and assets.

The goodwill impairment test 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, such change may require a reevaluation of our goodwill.

Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values, and fair values of our reporting units and assets.

The impairment tests for goodwill and indefinite-lived intangible assets are subject to uncertainties arising from such events as changes in competitive conditions, the current 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, such change may require a reevaluation of our goodwill and indefinite-lived intangible assets.

Changes in estimates or the application of alternative assumptions could produce significantly different results.

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What changed 10-K

Item 7. Management’s Discussion and Analysis