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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-24 · 241 added, 266 removed, 231 unchanged (69% of the section changed)

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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.

and we have nine 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.

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.

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

During the first quarter of 2021, we updated 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.

Our internal management reporting changed primarily due to the continued growth from Oak Grove Racing, Gaming & Hotel ("Oak Grove") and Turfway Park Racing & Gaming (“Turfway Park”), which opened its annex HRM facility, Newport Racing & Gaming ("Newport"), in October 2020, which resulted in our chief operating decision maker's decision to include Oak Grove, Turfway Park and Newport in the new Live and Historical Racing segment.

The Live and Historical Racing segment now includes Churchill Downs Racetrack, Derby City Gaming, Oak Grove, Turfway Park, and Newport.

We also realigned our retail sports betting results at our wholly owned casinos from our Gaming segment to our TwinSpires segment.

As a result of this realignment, our operating segments that meet the requirements to be disclosed separately as reportable segments are:

Live and Historical Racing, TwinSpires, and Gaming.

For additional information, refer to Note 22 to the notes to consolidated financial statements included in Item 8.

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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

• 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"):

◦ 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.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic.

The COVID-19 global pandemic resulted in travel limitations and business and government shutdowns which had a significant negative economic impact in the United States and to our business.

Although vaccines are available, we cannot predict the duration of the COVID-19 global pandemic.

The extent to which the COVID-19 pandemic, including the emergence of variant strains, will continue to impact the Company remains uncertain and will depend on many factors that are not within our control.

In March 2020, as a result of the COVID-19 outbreak, we temporarily suspended operations at our wholly owned and managed gaming properties, announced the temporary furlough of our employees at these properties and certain racing operations and implemented a temporary salary reduction for all remaining non-furloughed salaried employees based on a percentage that varied 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.

In May 2020, we began to reopen our properties with patron restrictions and gaming limitations.

One property suspended operations again in July 2020 and reopened in August 2020, and three properties suspended operations in December 2020 and reopened in January 2021.

All of our gaming properties have remained open since January 2021.

The 146 th Kentucky Oaks and Derby were held in the third quarter of 2020 without spectators.

During the second quarter of 2021, we held the 147 th Kentucky Oaks and Derby with capacity restrictions in compliance with Kentucky venue limitations at that time.

The capacity restrictions limited reserved seating in each area to approximately 40% to 60% capacity and limited general admission tickets.

Due to such restrictions, our revenues from the Kentucky Oaks and Derby in each year were significantly less than we would otherwise expect.

Assets Held for Sale

On September 29, 2021, the Company announced an agreement to sell the 326-acre property in Arlington Heights, Illinois (the "Arlington Property"), which is the current home of Arlington International Racecourse ("Arlington"), to the Chicago Bears for $197.2 million.

The closing of the sale of the Arlington Property is subject to the satisfaction of various closing conditions.

The Company anticipates closing the sale of the Arlington Property in early 2023.

The Company has classified certain assets of Arlington totaling $81.5 million as held for sale as of December 31, 2021, on the accompanying consolidated balance sheets.

Arlington’s operations and assets are included in All Other in our consolidated

During the year ended December 31, 2021, the Company recorded $1.4 million of severance costs and $3.9 million related to our multi-employer pension liability in conjunction with the announced sale of the Arlington Property.

On November 22, 2021, the Company announced an agreement to sell 115.7 acres of land near Calder Casino for $291.0 million or approximately $2.5 million per acre to Link Logistics Real Estate, a Blackstone portfolio company.

The closing of the sale of the property is subject to the satisfaction of various closing conditions.

The Company anticipates closing the sale of the property in the first half of 2022.

The Company has classified certain assets of Calder totaling $6.3 million as held for sale as of December 31, 2021, on the accompanying consolidated balance sheets.

Calder's operations and assets are included in Gaming in our consolidated results.

Natural Disaster

In August 2021, Hurricane Ida caused damage to portions of Louisiana, including Fair Grounds Race Course & Slots, and 15 off-track betting facilities ("OTBs") owned by Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI").

All of the Fair Grounds and VSI operations were reopened as of December 31, 2021, with the exception of two OTBs.

The Company carries property and casualty insurance, as well as business interruption insurance subject to certain deductibles.

As of December 31, 2021, the Company has recorded a reduction of property and equipment, net of $2.8 million and incurred $2.5 million in operating expenses.

Through December 31, 2021, the Company has received $2.7 million in insurance recoveries from our carriers, and has an insurance recovery receivable of $2.6 million at December 31, 2021.

The Company is currently working with its insurance carriers to finalize its claim.

We continue to assess damages and insurance coverage, and we currently do not expect our losses to exceed the applicable insurance recoveries.

Key Indicators to Evaluate Business Results and Financial Condition

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• Transaction expense, net which includes:

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

– Calder racing exit costs, and

– Acquisition, disposition, and land sale related charges;

– 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:

• Rivers Des Plaines' impact on our investments in unconsolidated affiliates from:

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

– Recapitalization and transaction costs.

– Legal reserves and transaction costs.

• Asset impairments,

• Gain on Ocean Downs/Saratoga Transaction,

• Loss on extinguishment of debt,

• Legal reserves,

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• 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 (loss) income.

See the Reconciliation of Comprehensive (Loss) 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 income (loss).

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

Business Highlights

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:

• 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 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.

In 2021, we delivered strong performance while continuing 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, operating income, net income, and Adjusted EBITDA:

• Net revenue was $1.6 billion, up $543.2 million, or 51.5% from fiscal year 2020;

• Operating income was $284.4 million, up $224.2 million from fiscal year 2020;

• Net income attributable to Churchill Downs Incorporated was $249.1 million, up $331.0 million from fiscal year 2020;

• Adjusted EBITDA was $627.0 million, up $340.5 million, or 118.8% from fiscal year 2020.

Live and Historical Racing Segment:

• Adjusted EBITDA was $175.0 million, up $135.9 million compared to 2020.

• Derby Week returned to its traditional spring dates at Churchill Downs Racetrack with the 147th running of the Kentucky Derby and Oaks with over 51,000 fans gathered in person to watch the most exciting two minutes in sports on the first Saturday in May.

• In July 2021, we announced three major multi-year capital investments at Churchill Downs Racetrack:

The Homestretch Club, the Turn 1 Experience, and the Paddock and Under the Spires projects.

• Derby City Gaming delivered record net revenue and Adjusted EBITDA.

We also announced plans to invest $76.0 million at Derby City Gaming to expand the facility for up to 450 additional gaming positions and to build a new five-story hotel with 123 rooms including amenities to better serve and attract guests.

• Oak Grove delivered strong growth in net revenue and Adjusted EBITDA in its first full year of operation.

We successfully completed and opened the final components of the facility including the equestrian center, outdoor concert venue, and RV Park in the first quarter of 2021.

• We continued building the new HRM and grandstand facility at Turfway Park and are on schedule to open the new entertainment venue in September 2022.

• Announced plans to open Derby City Gaming Downtown in downtown Louisville, Kentucky as a new entertainment venue with 500 HRMs.

• Legislation was developed and approved by the Kentucky legislative bodies and signed by the Governor on February 22, 2021 that resolved the legality of historical horse racing.

TwinSpires Segment:

• Adjusted EBITDA was $78.0 million, down $34.9 million compared to 2020.

– Horse Racing Adjusted EBITDA was down $7.8 million compared to 2020;

– Sports and Casino Adjusted EBITDA was a $27.1 million increased loss compared to 2020.

• We launched mobile sports betting and iGaming in Michigan in January 2021, and mobile sports betting in Tennessee in March 2021, Pennsylvania, Indiana, and Colorado in April 2021 and Arizona in September 2021, and we launched a retail sportsbook at Ocean Downs in December 2021.

• The Gaming Segment delivered a record $411.9 million of Adjusted EBITDA, an increase of $238.8 million, or 138.0%, compared to 2020, despite restrictions at our properties during the year and disruption from Hurricane Ida at Fair Grounds and VSI.

• The team delivered record wholly-owned casino margins of 36.6% in 2021, up 1110 basis points from 2020.

• Our equity investments, Rivers Des Plaines and MVG, contributed 43.0% of the Adjusted EBITDA growth compared to 2020.

• We were selected by the Indiana Gaming Commission to develop the Queen of Terre Haute Casino Resort in Vigo County, Indiana.

We will be investing up to $260.0 million in a new entertainment venue with 1,000 slot machines, 50 tables games, a 125-room luxury hotel, a state-of-the-art TwinSpires Sportsbook and other food and beverage offerings.

• During the second quarter of 2021, the Louisiana State Legislature passed a bill that was signed by the Governor that allows Fair Grounds to have up to 50 HRMs in its OTBs.

Fair Grounds currently operates 15 OTBs and is developing plans to incorporate a total of approximately 600 HRMs into 14 of its existing OTBs.

• We announced an announced an agreement to sell 115.7 acres of land near Calder Casino for $291.0 million or approximately $2.5 million per acre to Link Logistics Real Estate in the second quarter of 2022.

• We announced an agreement to sell Arlington Park, our 326-acre property in Arlington Heights, Illinois, for $197.2 million to the Chicago Bears in early 2023.

• We repurchased one million shares of our common stock from The Duchossois Group for $193.94 per share ($193.9 million total) in a privately negotiated transaction.

We signed a definitive agreement to acquire substantially all of the assets of Peninsula Pacific Entertainment LLC for total consideration of $2.485 billion.

The Company’s total shareholder return was 24% for 2021 compared to 26% for the Russell 1000 and 29% 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 Company’s five-year total shareholder return for 2021 was 392% compared to 133% for both the Russell 1000 and the S&P 500.

The preceding shareholder return calculations assume dividends are reinvested.

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We manage our operations through three reportable segments:

Churchill Downs, Online Wagering, and Gaming.

Live and Historical Racing, TwinSpires, and Gaming.

Refer to Part I, Item 1.

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Consolidated Financial Results

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

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

Years Ended December 31, Change

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Net income from continuing operations $ 249.1 $ 13.3 $ 235.8

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

Net income (loss) attributable to Churchill Downs Incorporated 249.1 (81.9) 331.0

Adjusted EBITDA 627.0 286.5 340.5

Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020

• 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.

• Net income from continuing operations decreased $126.3 million.

• Net revenue increased $543.2 million driven by a $260.1 million increase from Gaming due to the temporary suspension of operations of all of our Gaming properties in the prior year;

a $239.5 million increase from Live and Historical Racing primarily due to the running the 147 th Kentucky Oaks and Derby with capacity restrictions in 2021 compared to the running of the 146 th Kentucky Oaks and Derby in 2020 without spectators, the temporary suspension of operations at Derby City Gaming in the prior year, and the opening of Oak Grove HRM facility in September 2020 and Newport in October 2020;

a $26.4 million increase from All Other primarily due to the temporary suspension of operations in the prior year at Arlington and United Tote;

and a $17.2 million increase in TwinSpires primarily due to our expansion in additional states related to our Sports and Casino business.

• Operating income increased $224.2 million due to a $141.7 million increase from Gaming due to the increase in net revenue and increased operating efficiencies;

a $129.6 million increase in Live and Historical primarily due to the increase in net revenue and increased operating efficiencies at Derby City Gaming;

a $13.7 million increase in All Other due to the increase in net revenue at Arlington and United Tote;

and a $2.2 million decrease in asset impairments.

Partially offsetting these increases were a $32.4 million decrease in TwinSpires primarily due to additional marketing spend related to the Sports and Casino business;

a $23.7 million increase in selling, general and administrative expense primarily due to an increase in accrued bonuses in the current year;

and a $6.9 million increase in transaction expense, net due an increase in land sale related costs.

• Net income from continuing operations increased $235.8 million.

The following items impacted comparability of the Company's net income from continuing operations for the year ended December 31, 2021 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.

a $18.9 million after-tax expense decrease related to our equity portion of the non-cash change in the fair value of Rivers Des Plaines' interest rate swaps;

a $1.9 million non-cash tax decrease related to the re-measurement of our net deferred tax liabilities based on the impact of revenue related to states with higher tax rates in 2020 that did not recur in the current year;

and a $1.0 million non-cash after-tax decrease in asset impairments.

Partially offsetting these decreases were a $13.3 million tax benefit related to our net operating loss in 2020 that did not recur in the current year;

a $7.1 million after-tax increase related to our equity portion of the Rivers Des Plaines' transaction costs and legal reserves;

and a $0.4 million after-tax increase in transaction, pre-opening and other expenses.

Excluding these items, net income from continuing operations increased $234.8 million primarily due to a $236.5 million after-tax increase driven by the results of our operations and equity income from our unconsolidated affiliates, partially offset by a $1.7 million after-tax increase in interest expense associated with higher outstanding debt balances.

• Our net income attributable to Churchill Downs Incorporated increased $331.0 million due to a $235.8 million increase in net income from continuing operations discussed above and a $95.4 million net loss from discontinued operations in 2020 that did not recur in the current year, partially offset by $0.2 million decrease from other sources.

• Our Adjusted EBITDA increased $340.5 million driven by a $238.8 million increase from Gaming primarily due to the increased operating efficiencies at our wholly-owned properties and equity investments and temporary suspension of operations in the prior year;

a $135.9 million increase from Live and Historical Racing primarily due to the running the 147 th Kentucky Oaks and Derby with capacity restrictions in 2021 compared to the running of the 146 th Kentucky

Oaks and Derby in 2020 without spectators, the increased operating efficiencies and the temporary suspension of operations at Derby City Gaming in the prior year, and the opening of Oak Grove HRM facility in September 2020;

and a $0.7 million increase from All Other primarily due to the temporary suspension of operations at Arlington and United Tote in the prior year, partially offset by a decrease in Corporate primarily due to an increase in accrued bonus in the current year.

Partially offsetting these increases was a $34.9 million decrease from TwinSpires primarily due to increased marketing and promotional activities from Sports and Casino and a decrease in net revenue from Horse Racing.

Financial Results by Segment

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(in millions) 2021 2020

Churchill Downs:

Live and Historical Racing:

Churchill Downs Racetrack $ 148.0 $ 81.1 $ 66.9

Derby City Gaming 154.3 79.5 74.8

Total Churchill Downs 160.5 289.4 (128.9)

Online Wagering:

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

Presque Isle 75.4 139.0 (63.6)

Oak Grove 100.7 16.6 84.1

Newport 17.9 3.1 14.8

Turfway Park 9.7 8.5 1.2

Total Live and Historical Racing 430.6 188.8 241.8

Horse Racing 398.3 404.7 (6.4)

Sports and Casino 34.8 11.3 23.5

Total TwinSpires 433.1 416.0 17.1

Fair Grounds Slots and VSI 136.2 99.9 36.3

Oxford 44.9 101.7 (56.8)

Calder 51.9 99.9 (48.0)

Presque Isle 119.9 73.3 46.6

Ocean Downs 100.6 60.2 40.4

Calder 100.1 51.8 48.3

Oxford 99.8 44.9 54.9

Riverwalk 61.2 46.3 14.9

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Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020

• 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.

• Live and Historical revenue increased $241.8 million primarily due to a $84.1 million increase at Oak Grove as a result of the opening of the HRM facility in September 2020 and the hotel in October 2020;

a $74.8 million increase at Derby City Gaming primarily due to the temporary suspension of operations during the prior year and the completion of their second outdoor patio which added an additional 225 HRMs in September 2020;

a $66.9 million increase at Churchill Downs Racetrack due to the running of the 147 th Kentucky Oaks and Derby with capacity restrictions in 2021 compared to the running of the 146 th Kentucky Oaks and Derby in 2020 without spectators, a $14.8 million increase at Newport due to the opening of the facility in October 2020;

and a $1.2 million increase at Turfway Park primarily due to the temporary suspension of operations during the prior year.

• TwinSpires revenue increased $17.1 million from the prior year primarily due to a $23.5 million increase from Sports and Casino driven by the expansion in additional states and marketing and promotional activities.

revenue decreased $6.4 million, or 1.6%, as a portion of our patrons returned to wagering at brick-and-mortar facilities in 2021 instead of wagering online..

• Gaming revenue increased $260.6 million primarily due to the temporary suspension of operations of all of our Gaming properties and the loss of revenue at each property during 2020.

• All Other revenue increased $27.5 million primarily due to an increase of $21.7 million at Arlington and a $5.4 million increase at United Tote, both of which were due to the temporary suspension of operations in the prior year, and a $0.4 million increase from other sources.

Consolidated Operating Expense

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Marketing and advertising expense 74.5 31.4 43.1

Impairment expense 17.5 — 17.5

Asset impairments 15.3 17.5 (2.2)

Transaction expense, net 7.9 1.0 6.9

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Significant items affecting comparability of consolidated operating expense include:

• 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.

• Taxes and purses increased $166.2 million driven by the temporary suspension of operations in 2020, and the opening of the Oak Grove HRM facility in September 2020 and Newport in October 2020.

• Content expense increased $4.2 million primarily due to an increase in certain host fees and source market fees for our TwinSpires Horse Racing business.

• Salaries and benefits expense increased $29.8 million driven by the temporary suspension of operations in 2020, and the opening of the Oak Grove HRM facility in September 2020 and Newport in October 2020.

• Selling, general and administrative expense increased $23.7 million primarily driven from an increase in our accrued bonuses in 2021 compared to the prior year due to the temporary suspension of operations in the prior year.

• Depreciation and amortization expense increased $10.3 million primarily driven by the opening of the Oak Grove HRM facility in September 2020 and Newport in October 2020.

• Marketing and advertising expense increased $43.1 million primarily due to increased marketing by our TwinSpires segment, and the temporary suspension of operations in the prior year.

• Asset impairments decreased $2.2 million driven by an $11.2 million non-cash asset impairment at Churchill Downs Racetrack related to revised capital plans associated with the first turn project during 2021 and a $4.1 million non-cash impairment charge related to certain assets in the TwinSpires segment where the carrying value exceeded the estimated fair value, offset by the $17.5 million non-cash intangible asset impairment in 2020 that did not recur in the current year.

• Transaction expense, net increased $6.9 million due to increased legal and professional expenses and land sale related costs associated with Arlington and Calder.

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

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.

Other operating expense increased $37.0 million primarily driven by the temporary

suspension of operations at our properties during 2020, and the opening of the Oak Grove HRM facility in September 2020 and Newport in October 2020.

Adjusted EBITDA

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(in millions) 2021 2020

Churchill Downs $ 38.3 $ 137.7 $ (99.4)

Online Wagering 109.3 66.3 43.0

Live and Historical Racing $ 175.0 $ 39.1 $ 135.9

TwinSpires 78.0 112.9 (34.9)

Gaming 411.9 173.1 238.8

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Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020

• 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

• Live and Historical Racing Adjusted EBITDA increased $135.9 million due to a $52.1 million increase at Churchill Downs Racetrack primarily due to the running of the 147 th Kentucky Oaks and Derby with capacity restrictions in 2021 compared to the running of the 146 th Kentucky Oaks and Derby in 2020 without spectators;

a $47.1 million increase at Derby City Gaming due to the increase in net revenue, increased operating efficiencies, and the temporary suspension of operations during 2021;

a $33.2 million increase at Oak Grove as a result of the opening of the HRM facility in September 2020;

a $2.8 million increase at Newport due to the opening of the facility in October 2020;

and a $0.7 million increase at Turfway due to the temporary suspension of operations during 2020.

• TwinSpires Adjusted EBITDA decreased $34.9 million primarily due to a $27.1 million increase in the loss from our Sports and Casino business due to increased marketing and promotional activities and a $7.8 million decrease from Horse Racing primarily due to the decrease in net revenue.

• Gaming Adjusted EBITDA increased $238.8 million driven by an $136.0 million increase at our wholly-owned Gaming properties and a $102.8 million increase from our equity investments, both of which are due to the temporary suspension of operations of all of our Gaming properties in 2020.

• All Other Adjusted EBITDA increased $0.7 million primarily due to an $11.1 million increase at Arlington and $1.7 million increase at United Tote, both of which were due to the temporary suspension of operations in 2020, partially offset by a $11.9 million decrease at Corporate primarily due to an increase in accrued bonus in the current year, and a $0.2 million decrease from other sources.

Reconciliation of Comprehensive Income (Loss) to Adjusted EBITDA

Years Ended December 31, Change

(in millions) 2021 2020

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

Net income (loss) and comprehensive income (loss) attributable to Churchill Downs Incorporated $ 249.1 $ (81.9) $ 331.0

Net loss attributable to noncontrolling interest — 0.2 (0.2)

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

Net income (loss) 249.1 (82.1) 331.2

Loss from discontinued operations, net of tax — 95.4 (95.4)

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Interest expense 84.7 80.0 4.7

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

Income tax provision (benefit) 94.5 (5.3) 99.8

EBITDA $ 531.5 $ 180.9 $ 350.6

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Stock-based compensation expense $ 27.8 $ 23.7 $ 4.1

Legal reserves — 3.6 (3.6)

Other, net 0.8 0.4 0.4

Pre-opening expense 11.2 5.1 6.1

Other charges 0.2 0.8 (0.6)

Pre-opening expense and other expense 5.8 11.2 (5.4)

Other income, expense:

Interest, depreciation and amortization expense related to equity investments 41.5 38.5 3.0

Changes in fair value of Midwest Gaming's interest rate swaps 12.9 12.4 0.5

Midwest Gaming's recapitalization and transactions costs — 4.7 (4.7)

Other charges and recoveries, net — (0.2) 0.2

Changes in fair value of Rivers Des Plaines' interest rate swaps (12.9) 12.9 (25.8)

Rivers Des Plaines' legal reserves and transactions costs 9.9 — 9.9

Transaction expense, net 7.9 1.0 6.9

Impairment of tangible and other intangible assets 17.5 — 17.5

Asset impairments 15.3 17.5 (2.2)

Total adjustments to EBITDA 95.5 105.6 (10.1)

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Total shareholders’ equity 306.8 367.1 (60.3)

• 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;

• Total assets increased $295.2 million driven by a $223.9 million increase in cash and cash equivalents primarily due to the net proceeds from the new Term Loan B-1 and Additional 2028 Notes and the increase in operating income for the year;

a $33.0 million increase in investment in and advances to unconsolidated affiliates due to the Company's interest in Rivers Des Plaines and MVG;

a $16.6 million increase in income taxes receivable due to the payment of the Kater and Thimmegowda litigation settlements in 2021 partially offset by our current year taxable income;

and a $21.7 million increase in all other assets.

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 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.

• Total liabilities increased $355.5 million driven by a $204.6 million increase in notes payable due to the proceeds from our Additional 2028 Notes;

a $138.1 million increase in long-term debt due to the proceeds from the new Term Loan B-1 under our Credit Agreement;

a $64.8 million increase in accrued expenses and other current liabilities driven by an increase in accrued bonuses, purses payable due to timing, and increased account wagering deposits with TwinSpires;

a $39.0 million increase in deferred income taxes primarily driven by the payment of the Kater and Thimmegowda litigation settlements in 2021;

a $14.9 million increase in current deferred revenue due to an increase in cash receipts related to the 2022 Kentucky Oaks and Derby;

and an $18.1 million increase in all other liabilities.

Partially offsetting these increases was a $124.0 million decrease in current liabilities of discontinued operations due to the payment of the Kater and Thimmegowda litigation settlements.

• Total shareholders’ equity decreased $60.3 million driven by $297.5 million in repurchases of common stock, $26.1 million from our annual dividend declared in December 2021, and $16.1 million in taxes paid related to net share settlement of stock awards.

Partially offsetting these decreases were $249.1 million current year net income attributable to Churchill Downs Incorporated, $27.8 million from stock-based compensation, and $2.5 million from other sources.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources have been and will continue to be cash flow from operations, borrowings under our Credit Facility, and proceeds from the issuance of debt securities.

Our ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, acquisitions or equity investments, funding of construction for development projects, and our compliance with our covenants under our Credit Facility.

The following table is a summary of our liquidity and cash flows:

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Financing activities (0.5) 76.0 (76.5)

Operating Cash Flow

Cash provided by operating activities increased $316.3 million driven by a $224.2 million increase in operating income related to continuing operations, a $78.7 million increase in distributions from unconsolidated affiliates, and a $13.4 million increase from all other operating activities.

We anticipate that cash flows from operations over the next twelve months will be adequate to fund our business operations and capital expenditures.

Investing Cash Flow

Cash used in investing activities decreased $139.0 million driven by $158.9 million decrease in capital project expenditures due to reduced capital project spending in 2021 compared to prior year.

Partially offsetting this decrease was a $16.5 million increase in capital maintenance expenditures and a $3.4 million increase from all other investing activities.

Financing Cash Flow

Cash provided by financing activities decreased $76.5 million driven by a $269.1 million increase in common stock repurchases and a $11.6 million decrease from all other financing activities .

Partially offsetting this decrease was a $204.2 million in crease in net borrowings from long-term debt .

Capital Expenditures

Included in cash flows from investing activities are capital maintenance expenditures and capital project expenditures.

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Capital project expenditures represent fixed asset additions related to land or building improvements to new or existing assets or purchases of new (non-replacement) equipment or software related to specific projects deemed necessary expenditures.

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

• 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 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.

We have announced several project capital investments during the past year, including the following:

Churchill Downs Racetrack Homestretch Club, Churchill Downs Racetrack Turn I Experience, Derby City Gaming Expansion and Hotel, Derby City Gaming Downtown, Turfway Park HRM Facility and Grandstand, the Queen of Terre Haute Casino Resort, and Louisiana HRMs in our OTBs.

We are currently estimating that we will spend between $300 million and $350 million for project capital in 2022, although this amount may vary significantly based on the timing of work completed, unanticipated delays, and timing of payments to third parties.

Common Stock Repurchase Program

On September 29, 2021, the Board of Directors of the Company approved a common stock repurchase program of up to $500.0 million (“2021 Stock Repurchase Program”).

The 2021 Stock Repurchase Program includes and is not in addition to the unspent amount remaining under the prior 2018 Stock Purchase Program authorization.

Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions.

The repurchase program has no time limit and may be suspended or discontinued at any time.

We had $445.6 million of repurchase authority remaining under this program at December 31, 2021.

On October 26, 2021, the Company's Board of Directors approved an annual cash dividend on our common stock of $0.667 per outstanding share, which represented a 7% increase over the prior year.

The dividend was payable on January 7, 2022 to shareholders of record as of the close of business on December 3, 2021.

The 7% increase marked the 11th consecutive year that the Company has increased the dividend.

The payment and amount of future dividends will be determined by the Board of Directors and will depend upon, among other things, our operating results, financial condition, cash requirements and general business conditions at the time such payment is considered.

Credit Facilities and Indebtedness

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Term Loan B due 2024 $ 384.0 $ 388.0 $ (4.0)

Term Loan B-1 due 2028 297.8 — 297.8

Revolver — 149.7 (149.7)

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Issuance cost and fees (13.8) (15.4) 1.6

Net debt $ 1,618.3 $ 1,469.9 $ 148.4

Total debt $ 1,961.0 $ 1,618.3 $ 342.7

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.

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

The Credit Agreement provides for a $700.0 million senior secured revolving credit facility due 2024 (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.

The Credit Amendment is secured by substantially all wholly-owned assets of the Company.

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 Credit Agreement is collateralized by substantially all of the wholly-owned assets of the Company.

The Company capitalized debt issuance costs of $1.6 million associated with the Revolver and $5.1 million associated with the Term Loan B, both of which are being amortized over the respective debt period.

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

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For the period ended December 31, 2021, the Company's commitment fee rate was 0.20%.

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.

On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement, which (i) provided for a financial covenant relief period through the date on which the Company delivered the Company's quarterly financial statements and compliance certificate for the fiscal quarter ended June 30, 2021, subject to certain exceptions (the "Financial Covenant Relief Period"), (ii) amended 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) extended certain deadlines and makes certain other amendments to the Company’s financial reporting obligations, (iv) placed certain restrictions on restricted payments during the Financial Covenant Relief Period, and (v) amended the definitions of "Material Adverse Effect" and "License Revocation" in the Credit Agreement to take into consideration COVID-19.

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 from $26.0 million to $226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc.

Refer to Note 11, Shareholders' Equity, of the Notes to the Consolidated Financial Statements for information regarding this transaction.

On March 17, 2021, the Company entered into the Incremental Joinder Agreement No.

1 (the "Joinder") to its Credit Agreement which provided $300.0 million in New Term Loan Commitments ("Term Loan B-1") as a new tranche of term loans under the existing Credit Agreement (as conformed to recognize the new loan), and carries a maturity date of March 17, 2028.

The Term Loan B-1 bears interest at LIBOR plus 200 basis points and requires quarterly payments of 0.25% of the original $300.0 million balance.

The Term Loan B-1 may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement.

The Company capitalized $3.5 million of debt issuance costs associated with the Joinder which are being amortized as interest expense over the 7-year term of the Term Loan B-1.

The interest rate on the Revolver on December 31, 2021 was LIBOR plus 137.5 basis points based on the Revolver pricing grid in the Second Amendment and the Company's net leverage ratio as of September 30, 2021.

The Term Loan B and Term Loan B-1 bear 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.

Actual Requirement

Interest coverage ratio 6.6 to 1.0 > 2.5 to 1.0

Consolidated total secured net leverage ratio 0.9 to 1.0 < 4.0 to 1.0

The Company was compliant with all applicable covenants on December 31, 2021.

2027 Senior Notes

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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 Company may redeem some or all of the 2027 Senior Notes at any time at redemption prices set forth in the 2027 Indenture.

The terms of the 2027 Indenture, among other things, limit the ability of the Company to:

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and (viii) enter into transactions with affiliates.

In connection with the issuance of the 2027 Senior Notes, the Company and the 2027 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.

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.

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 "Existing 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 15 th and July 15 th of each year, commencing on July 15, 2018.

The Company used the net proceeds from the 2028 Senior Notes and the Credit Agreement to repay the remaining outstanding amount of our $600.0 million 5.375% Senior Unsecured Notes that were scheduled to mature on December 15, 2021.

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 "2028 Guarantors"), and U.S.

The Existing 2028 Senior Notes were issued at par, with interest payable on January 15 th and July 15 th 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 Existing 2028 Senior Notes.

The Existing 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 "2028 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 Company may redeem some or all of the Existing 2028 Senior Notes at any time at redemption prices set forth in the 2028 Indenture.

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

(ii) pay dividends or make other restricted payments;

(iii) make certain investments;

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and (viii) enter into transactions with affiliates.

In connection with the issuance of the 2028 Senior Notes, the Company and the 2028 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.

On March 17, 2021, the Company completed an offering of $200.0 million in aggregate principal amount of 4.75% Senior Unsecured Notes that mature on January 15, 2028 (the "Additional 2028 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 Additional 2028 Notes were offered under the indenture dated as of December 27, 2017, governing the Existing 2028 Senior Notes and form a part of the same series for purposes of the indenture.

In connection with the offering, we capitalized $3.4 million of debt issuance costs which are being amortized as interest expense over the term of the Additional 2028 Notes.

Upon completion of this offering, the aggregate principal amount outstanding of the Existing 2028 Notes, together with the Additional 2028 Notes (collectively the "2028 Senior Notes") is $700 million.

The Additional 2028 Notes were issued at 103.25% of the principal amount, plus interest deemed to have accrued from January 15, 2021, with interest payable on January 15 th and July 15 th of each year, commencing on July 15, 2021.

The 2028 Senior Notes will vote as one class under the indenture governing the 2028 Senior Notes.

The 3.25% premium will be amortized through interest expense, net over the term of the Additional 2028 Notes.

The Company used the net proceeds from the Additional 2028 Notes and the Term Loan B-1 (i) to repay indebtedness outstanding under our Revolving Credit Facility, (ii) to fund related transaction fees and expenses and (iii) for working capital and other general corporate purposes.

The Company may redeem some or all of the Additional 2028 Notes at any time as set forth in the 2028 Offering Memorandum.

In connection with the issuance of the Additional 2028 Notes, the Company and the 2028 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 March 17, 2021.

Contractual Obligations

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8.1 15.9 — — 24.0

Revolver — — 149.7 — 149.7

Interest on Revolver (2)

Term Loan B-1 3.0 6.0 6.0 282.8 297.8

Interest on Term Loan B-1 (1)

6.4 12.6 12.3 7.3 38.6

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Interest on 2028 Senior Notes 33.3 66.5 66.5 49.9 216.2

Operating Leases 5.5 8.1 7.4 5.5 26.5

Operating and Finance Leases 6.7 12.2 11.0 14.5 44.4

Minimum Guarantees (2)

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(1) Interest includes the estimated contractual payments under our Credit Facility assuming no change in the weighted average borrowing rate of 2.11%, which was the rate in place as of December 31, 2021.

(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.

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

As of December 31, 2021, we had approximately $3.9 million of unrecognized tax benefits.

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

Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources.

observance of known trends in our Company and the industry as a whole and information available from other outside sources.

Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.

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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, capital expenditures, royalty rate, and the discount rate.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis