Churchill Downs Inc 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), which provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this report are made pursuant to the Act. The reader is cautioned that such forward-looking statements are based on information available at the time and / or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date that the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as “anticipate,” "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "seek," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations include the following: • the receipt of regulatory approvals on terms desired or anticipated, unanticipated difficulties or expenditures relating to our proposed transactions, including, without limitation, difficulties that result in the failure to realize expected synergies, efficiencies and cost savings from the proposed transactions within the expected time period (if at all), our ability to obtain financing on the anticipated terms and schedule, disruptions of our or Peninsula Pacific Entertainment LLC's ("P2E") current plans, operations and relationships with customers and suppliers caused by the announcement and pendency of the proposed transaction, our and P2E’s ability to consummate a sale-leaseback transaction with respect to the Hard Rock Sioux City on terms desired or anticipated; • the impact of the novel coronavirus (COVID-19) pandemic, including the emergence of variant strains, and related economic matters on our results of operations, financial conditions and prospects; • the occurrence of extraordinary events, such as terrorist attacks, public health threats, civil unrest, and inclement weather; • the effect of economic conditions on our consumers' confidence and discretionary spending or our access to credit; • additional or increased taxes and fees; • the impact of significant competition, and the expectation the competition levels will increase; • changes in consumer preferences, attendance, wagering, and sponsorships; • loss of key or highly skilled personnel; • lack of confidence in the integrity of our core businesses or any deterioration in our reputation; • risks associated with equity investments, strategic alliances and other third-party agreements; • inability to respond to rapid technological changes in a timely manner; • concentration and evolution of slot machine and historical racing machine ("HRM") manufacturing and other technology conditions that could impose additional costs; • inability to negotiate agreements with industry constituents, including horsemen and other racetracks; • inability to successfully focus on market access and retail operations for our TwinSpires Sports and Casino business and effectively compete; • inability to identify, complete, or fully realize the benefits of, our proposed acquisitions, divestitures, development of new venues or the expansion of existing facilities on time, on budget, or as planned; • general risks related to real estate ownership and significant expenditures, including fluctuations in market values and environmental regulations; • reliance on our technology services and catastrophic events and system failures disrupting our operations; • online security risk, including cyber-security breaches, or loss or misuse of our stored information as a result of a breach, including customers’ personal information, could lead to government enforcement actions or other litigation; • personal injury litigation related to injuries occurring at our racetracks; • compliance with the Foreign Corrupt Practices Act or applicable money-laundering regulations; • payment-related risks, such as risk associated with fraudulent credit card and debit card use; • work stoppages and labor issues; FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 24 • risks related to pending or future legal proceedings and other actions; • highly regulated operations and changes in the regulatory environment could adversely affect our business; • restrictions in our debt facilities limiting our flexibility to operate our business; • failure to comply with the financial ratios and other covenants in our debt facilities and other indebtedness; • disruptions in the credit markets or changes to our credit ratings may adversely affect our business; and • increase in our insurance costs, or obtain similar insurance coverage in the future, and inability to recover under our insurance policies for damages sustained at our properties in the event of inclement weather and casualty events. The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts assume dilution unless otherwise noted. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, including Part I - Item 1A, "Risk Factors" of our Form 10-K for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 25 Our Business Executive Overview Churchill Downs Incorporated (the "Company," "we", "us", "our") 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 entertainment venues with approximately 3,050 HRMs in Kentucky. We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing in the U.S. 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. Segments During the first quarter of 2022, 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 chief operating decision maker decided to include the results of our United Tote business in the TwinSpires segment as we evolve our strategy to integrate the United Tote offering with TwinSpires Horse Racing, which we believe will create additional business to business revenue opportunities. Results of our United Tote business were previously included in our All Other segment. The prior year results were reclassified to conform to this presentation. P2E Acquisition On February 18, 2022, the Company entered into a definitive purchase agreement to acquire substantially all of the assets of Peninsula Pacific Entertainment LLC ("P2E") for total consideration of $2.485 billion (the "P2E Purchase Agreement") (collectively, the "P2E Transaction"). The P2E Purchase Agreement contemplates the acquisition by the Company of the following properties: Colonial Downs Racetrack in New Kent, Virginia ("Colonial Downs"), six historical racing entertainment venues across Virginia, del Lago Resort & Casino ("del Lago") in Waterloo, New York, and the operations of Hard Rock Hotel & Casino in Sioux City, Iowa (“Hard Rock Sioux City”). The P2E Transaction is dependent on customary closing conditions, including the Company obtaining approvals from the Virginia Racing Commission, the New York State Gaming Commission, and the Iowa Racing and Gaming Commission. The transaction is expected to close by the end of 2022. Either the Company or P2E may terminate the P2E Purchase Agreement if the closing has not occurred prior to the date that is nine months after signing the P2E Purchase Agreement (such date being November 18, 2022), subject to the ability of either party to elect to extend such date for an additional four months in certain circumstances. If certain required regulatory approvals are not obtained and the P2E Purchase Agreement is terminated, the Company may have to pay a Regulatory Termination Fee of up to $137.5 million. April 2022 Financing Transactions On April 13, 2022, the Company announced an amendment of its senior secured credit agreement (the “Credit Agreement Amendment”) to extend the maturity date of its existing revolving credit facility to 2027 and to increase the commitments under the existing revolving credit facility from $700 million to $1,200 million. The Credit Agreement Amendment also provides for a senior secured delayed draw term loan A credit facility due 2027 in the amount of $800 million (the “Delayed Draw Term Loan A”) and makes certain other changes to the credit agreement. The interest rate applicable to borrowings on the Revolver and Delayed Draw Term Loan A will be secured financing overnight rate-based plus a spread, determined by the Company’s total net leverage ratio. The Company also successfully closed into escrow the previously announced offering of $1,200 million in aggregate principal amount of 5.750% senior notes due 2030. Chasers Poker Room Acquisition On March 22, 2022, the Company entered into a definitive purchase agreement to acquire Chasers Poker Room ("Chasers") in Salem, New Hampshire. Chasers is a charitable gaming facility located approximately 30 miles from Boston, Massachusetts, that offers poker and a variety of table games. Following the closing of the acquisition, the Company plans to develop an expanded charitable gaming facility in Salem to accommodate historical racing machines. The Company expects the total investment in Salem, inclusive of the Chasers purchase price to be approximately $150 million. The transaction is expected to close during the second quarter of 2022. Impact of COVID-19 Pandemic In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 global pandemic has resulted in travel limitations and business and government shutdowns which have had significant negative FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 26 economic impacts in the United States and in relation to our business. Although vaccines are now 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. We will continue to monitor for new developments related to the pandemic and assess these developments to maintain continuity in our operations. Asset Impairment On February 24, 2022, the Company announced its plans to exit the direct online sports betting and iGaming business and pursue monetization of its online market access licenses. During the quarter ended March 31, 2022, the Company evaluated whether this planned exit would indicate it is more likely than not that any of the Company’s intangible assets, long-lived assets, current assets or property and equipment, were impaired (“Trigger Event”). Based on the Company’s evaluation, the Company concluded that a Trigger Event occurred related to certain TwinSpires assets. As a result, the Company recorded a $4.9 million non-cash impairment charge related to certain assets in the TwinSpires segment. Key Indicators to Evaluate Business Results and Financial Condition Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend. Our condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following: Adjusted EBITDA includes our portion of EBITDA from our equity investments. Adjusted EBITDA excludes: • Transaction expense, net which includes: • Acquisition, disposition, and land sale related charges; • Direct online Sports and Casino business costs; and • Other transaction expense, including legal, accounting, and other deal-related expense; • Stock-based compensation expense; • Rivers Des Plaines' impact on our investments in unconsolidated affiliates from: – The impact of changes in fair value of interest rate swaps; and – Legal reserves and transaction costs; • Asset impairments; • Legal reserves; • Pre-opening expense; and • Other charges, recoveries and expenses As of December 31, 2021, Arlington ceased racing and simulcast operations given the pending sale of the property to the Chicago Bears. Arlington's operating loss in the current year quarter was treated as an adjustment to EBITDA and is included in Other expenses, net in the Reconciliation of Comprehensive Income to Adjusted EBITDA. For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying condensed consolidated statements of comprehensive income. Refer to the reconciliation of comprehensive income to Adjusted EBITDA included in this section for additional information. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 27 Governmental Regulations and Legislative Changes We are subject to various federal, state and international laws and regulations that affect our businesses. The ownership, operation and management of our Live and Historical Racing, TwinSpires, and Gaming segments, as well as our other operations, are subject to regulation under the laws and regulations of each of the jurisdictions in which we operate. The ownership, operation and management of our businesses and properties are also subject to legislative actions at both the federal and state level. There have been no material changes with respect to our regulatory and legislative activities disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Consolidated Financial Results The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information: Three Months Ended March 31, (in millions) 2022 2021 Change Net revenue $ 364.1 $ 324.3 $ 39.8 Operating income 47.4 46.7 0.7 Operating income margin 13 % 14 % Net income 42.1 36.1 6.0 Adjusted EBITDA 128.5 110.6 17.9 Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 • Net revenue increased $39.8 million due to a $25.3 million increase from Gaming primarily due to certain capacity restrictions on patrons and gaming during the prior year quarter; a $22.8 million increase from Live and Historical Racing due to capacity restrictions at the Oak Grove HRM facility and Derby City Gaming in the prior year quarter and overall continued growth in the businesses. Partially offsetting these increases were a $5.1 million decrease in revenue from All Other primarily driven by the cessation of racing and simulcast operations at Arlington at the end of 2021 and a decrease of $3.2 million f rom TwinSpires driven by a decrease in Horse Racing handle partially offset by an increase in Sports and Casino due to our expansion in additional states during 2021. • Operating income increased $0.7 million due to a $9.8 million increase from Live and Historical Racing primarily due to an increase in net revenue; a $6.4 million increase from Gaming primarily due to the increase in net revenue as a result of capacity restrictions on patrons and gaming during the prior year quarter; and a $0.6 million increase from All Other. Partially offsetting these increases were a $5.7 million increase in selling, general and administrative expenses due to an increase in employee benefits as well as an increase in legal fees, a $4.9 million increase in transaction expenses driven by the P2E Transaction, a $4.9 asset impairment related to TwinSpires Sports and Casino as a result of the decision to exit the direct online Sports and Casino business, and a $0.6 million decrease at TwinSpires. • Net income increased $6.0 million. The following items impacted comparability of the Company's first quarter of 2022 net income compared to the prior year's first quarter: a $6.3 million after-tax increase in expenses related to transaction, pre-opening and other expenses, net, and a $3.5 million after-tax impairment charge driven by the decision to exit the direct online Sports and Casino business, and $0.7 million of other charges primarily related to our equity portion of Miami Valley Gaming's after-tax non-cash impairment charge related to prior expansion plans. Partially offsetting these increases were a $4.5 million after tax benefit increase related to our equity portion of the non-cash change in the fair value of Rivers Des Plaines' interest rate swaps and a $0.7 million after tax decrease in Rivers Des Plaines' legal reserves and transaction costs. Excluding these items, net income increased $11.3 million primarily due to a $12.9 million after-tax increase driven by the results of our operations and equity in income from our unconsolidated affiliates, partially offset by a $1.6 million after-tax increase in interest expense associated with higher outstanding debt balances. • Adjusted EBITDA increased $17.9 million driven by a $9.6 million increase from Live and Historical Racing primarily due an increase in net revenue, a $8.7 million increase from Gaming primarily due to certain capacity restrictions on patrons and gaming during the prior year quarter, and a $1.0 million increase from TwinSpires Sports and Casino primarily due to a decrease in marketing and promotional activities, partially offset by a decline in TwinSpires Horse Racing due to decreased handle. Partially offsetting these increases was a $1.4 million decrease from All Other primarily due to an increase in Corporate expenses offset by an increase at Arlington, as operations expenses incurred in the previous year quarter did not recur. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 28 Financial Results by Segment Net Revenue by Segment The following table presents net revenue for our segments, including intercompany revenue: Three Months Ended March 31, (in millions) 2022 2021 Change Live and Historical Racing: Churchill Downs Racetrack $ 2.5 $ 2.6 $ (0.1) Derby City Gaming 42.8 32.9 9.9 Oak Grove 30.4 19.4 11.0 Newport 6.3 4.4 1.9 Turfway Park 5.2 5.4 (0.2) Total Live and Historical Racing 87.2 64.7 22.5 TwinSpires: Horse Racing 91.1 98.0 (6.9) Sports and Casino 10.3 7.0 3.3 Total TwinSpires 101.4 105.0 (3.6) Gaming: Fair Grounds and VSI 43.4 40.3 3.1 Presque Isle 27.2 23.8 3.4 Calder 27.0 20.9 6.1 Ocean Downs 21.3 20.0 1.3 Oxford 26.8 15.7 11.1 Riverwalk 14.4 14.4 — Harlow's 13.1 14.0 (0.9) Lady Luck Nemacolin 6.0 4.9 1.1 Total Gaming 179.2 154.0 25.2 All Other 0.5 7.2 (6.7) Eliminations (4.2) (6.6) 2.4 Net Revenue $ 364.1 $ 324.3 $ 39.8 Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 • Live and Historical Racing revenue increased $22.5 million due primarily to an $11.0 million increase at Oak Grove, a $9.9 million increase from Derby City Gaming, and a $1.9 million increase from Newport. Oak Grove and Derby City Gaming reflected the benefit of the elimination of the operating restrictions that were in place during the first quarter of 2021 and overall continued growth in the businesses. • TwinSpires revenue decreased $3.6 million from the prior year quarter primarily due to a $6.9 million decrease from Horse Racing that was partially offset by a $3.3 million increase from Sports and Casino. Horse Racing net revenue decreased as a portion of our patrons returned to wagering at brick-and-mortar facilities in the current quarter instead of wagering online. Sports and Casino net revenue increased as a result of our expansion in additional states during 2021. • Gaming revenue increased $25.2 million primarily due to certain capacity restrictions on patrons and gaming during the prior year quarter that were no longer in place at Oxford, Calder, and Presque Isle. • All Other revenue decreased $6.7 million primarily as a result of Arlington ceasing racing and simulcast operations at the end of 2021. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 29 Consolidated Operating Expense The following table is a summary of our consolidated operating expense: Three Months Ended March 31, (in millions) 2022 2021 Change Taxes and purses $ 101.6 $ 88.9 $ 12.7 Salaries and benefits 42.3 37.2 5.1 Content expense 41.3 43.1 (1.8) Selling, general and administrative expense 35.9 30.2 5.7 Depreciation and amortization 25.1 26.0 (0.9) Marketing and advertising 11.5 12.1 (0.6) Transaction expense, net 5.0 0.1 4.9 Asset impairments 4.9 — 4.9 Other operating expense 49.1 40.0 9.1 Total expense $ 316.7 $ 277.6 $ 39.1 Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 Significant items affecting comparability of consolidated operating expense include: • Taxes and purses increased $12.7 million primarily driven by the increase in net revenue by our wholly-owned gaming and HRM properties. • Salaries and benefits expense increased $5.1 million driven by the capacity restrictions at our gaming properties in the prior year quarter. • Content expense decreased $1.8 million primarily due to a decrease in online simulcast host fees in the TwinSpires Horse Racing business. • Selling, general and administrative expense increased $5.7 million driven primarily from an increase in employee benefits as well as an increase in legal fees. • Depreciation and amortization decreased $0.9 million primarily driven by the assets held for sale at Arlington. • Marketing and advertising expense decreased $0.6 million primarily due to decreased marketing by our TwinSpires Sports and Casino business due to the decision to exit the direct online Sports and Casino business. This decrease was partially offset by increased marketing spend at our gaming properties. • Transaction expense, net increased $4.9 million primarily due to increased legal and professional expenses related to the P2E Transaction. • Asset impairments increased $4.9 million due to a non-cash impairment charge related to the Company's plan to exit the direct online Sports and Casino business. • Other operating expenses include maintenance, utilities, food and beverage costs, property taxes, insurance, and other operating expenses. Other operating expense increased $9.1 million primarily driven by significant increases in property insurance, food and beverage costs, and preparation for the running of the 148th Kentucky Oaks and Derby. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 30 Adjusted EBITDA We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Three Months Ended March 31, (in millions) 2022 2021 Change Live and Historical Racing $ 27.9 $ 18.3 $ 9.6 TwinSpires 24.1 23.1 1.0 Gaming 91.1 82.4 8.7 Total Segment Adjusted EBITDA 143.1 123.8 19.3 All Other (14.6) (13.2) (1.4) Total Adjusted EBITDA $ 128.5 $ 110.6 $ 17.9 Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 • Live and Historical Racing Adjusted EBITDA increased $9.6 million due to a $5.3 million increase at Oak Grove, a $5.2 million increase at Derby City Gaming, and a $0.7 million increase at Newport from the increase in net revenue. Partially offsetting these increases was a $1.2 million decrease at Churchill Downs Racetrack due to the timing of Derby Week expenses and a $0.4 million decrease from higher expenses at Turfway Park. • TwinSpires Adjusted EBITDA increased $1.0 million primarily due to a $3.7 million increase from our Sports and Casino business due to decreased marketing and promotional activities and a $0.6 million increase at United Tote. Partially offsetting these increases was a decrease from Horse Racing of $3.3 million due to the reduction in net revenue. • Gaming Adjusted EBITDA increased $8.7 million driven by a $5.6 million increase at our wholly-owned Gaming properties due to increased net revenue and a $3.1 million increase from our equity investments, both of which were due to certain capacity restrictions on patrons and gaming during the prior year quarter. • All Other Adjusted EBITDA decreased $1.4 million driven by a $2.6 million increase in legal fees and the timing of other Corporate expenses that was partially offset by a $1.2 million decrease in the Arlington operating loss in the current year quarter compared to the prior year quarter as a result of Arlington ceasing racing and simulcast operations at the end of 2021. We are excluding Arlington's operating results from Adjusted EBITDA in 2022 pending the sale of the property to the Chicago Bears. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 31 Reconciliation of Comprehensive Income to Adjusted EBITDA Three Months Ended March 31, (in millions) 2022 2021 Change Net income and comprehensive income $ 42.1 $ 36.1 $ 6.0 Additions: Depreciation and amortization 25.1 26.0 (0.9) Interest expense 21.3 19.4 1.9 Income tax provision 16.5 16.2 0.3 EBITDA $ 105.0 $ 97.7 $ 7.3 Adjustments to EBITDA: Stock-based compensation expense $ 7.0 $ 5.5 $ 1.5 Pre-opening expense 2.1 0.6 1.5 Other expense, net 2.5 — 2.5 Asset impairments 4.9 — 4.9 Transaction expense, net 5.0 0.1 4.9 Other income, expense: Interest, depreciation and amortization expense related to equity investments 11.1 9.6 1.5 Changes in fair value of Rivers Des Plaines' interest rate swaps (10.4) (4.2) (6.2) Rivers Des Plaines' legal reserves and transactions costs 0.3 1.3 (1.0) Other charges 1.0 — 1.0 Total adjustments to EBITDA 23.5 12.9 10.6 Adjusted EBITDA $ 128.5 $ 110.6 $ 17.9 Consolidated Balance Sheet The following table is a summary of our overall financial position: (in millions) March 31, 2022 December 31, 2021 Change Total assets $ 3,036.9 $ 2,981.6 $ 55.3 Total liabilities $ 2,719.1 $ 2,674.8 $ 44.3 Total shareholders' equity $ 317.8 $ 306.8 $ 11.0 Significant items affecting the comparability of our condensed consolidated balance sheets include: • Total assets increased $55.3 million driven b y a $40.9 million increase in property and equipment driven by capital expenditures at Churchill Downs Racetrack, Turfway Park, and Derby City Gaming; a $16.9 million increase in other current assets driven by an increase in prepaid insurance; and a $11.8 million increase in all other assets. Partially offsetting these increases was an $8.1 million decrease in investments in and advances to unconsolidated affiliates driven by distributions received from Rivers Des Plaines and MVG; and a $6.2 million decrease in income tax receivable driven by the current year quarter income tax provision. • Total liabilities increased $44.3 million primarily driven by a $56.3 million increase in current deferred revenue due to advance sales associated with the 148th Kentucky Oaks and Derby tickets and sponsorships; a $15.3 million increase in accounts payable driven by timing of payments; and a $10.5 increase in all other liabilities. Partially offsetting these increases were a $26.1 million decrease in dividends payable due to the payment of our annual dividends; and a $11.7 million decrease in accrued expenses and other liabilities. • Total shareholders’ equity increased $11.0 million driven by a $42.1 million increase from current year net income and $7.0 million from stock-based compensation. Partially offsetting this increase were $25.0 million in repurchases of common stock and $13.1 million in taxes paid related to net share settlement of stock awards. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 32 Liquidity and Capital Resources The following table is a summary of our liquidity and cash flows: (in millions) Three Months Ended March 31, Cash flows from: 2022 2021 Change Operating activities $ 135.2 $ 104.2 $ 31.0 Investing activities $ (62.8) $ (12.3) $ (50.5) Financing activities $ (68.0) $ 106.8 $ (174.8) Three Months Ended March 31, 2022, Compared to the Three Months Ended March 31, 2021 • Cash flows from operating activities increased $31.0 million driven by a $35.3 million increase in current deferred revenue mainly due to advance sales associated with the 148th Kentucky Oaks and Derby tickets and sponsorships, an $18.6 million increase in distributions from unconsolidated affiliates, and a $0.7 million increase in operating income. Partially offsetting these increases was a $23.6 million decrease 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. • Cash used in investing activities increased $50.5 million driven by a $37.9 million increase in capital project expenditures at Churchill Downs Racetrack and Turfway Park, a $5.3 million increase in capital maintenance expenditures and a $7.3 million increase from all other investing activities. • Cash provided by financing activities decreased $174.8 million primarily driven by a $356.9 million decrease in net borrowings from long-term debt. Partially offsetting this decrease was a $169.6 million increase in common stock repurchases and a $12.5 million decrease from all other financing activities. Capital Expenditures Included in cash flows from investing activities are capital maintenance expenditures and capital project expenditures. Capital maintenance expenditures relate to the replacement of existing fixed assets with a useful life greater than one year that are obsolete, exhausted, or no longer cost effective to repair. Capital project expenditures represent fixed asset additions related to land or building improvements to new or existing assets or purchases of new (non-replacement) equipment or software related to specific projects deemed necessary expenditures. We have announced several project capital investments during the past year, including the following: Churchill Downs Racetrack Homestretch Club and the 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. We currently estimate 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 have approximately $420.6 million of repurchase authority remaining under the 2021 Stock Repurchase Program at March 31, 2022, based on trade date. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 33 Credit Facilities and Indebtedness The following table presents our debt outstanding: (in millions) March 31, 2022 December 31, 2021 Change Term Loan B due 2024 $ 383.0 $ 384.0 $ (1.0) Term Loan B-1 due 2028 297.0 297.8 (0.8) Revolver — — — 2027 Senior Notes 600.0 600.0 — 2028 Senior Notes 700.0 700.0 — Total debt 1,980.0 1,981.8 (1.8) Current maturities of long-term debt 7.0 7.0 — Total debt, net of current maturities 1,973.0 1,974.8 (1.8) Issuance costs, net of premiums and discounts (13.1) (13.8) 0.7 Net debt $ 1,959.9 $ 1,961.0 $ (1.1) Credit Agreement 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 Agreement is collateralized by substantially all of the wholly-owned assets of the Company. 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 TDG. Refer to Note 8, Shareholders' Equity, of the Notes to the Condensed 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. On April 13, 2022, the Company entered into the Credit Agreement Amendment to extend the maturity date of our existing revolving credit facility to 2027 and to increase the commitments under the existing revolving credit facility from $700 million to $1,200 million. The Credit Agreement Amendment also provides for the Delayed Draw Term Loan A credit facility due 2027 in the amount of $800 million. The interest rate applicable to borrowings on the Revolver and Delayed Draw Term Loan A will be SOFR-based plus a spread, determined by the Company’s and the guarantors’ leverage ratio. The interest rate on the Revolver on March 31, 2022 was LIBOR plus 138 basis points based on the Revolver pricing grid in the Second Amendment and the Company's net leverage ratio as of March 31, 2022. 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 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 34 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 6.92 to 1.0 > 2.5 to 1.0 Consolidated total secured net leverage ratio 0.52 to 1.0 < 4.0 to 1.0 The Company was compliant with all applicable covenants on March 31, 2022. The Term Loan B requires quarterly payments of 0.25% of the original $400.0 million balance, or $1.0 million per quarter. The Term Loan B may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the 2017 Credit Agreement. The Company is required to pay a commitment fee on the unused portion of the Revolver determined by a pricing grid based on the consolidated total net leverage ratio of the Company. For the period ended March 31, 2022, the Company's commitment fee rate was 0.20%. 2027 Senior Notes On March 25, 2019, we completed an offering of $600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature on April 1, 2027 (the "2027 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2027 Senior Notes were issued at par, with interest payable on April 1 st and October 1 st of each year, commencing on October 1, 2019. The Company used the net proceeds from the offering to repay our outstanding balance on the Revolver portion of our Credit Agreement. In connection with the offering, we capitalized $8.9 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes. The 2027 Senior Notes were issued pursuant to an indenture, dated March 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2027 Guarantors"), and U.S. Bank National Association, as trustee. 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: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates. 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 "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 Existing 2028 Senior Notes were issued at par, with interest payable on January 15th and July 15th of each year, commencing on July 15, 2018. The Company used the net proceeds from the offering to repay a portion of our $600.0 million 5.375% Senior Unsecured Notes. In connection with the offering, we capitalized $7.7 million of debt issuance costs which are being amortized as interest expense over the term of the 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 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 payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates. 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 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022 35 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 15th and July 15th 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 Our commitments to make future payments as of March 31, 2022, are estimated as follows: (in millions) 2022 2023-2024 2025-2026 Thereafter Total Term Loan B $ 3.0 $ 380.0 $ — $ — $ 383.0 Interest on Term Loan B (1) 6.1 15.9 — — 22.0 Term Loan B-1 2.3 6.0 6.0 282.7 297.0 Interest on Term Loan B-1 (1) 4.8 12.6 12.3 7.3 37.0 2027 Senior Notes — — — 600.0 600.0 2028 Senior Notes — — — 700.0 700.0 Interest on 2027 Senior Notes 33.0 66.0 66.0 16.5 181.5 Interest on 2028 Senior Notes 16.6 66.5 66.5 49.9 199.5 Operating and Finance Leases 5.3 12.9 11.6 16.0 45.8 Minimum Guarantees (2) 5.1 4.6 3.6 4.7 18.0 Total $ 76.2 $ 564.5 $ 166.0 $ 1,677.1 $ 2,483.8 (1) Interest includes the estimated contractual payments under our Credit Agreement assuming no change in the weighted average borrowing rate of 2.21% which was the rate in place as of March 31, 2022. (2) Includes the maximum estimated exposure where we are contractually obligated to make future minimum payments. As of March 31, 2022, we had approximately $3.9 million of tax liabilities related to unrecognized tax benefits.