Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in Part II, Item 8. Financial Statements and Supplementary Data. The following discussion provides an analysis of our results of operations and reasons for material changes therein for 2022 as compared to 2021. Discussion regarding our financial condition and results of operations for 2021 as compared to 2020 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.
Our Business
Churchill Downs Incorporated ("CDI" or the "Company") has been creating extraordinary entertainment experiences for nearly 150 years, beginning with the Company’s most iconic and enduring asset, the Kentucky Derby. Headquartered in Louisville, Kentucky, CDI has expanded through the development of live and historical racing entertainment venues, the growth of the TwinSpires horse racing online wagering business and the operation and development of regional casino gaming properties.
In 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. During the first quarter of 2022, 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. For additional information, refer to Note 2 1 - Segment Information, to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
2022 Transactions
Peninsula Pacific Entertainment Acquisition
On November 1, 2022, the Company completed the acquisition of substantially all the ass ets of Peninsula Pacific Entertainment, LLC ("P2E") with a base purchase price of $2.75 billion ("P2E Transaction") subject to working capital and other purchase price adjustments. The Company acquired the following properties as part of the P2E Transaction: Colonial Downs Racetrack ("Colonial Downs") in New Kent, Virginia, six historical racing entertainment venues in Virginia, del Lago Resort & Casino in Waterloo, New York ("del Lago"), and the Hard Rock Hotel & Casino in Sioux City, Iowa ("Hard Rock Sioux City"). The P2E Transaction also included development rights for two properties currently under development in Dumfries and Emporia, Virginia with up to five additional Historical Racing Machines ("HRMs") entertainment venues as well as ONE Casino and Resort in collaboration with Urban One.
Chasers Poker Room Acquisition
On September 2, 2022, the Company completed the acquisition of Chasers Poker Room ("Chasers") in Salem, New Hampshire ("Chasers Transaction"). Chasers is a charitable gaming facility located approximately 30 miles from Boston, Massachusetts, that offers poker and a variety of table games. The Company plans to develop an expanded charitable gaming facility in Salem to accommodate HRMs and table games. As part of the Chasers Transaction, the Company made an initial payment to the sellers for rights to operate the poker room and to build a historical racing entertainment venue.
Ellis Park Acquisition
On September 26, 2022, the Company completed the acquisition of Ellis Park Racing & Gaming ("Ellis Park Transaction"). Ellis Park Racing & Gaming ("Ellis Park") is a racetrack and gaming facility venue with HRMs. As part of the acquisition, the Company also acquired the rights to construct an HRM entertainment venue in Owensboro, Kentucky.
Calder Land Sale
On June 17, 2022, the Company closed on the sale of 115.7 acres of land near Calder Casino ("Calder") for $291.0 million to Link Logistics Real Estate, a Blackstone portfolio company. The Company received cash proceeds of $279.0 million which was net of $12.0 million of transaction costs. We recognized a gain of $274.6 million on the sale of the land, which is included in other income in the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).
Exacta Systems, LLC Acquisition
On December 19, 2022, the Company announced that it entered into a definitive agreement under which we would acquire all the outstanding equity interests of Exacta Systems, LLC ("Exacta") for total consideration of $250.0 million in cash (the "Exacta Transaction"), subject to certain working capital and other purchase price adjustments. The Exacta Transaction will provide the Company the ability to realize synergies related to the Company's recent acquisition of the HRM entertainment venues in Virginia.
30
Other Business Activities
Impairment
During the quarter ended December 31, 2022, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of the Company's intangible assets, goodwill, or property and equipment, were impaired. Based on the Company's evaluation, the Company concluded that a trigger event for impairment testing occurred related to the Presque Isle Downs and Casino ("Presque Isle") gaming rights, trademark, and the reporting unit's goodwill due to continued negative economic conditions that negatively impacted the estimates and assumptions utilized in our indefinite-lived intangible asset impairment assessment. As a result of the updated discount rate to reflect the increased uncertainty of the cash flows and updated projected cash flow stream, the Company recorded a $33.4 million non-cash impairment charge in fourth quarter of 2022 for the Presque Isle gaming rights and trademark.
Exit of the Direct Online Sports and Casino Business
In 2022, the Company exited the direct online Sports and Casino business in every state except for Pennsylvania and Arizona. 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. Based on the Company’s evaluation, the Company recorded a $4.9 million non-cash impairment charge related to certain assets in the TwinSpires segment. The Company will maintain its retail Sports operations and has monetized two of its online market access licenses
Impact of the COVID-19 Global Pandemic
In March 2020, as a result of the COVID-19 outbreak, we temporarily suspended operations at our wholly-owned and managed gaming properties. In May 2020, we began to reopen our properties with patron restrictions and gaming limitations, which fluctuated with the changing environment. All of our gaming properties have remained open since January 2021.
The 146th Kentucky Oaks and Derby were held in the third quarter of 2020 without spectators. During the second quarter of 2021, we held the 147th Kentucky Oaks and Derby with capacity restrictions in compliance with Kentucky venue limitations at that time. Due to such restrictions, our revenues from the Kentucky Oaks and Derby in each year were significantly less than we would otherwise expect. The 148th Kentucky Oaks and Derby were held in the second quarter of 2022 without capacity restrictions.
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.
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 consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of EBITDA from our equity investments.
Adjusted EBITDA excludes:
• Transaction expense, net which includes:
– Acquisition, disposition, and land sale related charges;
– Direct online Sports and Casino business exit 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:
31
– The impact of changes in fair value of interest rate swaps, and
– Legal reserves and transaction costs;
• Asset impairments;
• Gain on Calder land sale;
• Legal reserves;
• Pre-opening expense; and
• Other charges, recoveries and expenses
As of December 31, 2021, Arlington International Racecourse ("Arlington") ceased racing and simulcast operations. On February 15, 2023, the Company closed on the sale of the property to the Chicago Bears. For more information, refer to Note 4, Dispositions and Assets Held for Sale, to the notes to consolidated financial statements included in this Annual Report on Form 10-K. Arlington's operating loss in the current quarter and year is 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 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 2022, we delivered strong performance while continuing the execution of several organic investments and completing the largest acquisition in our Company’s history that collectively we believe will provide long-term sustainable value creation. We delivered strong growth in net revenue, operating income, net income, and Adjusted EBITDA compared to fiscal year 2021:
• Net revenue was $1.8 billion, up $212.6 million or 13%;
• Net income was $439.4 million, up $190.3 million or 76%;
• Adjusted EBITDA was $763.6 million, up $136.6 million, or 22%; and
• Cash from continuing operations was $510.8 million, up $51.3 million or 11%.
Live and Historical Racing Segment:
• Adjusted EBITDA was $287.5 million, up $112.5 million or 64% from fiscal year 2021.
• Churchill Downs Racetrack:
▪ Derby Week successfully returned to full capacity at Churchill Downs Racetrack with the 148th Kentucky Derby with over 147,000 fans gathered in person to watch the most exciting two minutes in sports on the first Saturday in May.
▪ We successfully completed the Homestretch Club prior to the 148th Kentucky Derby and approximately $8.0 million under budget.
▪ We continued construction on the new First Turn Experience which will be completed for the 149th Kentucky Derby in May 2023 and the Paddock Project for the 150th Kentucky Derby in May 2024.
▪ We extended the partnership with Woodford Reserve as the Presenting Sponsor for the Kentucky Derby through 2027.
• Derby City Gaming delivered record net revenue and Adjusted EBITDA. We continued construction of the gaming floor expansion and new five-story hotel.
• Oak Grove delivered record net revenue and Adjusted EBITDA.
• We celebrated the opening of the new HRM entertainment venue and racetrack facility at Turfway Park in September 2022.
• We began construction of Derby City Gaming Downtown in Louisville, Kentucky as a new HRM entertainment venue.
• We completed the acquisition of Chasers in Salem, New Hampshire on September 2, 2022, which will enable the Company to expand its HRM strategy with table games to the New England market.
• We completed the acquisition of Ellis Park in Henderson, Kentucky in September 2022 including the rights to build an HRM entertainment venue in Owensboro, Kentucky.
32
TwinSpires Segment:
• Adjusted EBITDA was $114.1 million, up $31.4 million or 38% from fiscal year 2021.
• We announced a multi-year agreement with FanDuel to enable FanDuel to create a fully integrated and seamless wagering experience with a single wallet for their customers who want to bet on sports and on horse racing with FanDuel TV driving ongoing engagement beginning in January 2023.
• We announced a multi-year agreement with DraftKings to provide ADW technology and other services.
• We announced the exit of the Online Sports & Casino business in February 2022 and ceased online wagering in Tennessee, Colorado, Indiana, New Jersey, and Michigan.
• We have executed strategic market access agreements with Bet365 in Pennsylvania and with Golden Nugget in Indiana to monetize our online wagering skins.
Gaming
• The Gaming Segment delivered a record $421.9 million of Adjusted EBITDA, an increase of $10.0 million or 2.4% from fiscal year 2021.
• We generated wholly-owned same-store casino margins of 34.5% in 2022, down 2.0 basis points from 2021 and 5.8 basis points higher than 2019.
• Rivers Des Plaines completed their $90 million gaming floor expansion in April 2022 which added 725 gaming positions, a 24-table poker room and additional amenities.
• We began construction of a $290 million casino, hotel, and entertainment venue in Terre Haute, Indiana.
• We completed the sale of 115.7 acres of land near Calder for $291.0 million or approximately $2.5 million per acre to Link Logistics Real Estate on June 17, 2022. We also executed a §1031 transaction to defer approximately $76.0 million of taxes related to the sale of the land.
Environmental, Social, and Governance
• We expanded our ESG efforts including the ongoing promotion of responsible gaming; initiatives at our properties to lessen energy and water usage, to decrease carbon emissions, and to responsibly manage waste; increasing investments in the communities in which we operate and supporting our teams through educational and leadership development; and further diversification of our Board of Directors and increasing engagement with our shareholders.
• We continued our diversity, equity, and inclusion initiatives (DE&I) including the roll-out of our mission, vision, culture statement, and core values company-wide.
All Other
• We closed the sale of our Arlington Heights, Illinois property to the Chicago Bears for $197.2 million on February 15, 2023.
• We completed the acquisition of substantially all the assets of P2E with a base purchase price of $2.75 billion on November 1, 2022. The P2E assets acquired included Colonial Downs and six HRM entertainment venues in Virginia, del Lago in New York, and Hard Rock Sioux City, as well as the development rights for Dumfries and Emporia HRM facilities in Virginia, up to five additional HRM entertainment venues in Virginia, and ONE Casino & Resort in Virginia in collaboration with Urban One.
▪ We completed the financing for the acquisition in April 2022 by closing a $1.2 billion Senior Secured Revolver due 2027, $800 million of Senior Secured Delayed Draw Term Loan A due 2027, and $1.2 billion of Senior Notes due 2030 at a 5.75% interest rate.
• We announced a definitive agreement to acquire Exacta for $250.0 million. The acquisition will provide the Company the opportunity to realize additional synergies related to our recent acquisition of the P2E HRM assets in Virginia.
The Company’s total shareholder return was (12)% for 2022 compared to (19)% for the Russell 1000 and (18)% for the S&P 500. The Company’s five-year total shareholder return for 2022 was 178% compared to 55% for the Russell 1000 and 57% for the S&P 500. The preceding shareholder return calculations assume dividends are reinvested.
33
We remain committed to delivering strong financial results and long-term sustainable growth. Our businesses generate strong cash flow and we have a solid balance sheet that supports our organic growth as well as strategic acquisitions that we believe will create long-term value for our shareholders.
Our Operations
We manage our operations through three reportable segments: Live and Historical Racing, TwinSpires, and Gaming.
Refer to Part I, Item 1. Business, of this Annual Report on Form 10-K for more information on our segments and a description of our competition and government regulations and potential legislative changes that affect our business.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:
Years Ended December 31, Change
(in millions) 2022 2021
Net revenue $ 1,809.8 $ 1,597.2 $ 212.6
Operating income 321.8 284.4 37.4
Operating income margin 17.8 % 17.8 %
Net income from continuing operations $ 439.4 $ 249.1 $ 190.3
Adjusted EBITDA 763.6 627.0 136.6
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
• Net revenue increased $212.6 million driven by a $205.5 million increase from Live and Historical Racing primarily due to revenue attributable to the Virginia properties acquired in the P2E, Ellis Park and Chasers Transactions, the running of the 2022 Kentucky Derby without capacity restrictions that were in place in 2021, and continued growth at our Oak Grove property and at Derby City Gaming and a $60.5 million increase from Gaming primarily due to our New York and Iowa properties acquired in the P2E Transaction and increased revenue in Maine, Florida, and Maryland as a result of certain capacity restrictions during the first half of 2021 that did not recur. Partially offsetting these increases were a $15.0 million decrease in TwinSpires primarily due to a decrease in Horse Racing as a higher portion of our patrons returned to wagering at brick-and-mortar facilities instead of wagering online and the exit of our direct online Sports and Casino business in the first quarter of 2022 and a $38.4 million decrease from All Other, primarily due to Arlington not conducting live racing and simulcast during 2022.
• Operating income increased $37.4 million due to a $93.5 million increase in Live and Historical Racing primarily due to the running of the 2022 Kentucky Derby without restrictions, increases in revenue at our historical racing facilities in Kentucky, and the incremental revenue from the acquired properties in Virginia, and a $37.2 million increase in TwinSpires driven by decreased online marketing and promotions expense. Partially offsetting these increases were a $34.2 million increase in transaction expense driven by the P2E Transaction, a $25.7 million increase in selling, general and administrative expenses due to an increase in Corporate compensation related expenses, legal fees, and charitable donations, a $23.0 million increase in asset impairments, a decrease of $9.3 million in All Other due to Arlington not conducting live racing in 2022, and a $1.1 million decrease in Gaming.
• Net income from continuing operations increased $190.3 million. The following items impacted comparability of the Company's net income from continuing operations for the year ended December 31, 2022 compared to the prior year: a $198.7 million non-cash after tax gain on the sale of Calder assets and a $6.5 million after tax decrease in expense related to Rivers Des Plaines' legal reserves and transaction costs. Offsetting these increases in net income were a $17.8 million non-cash after-tax increase in asset impairments; a $35.5 million after-tax increase in transaction, pre-opening and other expenses, net, a $2.8 million after-tax increase in legal reserves, and $0.7 million of other charges. Excluding these items, net income increased $41.8 million primarily due to a $63.5 million after-tax increase driven by the results of our operations and equity in income from our unconsolidated affiliates, partially offset by a $21.7 million after-tax increase in interest expense associated with higher outstanding debt balances.
• Adjusted EBITDA increased $136.6 million driven by a $112.5 million increase from Live and Historical Racing primarily due to an increase attributable to the Virginia properties acquired in the P2E, Ellis Park and Chasers Transactions, an increase due to the running of the 2022 Kentucky Derby without capacity restrictions that were in place in 2021, and continued growth at our Oak Grove property and at Derby City Gaming, a $31.4 million increase from TwinSpires primarily due to a decrease in marketing spend as a result of exiting the Sports and Casino business, and a $10.0 million increase from Gaming driven by an increase in New York and Iowa from the properties acquired
34
as part of the P2E Transaction and an increase primarily from our properties in Maine, Florida, and Louisiana as a result of capacity restrictions in 2021 that did not recur. These increases were partially offset by declines in Mississippi and Pennsylvania driven by the current economic factors and a $17.3 million decline in All Other primarily due to Arlington not conducting live racing and simulcast operations in 2022.
Revenue by Segment
The following table presents net revenue for our segments, including intercompany revenues:
Years Ended December 31, Change
(in millions) 2022 2021
Live and Historical Racing $ 646.4 $ 430.6 $ 215.8
TwinSpires 441.6 457.8 (16.2)
Gaming 761.8 698.4 63.4
All Other 3.3 49.2 (45.9)
Eliminations (43.3) (38.8) (4.5)
Net Revenue $ 1,809.8 $ 1,597.2 $ 212.6
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
• Live and Historical Racing revenue for 2022 increased $215.8 million primarily due to $62.4 million in revenue attributable to the Virginia properties acquired in the P2E Transaction, $8.0 million in revenue attributable to properties acquired in the Ellis Park and Chasers Transactions, $77.6 million increased revenue at Churchill Downs Racetrack primarily due to the running of the 2022 Kentucky Derby without capacity restrictions that were in place in 2021, and $67.8 million increase driven primarily by growth at our Oak Grove property and Derby City Gaming as well as the opening of Turfway Park in September 2022.
• TwinSpires revenue decreased $16.2 million primarily due to a decrease in pari-mutuel handle as a higher portion of our patrons returned to wagering at brick-and-mortar facilities instead of wagering online and the decision to exit the direct online Sports and Casino business in the first quarter of 2022.
• Gaming revenue increased $63.4 million primarily due to $46.5 million attributable to our New York and Iowa properties acquired in the P2E Transaction, $25.5 million in Maine, Florida, and Maryland as a result of certain capacity restrictions during the first half of 2021 and a $9.7 million increase in Louisiana as a result of the 2022 Jazz Festival that was not held in the prior year due to COVID-19 and shutdowns in 2021 due to Hurricane Ida that did not recur. Partially offsetting these increases was a decrease of $18.3 million primarily from our Mississippi and Pennsylvania properties due to the current economic conditions.
• All Other revenue decreased $45.9 million primarily as a result of Arlington ceasing racing and simulcast operations at the end of 2021.
35
Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
Years Ended December 31, Change
(in millions) 2022 2021
Taxes and purses $ 473.7 $ 434.5 $ 39.2
Content expense 173.7 182.6 (8.9)
Salaries and benefits 196.0 170.3 25.7
Selling, general and administrative expense 164.2 138.5 25.7
Depreciation and amortization 113.7 103.2 10.5
Marketing and advertising expense 52.9 74.5 (21.6)
Asset impairments 38.3 15.3 23.0
Transaction expense 42.1 7.9 34.2
Other operating expense 233.4 186.0 47.4
Total expense $ 1,488.0 $ 1,312.8 $ 175.2
Percent of revenue 82 % 82 %
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Significant items affecting comparability of consolidated operating expense include:
• The additional properties acquired as part of the P2E, Ellis Park and Chasers Transactions drove increases in taxes and purses, salaries and benefits, selling, general and administrative and other operating expenses.
• In May 2022, we ran the Kentucky Derby without capacity restrictions which drove increases in salaries and benefits and other operating expenses.
• In addition to the impacts from the acquisitions, Corporate compensation related expenses, legal fees, and charitable donations also contributed to increases in selling, general and administrative expenses.
• The decline of $21.6 million in marketing and advertising expense was primarily due to decreased online 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 the Kentucky HRM properties in our Live and Historical Racing segment.
• The increase in asset impairments was driven by a $33.4 million non-cash impairment charge at Presque Isle.
• Transaction expense increased $34.2 million due to the P2E, Ellis Park, and Chasers Transactions.
36
Adjusted EBITDA by Segment
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
Year Ended December 31, Change
(in millions) 2022 2021
Live and Historical Racing $ 287.5 $ 175.0 $ 112.5
TwinSpires 114.1 82.7 31.4
Gaming 421.9 411.9 10.0
Total segment Adjusted EBITDA 823.5 669.6 153.9
All Other (59.9) (42.6) (17.3)
Total Adjusted EBITDA $ 763.6 $ 627.0 $ 136.6
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
• Live and Historical Racing Adjusted EBITDA increased $112.5 million due to a $30.1 million increase attributable to the Virginia properties acquired in the P2E Transaction, a $0.7 million increase attributable to properties acquired in the Ellis Park and Chasers Transactions, a $59.1 million increase at Churchill Downs Racetrack primarily due to the running of the 2022 Kentucky Derby without capacity restrictions that were in place in 2021, and a $22.6 million increase primarily due to the continued growth at our Oak Grove property and at Derby City Gaming.
• TwinSpires Adjusted EBITDA increased $31.4 million primarily due to a $40.0 million increase from our Sports and Casino business primarily due to decreased marketing and promotional activities and an $8.6 million decrease attributable to lower Horse Racing net revenue.
• Gaming Adjusted EBITDA increased $10.0 million driven by a $17.9 million increase in New York and Iowa from the properties acquired as part of the P2E Transaction, an $11.6 million increase primarily from our properties in Maine, Florida, and Louisiana as a result of capacity restrictions in 2021 that did not recur, and a $2.8 million increase from our equity investments. Partially offsetting these increases was a decrease of $22.3 million primarily from our Mississippi and Pennsylvania properties due to the current economic conditions.
• All Other Adjusted EBITDA decreased $17.3 million primarily due to the elimination of the $9.7 million operating income related to Arlington as a result of ceasing racing and simulcast operations at the end of 2021 and a $7.6 million increase in Corporate compensation related expenses, legal fees, and charitable donations.
37
Reconciliation of Comprehensive Income to Adjusted EBITDA
Years Ended December 31, Change
(in millions) 2022 2021
Net income and comprehensive income attributable to Churchill Downs Incorporated $ 439.4 $ 249.1 $ 190.3
Net loss attributable to noncontrolling interest — — —
Net income 439.4 249.1 190.3
Loss from discontinued operations, net of tax — — —
Income from continuing operations, net of tax 439.4 249.1 190.3
Additions:
Depreciation and amortization 113.7 103.2 10.5
Interest expense 147.3 84.7 62.6
Income tax provision 169.4 94.5 74.9
EBITDA $ 869.8 $ 531.5 $ 338.3
Adjustments to EBITDA:
Selling, general and administrative:
Stock-based compensation expense $ 31.8 $ 27.8 $ 4.0
Legal reserves 3.8 — 3.8
Other charges 7.4 0.2 7.2
Pre-opening expense and other expense 13.2 5.8 7.4
Other income, expense:
Interest, depreciation and amortization expense related to equity investments 42.8 41.5 1.3
Changes in fair value of Rivers Des Plaines' interest rate swaps (12.6) (12.9) 0.3
Rivers Des Plaines' legal reserves and transactions costs 0.6 9.9 (9.3)
Other charges and recoveries, net 1.0 — 1.0
Gain on Calder land sale (274.6) — (274.6)
Transaction expense, net 42.1 7.9 34.2
Asset impairments 38.3 15.3 23.0
Total adjustments to EBITDA (106.2) 95.5 (201.7)
Adjusted EBITDA $ 763.6 $ 627.0 $ 136.6
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
As of December 31, Change
(in billions) 2022 2021
Total assets $ 6.2 $ 3.0 $ 3.2
Total liabilities 5.6 2.7 2.9
Total shareholders’ equity 0.6 0.3 0.3
• Total assets increased $3.2 billion driven by a $2.4 billion increase in goodwill and other intangibles from the P2E, Ellis Park and Chasers Transactions and a $1.0 billion increase in property and equipment, net from the P2E and Ellis Park Transactions and construction projects. Partially offsetting these increases was a $0.2 billion decrease in cash and cash equivalents due to outflows for bond and term loan interest, capital expenditures related to ongoing construction projects and payments for the purchases of Ellis Park and Chasers.
• Total liabilities increased $2.9 billion driven by a $1.2 billion increase in notes payable, net of debt issuance costs, related to the closing of the 2030 Senior Notes, a $1.4 billion increase in long-term debt, driven by the P2E
38
Transaction, a $0.2 billion increase in liabilities assumed as part of the P2E, Ellis Park and Chasers Transactions, and an increase in deferred income taxes.
• Total shareholders’ equity increased $0.3 billion driven by net income of $0.4 billion, partially offsetting this increase was $0.1 billion of primarily stock repurchases, and taxes paid related to net share settlement of stock awards.
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:
Year Ended December 31, Change
(in billions) 2022 2021
Cash Flows from:
Operating activities $ 0.5 $ 0.5 $ —
Investing activities (3.1) (0.1) (3.0)
Financing activities 2.4 — 2.4
Operating Cash Flow
Cash provided by operating activities increased from increased operating income, increased distributions from unconsolidated affiliates, and tax refunds in the current year driven by prior years' tax return losses. These increases were partially offset by an increase in net interest paid and transaction costs paid as part of the P2E Transaction and other operating expenses. 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 increased $3.0 billion driven primarily by $3.0 billion used for the P2E, Ellis Park and Chasers Transactions, increased capital maintenance expenditures of $0.3 billion, partially offset by proceeds from the Calder land sale of $0.3 billion.
Financing Cash Flow
Cash provided by financing activities increased $2.4 billion primarily driven by a $2.3 billion increase in net borrowings from long-term debt and a $0.1 billion decrease in common stock repurchases.
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, including the following: Churchill Downs Racetrack First Turn Experience and the Paddock Project, the Derby City Gaming Expansion and Hotel, Derby City Gaming Downtown, the Ellis Park HRM facility in Owensboro, Kentucky, the Terre Haute Casino Resort, a New Hampshire HRM Facility, the Virginia HRM entertainment venues in Dumfries and Emporia, and HRMs in our Louisiana OTBs. We currently expect our project capital to be approximately $575 to $675 million in 2023, 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 $270.2 million of repurchase authority remaining under this program on December 31, 2022.
39
Dividends
On October 25, 2022, the Company's Board of Directors approved an annual cash dividend on our common stock of $0.714 per outstanding share, which represented a 7% increase over the prior year. The dividend was payable on January 6, 2023 to shareholders of record as of the close of business on December 2, 2022. The 7% increase marked the 12th 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
The following table presents our debt outstanding, bond premium and debt issuance costs:
As of December 31, Change
(in millions) 2022 2021
Term Loan B due 2024 $ 380.0 $ 384.0 $ (4.0)
Term Loan B-1 due 2028 294.7 297.8 (3.1)
Term Loan A due 2027 800.0 — 800.0
Revolver 664.1 — 664.1
2027 Senior Notes 600.0 600.0 —
2028 Senior Notes 700.0 700.0 —
2030 Senior Notes 1,200.0 — 1,200.0
Total debt 4,638.8 1,981.8 2,657.0
Current maturities of long-term debt 47.0 7.0 40.0
Total debt, net of current maturities 4,591.8 1,974.8 2,617.0
Issuance cost and fees (33.1) (13.8) (19.3)
Total debt $ 4,558.7 $ 1,961.0 $ 2,597.7
Credit Agreement
On December 27, 2017, we entered into a senior secured credit agreement ("2017 Credit Agreement") with a syndicate of lenders. The 2017 Credit Agreement provided 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 was 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 Term Loan B bears interest at LIBOR plus 200 basis points and 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 as determined by a pricing grid based on the consolidated total net secured leverage ratio of the Company. For the period ended December 31, 2022, the Company's commitment fee rate was 0.175%.
On March 17, 2021, the Company entered into the Incremental Joinder Agreement No. 1 (the "Joinder") to its 2017 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 2017 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 2017 Credit Agreement.
On April 13, 2022, the Company amended the 2017 Credit Agreement (as amended, the "Credit Agreement") to extend the maturity date of its existing Revolver to April 13, 2027, to increase the commitments under the existing Revolver from $700.0 million to $1.2 billion, and to increase the swing line commitment from $50.0 million to $100.0 million. The amendment also provides for a senior secured Delayed Draw Term Loan A due April 13, 2027 in the amount of $800.0 million, which was drawn on November 1, 2022 as part of the financing for the P2E Transaction. For more information regarding the P2E Transaction, refer to Note 3, Acquisitions, to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
40
The Revolver and Delayed Draw Term Loan A bear interest at the Secured Overnight Financing Rate ("SOFR") plus 10 basis points, plus a variable applicable margin which is determined by the Company's net leverage ratio. As of December 31, 2022, that applicable margin was 125 basis points which was based on the pricing grid in the Credit Agreement. During 2022, we have borrowed $664.1 million on our Revolver which provided the Company with financing for the Chasers, Ellis Park, and P2E Transactions. For more regarding the Chasers, Ellis Park and P2E Transactions, refer to Note 3, Acquisitions, to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The Company had $524.8 million available borrowing capacity, after consideration of $11.1 million in outstanding letters of credit, under the Revolver as of December 31, 2022.
The phase-out of LIBOR for existing debt agreements is set for June 30, 2023. The Credit Agreement includes a general process for establishing an alternative reference rate to the extent LIBOR is phased out. The Company is in the process of transitioning its financing from LIBOR to alternative reference rates. These transition activities are not expected to have a material impact on the Company’s financial statements.
The Credit Agreement is collateralized by substantially all the wholly-owned assets of the Company. 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 as of
December 31, 2022 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, 2022.
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 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 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 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 due in 2021.
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 $500.0 million aggregate principal amount of 4.75% Senior Unsecured Notes due 2028 and form a part of the same series for purposes of the indenture. 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 $700.0 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
41
Notes will vote as one class under the indenture governing the 2028 Senior Notes. The 3.25% premium is being 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 Revolver, (ii) to fund related transaction fees and expenses, and (iii) for working capital and other general corporate purposes.
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. Bank National Association, as trustee. The Company may redeem some or all the 2028 Senior Notes 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.
2030 Senior Notes
On April 13, 2022, a wholly-owned subsidiary of the Company completed an offering of $1.2 billion in aggregate principal amount of 5.75% Senior Unsecured Notes that mature on April 13, 2030 (the "2030 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that was exempt from registration under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The offering of the 2030 Senior Notes was part of the financing utilized for the P2E Transaction. The Company held the net proceeds of this transaction of $1.2 billion in escrow until the proceeds were utilized to complete the P2E Transaction on November 1, 2022, at which time CDI assumed the obligation and became the Issuer.
The 2030 Senior Notes were issued at 100% of the principal amount, plus interest deemed to have accrued from April 13, 2022, with interest payable in arrears on April 1 st and October 1 st of each year, commencing on October 1, 2022. The 2030 Senior Notes will vote as one class under the indenture governing the 2030 Senior Notes.
The Issuer may redeem some of or all the 2030 Senior Notes at any time prior to April 1, 2025, at redemption prices set forth in the 2030 Offering Memorandum.
42
Contractual Obligations
Our commitments to make future payments as of December 31, 2022, are estimated as follows:
(in millions) 2023 2024-2025 2026-2027 Thereafter Total
Dividends $ 27.0 $ — $ — $ — $ 27.0
Term Loan B 4.0 376.0 — — 380.0
Interest on Term Loan B (1)
22.1 21.7 — — 43.8
Revolver — — 664.1 — 664.1
Interest on Revolver (1)
38.3 76.6 49.2 — 164.1
Term Loan B-1 3.0 6.0 6.0 279.8 294.8
Interest on Term Loan B-1 (1)
17.2 33.9 33.1 3.5 87.7
Term Loan A 40.0 80.0 680.0 — 800.0
Interest on Term Loan A (1)
45.9 84.9 49.4 — 180.2
2027 Senior Notes — — 600.0 — 600.0
2028 Senior Notes — — — 700.0 700.0
2030 Senior Notes — — — 1,200.0 1,200.0
Interest on 2027 Senior Notes 33.0 66.0 49.5 — 148.5
Interest on 2028 Senior Notes 33.3 66.5 66.5 16.6 182.9
Interest on 2030 Senior Notes 69.0 138.0 138.0 175.0 520.0
Operating and Finance Leases 8.9 16.5 12.0 22.0 59.4
All other
2.5 5.2 5.0 11.6 24.3
Total $ 344.2 $ 971.3 $ 2,352.8 $ 2,408.5 $ 6,076.8
(1) Interest includes the estimated contractual payments under our Credit Facility assuming no change in the weighted average borrowing rate of 5.77%, which was the rate in place as of December 31, 2022.
As of December 31, 2022, we had approximately $6.4 million of unrecognized tax benefits.
Critical Accounting Policies and Estimates
Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2, Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. 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. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.
Our critical accounting estimates relate to goodwill and certain indefinite-lived intangible assets.
Goodwill and certain indefinite-lived intangible assets
Acquisition of certain identifiable indefinite-lived intangible assets
In conjunction with the acquisition of a business, the Company records identifiable indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. Our indefinite-lived intangible assets primarily consist of gaming rights and trademarks. Gaming rights and trademarks are considered indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities and use the trademarks indefinitely, and our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions.
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 fair values of gaming rights are generally determined using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. This method assumes
43
that the gaming rights provides the opportunity to develop a casino or historical racing facility in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses, start-up costs of the acquired business, and the discount rate are the primary assumptions and estimates used in these valuations. The fair values of trademarks are generally determined using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the trademarks. The estimated future revenue, royalty rate, and the discount rate are the primary assumptions and estimates used in these valuations. The discount rates used to discount expected future cash flows to present value are generally derived from the weighted average cost of capital analysis and adjusted for the size and/or risk of the asset. Changes in estimates or the application of alternative assumptions could produce significantly different results.
Assessments of goodwill and indefinite-lived intangible assets
We perform our annual review for impairment of goodwill and indefinite-lived intangible assets on April 1 of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not the asset is impaired. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues which are triggering events requiring the testing of an asset’s carrying value for recoverability.
Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired. An entity may first assess qualitative factors to determine whether it is necessary to complete the impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies. If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield Method for gaming rights and relief-from-royalty method of the income approach for trademarks. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others. These factors require significant judgments and estimates, and application of alternative assumptions could produce materially different results. Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values, and fair values of our reporting units and assets. The impairment tests for goodwill and indefinite-lived intangible assets are subject to uncertainties arising from such events as changes in competitive conditions, the current economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions. If any of these factors were to materially change, such change may require a reevaluation of our goodwill and indefinite-lived intangible assets. Changes in estimates or the application of alternative assumptions could produce significantly different results.
44