Churchill Downs Inc 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) for the years ended December 31, (in millions, except per common share data) 2022 2021 2020 Net revenue: Live and Historical Racing $ 614.6 $ 409.1 $ 169.6 TwinSpires 436.4 451.4 430.1 Gaming 755.9 695.4 435.3 All Other 2.9 41.3 19.0 Total net revenue 1,809.8 1,597.2 1,054.0 Operating expense: Live and Historical Racing 400.9 288.9 179.0 TwinSpires 293.6 345.8 293.1 Gaming 537.9 476.3 357.9 All Other 11.0 40.1 30.5 Selling, general and administrative expense 164.2 138.5 114.8 Asset impairments 38.3 15.3 17.5 Transaction expense 42.1 7.9 1.0 Total operating expense 1,488.0 1,312.8 993.8 Operating income 321.8 284.4 60.2 Other income (expense): Interest expense, net ( 147.3 ) ( 84.7 ) ( 80.0 ) Equity in income of unconsolidated affiliates 152.7 143.2 27.7 Gain on Calder land sale 274.6 — — Miscellaneous, net 7.0 0.7 0.1 Total other income (expense) 287.0 59.2 ( 52.2 ) Income from continuing operations before provision for income taxes 608.8 343.6 8.0 Income tax (provision) benefit ( 169.4 ) ( 94.5 ) 5.3 Income from continued operations, net of tax 439.4 249.1 13.3 Loss from discontinued operations, net of tax — — ( 95.4 ) Net income (loss) 439.4 249.1 ( 82.1 ) Net loss attributable to noncontrolling interest — — ( 0.2 ) Net income (loss) and comprehensive income (loss) attributable to Churchill Downs Incorporated $ 439.4 $ 249.1 $ ( 81.9 ) Net income (loss) per common share data - basic: Continuing operations $ 11.58 $ 6.45 $ 0.34 Discontinued operations $ — $ — $ ( 2.41 ) Net income (loss) per common share - basic $ 11.58 $ 6.45 $ ( 2.07 ) Net income (loss) per common share data - diluted: Continuing operations $ 11.42 $ 6.35 $ 0.33 Discontinued operations $ — $ — $ ( 2.41 ) Net income (loss) per common share - diluted $ 11.42 $ 6.35 $ ( 2.08 ) Weighted average shares outstanding: Basic 37.9 38.6 39.6 Diluted 38.5 39.2 40.1 The accompanying notes are an integral part of the consolidated financial statements. 46 CHURCHILL DOWNS INCORPORATED CONSOLIDATED BALANCE SHEETS December 31, (in millions) 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 129.8 $ 291.3 Restricted cash 74.9 64.3 Accounts receivable, net 81.5 42.3 Income taxes receivable 14.0 66.0 Other current assets 44.3 37.6 Total current assets 344.5 501.5 Property and equipment, net 1,978.3 994.9 Investment in and advances to unconsolidated affiliates 659.4 663.6 Goodwill 723.8 366.8 Other intangible assets, net 2,391.8 348.1 Other assets 27.0 18.9 Long-term assets held for sale 82.0 87.8 Total assets $ 6,206.8 $ 2,981.6 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 145.5 $ 81.6 Accrued expenses and other current liabilities 361.0 231.7 Income taxes payable 2.1 0.9 Current deferred revenue 39.0 47.7 Current maturities of long-term debt 47.0 7.0 Dividends payable 27.0 26.1 Total current liabilities 621.6 395.0 Long-term debt (net of current maturities and loan origination fees of $ 10.2 in 2022 and $ 6.2 in 2021) 2,081.6 668.6 Notes payable (net of debt issuance costs of $ 22.9 in 2022 and $ 7.6 in 2021) 2,477.1 1,292.4 Non-current deferred revenue 11.8 13.3 Deferred income taxes 340.8 252.9 Other liabilities 122.4 52.6 Total liabilities 5,655.3 2,674.8 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 0.3 shares authorized; no shares issued or outstanding — — Common stock, no par value; 150.0 shares authorized; 37.4 shares issued and outstanding December 31, 2022 and 38.1 shares at December 31, 2021 — — Retained earnings 552.4 307.7 Accumulated other comprehensive loss ( 0.9 ) ( 0.9 ) Total shareholders' equity 551.5 306.8 Total liabilities and shareholders' equity $ 6,206.8 $ 2,981.6 The accompanying notes are an integral part of the consolidated financial statements. 47 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY for the years ended December 31, 2022, 2021 and 2020 Common Stock Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Shareholders' Equity (in millions, except per common share data) Shares Amount Balance, December 31, 2019 39.7 $ — $ 509.2 $ ( 0.9 ) $ 2.7 $ 511.0 Net loss ( 81.9 ) ( 0.2 ) ( 82.1 ) Purchase of noncontrolling interest ( 0.5 ) ( 2.5 ) ( 3.0 ) Issuance of common stock 0.1 2.4 2.4 Repurchase of common stock ( 0.2 ) ( 4.3 ) ( 23.6 ) ( 27.9 ) Cash settlement of stock awards ( 12.7 ) ( 12.7 ) Taxes paid related to net share settlement of stock awards ( 0.1 ) ( 3.6 ) ( 15.1 ) ( 18.7 ) Stock-based compensation 23.7 23.7 Adoption of ASC 842 ( 0.5 ) ( 0.5 ) Cash dividends ($ 0.622 per share) ( 25.1 ) ( 25.1 ) Balance, December 31, 2020 39.5 18.2 349.8 ( 0.9 ) — 367.1 Net income 249.1 249.1 Issuance of common stock 0.2 2.5 2.5 Repurchase of common stock ( 1.5 ) ( 48.5 ) ( 249.0 ) ( 297.5 ) Taxes paid related to net share settlement of stock awards ( 0.1 ) ( 16.1 ) ( 16.1 ) Stock-based compensation 27.8 27.8 Cash dividends ($ 0.667 per share) ( 26.1 ) ( 26.1 ) Balance, December 31, 2021 38.1 — 307.7 ( 0.9 ) — 306.8 Net income 439.4 439.4 Issuance of common stock 0.3 2.7 2.7 Repurchase of common stock ( 0.9 ) ( 34.5 ) ( 141.0 ) ( 175.5 ) Taxes paid related to net share settlement of stock awards ( 0.1 ) ( 26.9 ) ( 26.9 ) Stock-based compensation 31.8 31.8 Cash dividends ($ 0.714 per share) ( 26.8 ) ( 26.8 ) Balance, December 31, 2022 37.4 $ — $ 552.4 $ ( 0.9 ) $ — $ 551.5 The accompanying notes are an integral part of the consolidated financial statements. 48 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, (in millions) 2022 2021 2020 Cash flows from operating activities: Net income (loss) $ 439.4 $ 249.1 $ ( 82.1 ) Loss from discontinued operations, net of tax — — ( 95.4 ) Income from continuing operations, net of tax $ 439.4 $ 249.1 $ 13.3 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 113.7 103.2 92.9 Equity in income of unconsolidated affiliates ( 152.7 ) ( 143.2 ) ( 27.7 ) Distributions from unconsolidated affiliates 156.9 109.4 30.7 Stock-based compensation 31.8 27.8 23.7 Deferred income taxes 108.7 9.8 30.1 Asset impairments 38.3 15.3 17.5 Amortization of operating lease assets 5.3 5.3 5.0 Gain on Calder land sale ( 274.6 ) — — Other 7.4 5.3 4.5 Changes in operating assets and liabilities, net of businesses acquired and dispositions: Income taxes 28.2 12.9 ( 34.6 ) Deferred revenue ( 12.7 ) 10.7 ( 8.3 ) Other assets and liabilities 21.1 53.9 ( 3.9 ) Net cash provided by operating activities 510.8 459.5 143.2 Cash flows from investing activities: Capital maintenance expenditures ( 50.2 ) ( 39.5 ) ( 23.0 ) Capital project expenditures ( 373.3 ) ( 52.3 ) ( 211.2 ) Acquisition of businesses, net of cash acquired ( 2,918.5 ) — — Acquisition of gaming rights, net of cash acquired ( 33.3 ) — — Proceeds from the Calder land sale 279.0 — — Other ( 7.4 ) ( 8.6 ) ( 5.2 ) Net cash used in investing activities ( 3,103.7 ) ( 100.4 ) ( 239.4 ) Cash flows from financing activities: Proceeds from borrowings under long-term debt obligations 2,862.4 780.8 726.1 Repayments of borrowings under long-term debt obligations ( 205.4 ) ( 430.9 ) ( 580.4 ) Payment of dividends ( 26.0 ) ( 24.8 ) ( 23.4 ) Repurchase of common stock ( 174.9 ) ( 297.5 ) ( 28.4 ) Cash settlement of stock awards — — ( 12.7 ) Taxes paid related to net share settlement of stock awards ( 28.4 ) ( 12.9 ) ( 18.7 ) Debt issuance costs ( 27.3 ) ( 6.9 ) ( 2.0 ) Change in bank overdraft 13.3 ( 10.5 ) 13.4 Other 2.3 2.2 2.1 Net cash provided by (used in) financing activities 2,416.0 ( 0.5 ) 76.0 Cash flows from discontinued operations: Operating cash flows of discontinued operations 26.0 ( 124.0 ) ( 1.3 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 150.9 ) 234.6 ( 21.5 ) Cash, cash equivalents and restricted cash, beginning of year 355.6 121.0 142.5 Cash, cash equivalents and restricted cash, end of year $ 204.7 $ 355.6 $ 121.0 The accompanying notes are an integral part of the consolidated financial statements. 49 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) for the years ended December 31, (in millions) 2022 2021 2020 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 133.6 $ 77.5 $ 79.6 Cash paid for income taxes 68.6 72.4 1.6 Cash received from income tax refunds 61.6 — — Schedule of non-cash investing and financing activities: Dividends payable $ 27.0 $ 27.0 $ 25.8 Deferred payment on gaming rights included in accounts payable and accrued expenses 50.6 — — Property and equipment additions included in accounts payable and accrued expense and other current liabilities 51.3 18.7 12.9 Repurchase of common stock in payment of income taxes on stock-based compensation included in accrued expense and other current liabilities 1.7 3.2 — The accompanying notes are an integral part of the consolidated financial statements. 50 Churchill Downs Incorporated Notes to Consolidated Financial Statements 1. DESCRIPTION OF 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. We own and operate 13 live and historical racing entertainment venues in three states, one of the largest online horse racing wagering platforms in the U.S., twelve casino gaming properties in ten states and ten retail sportsbooks. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky. 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 21, Segment Information. Acquisition of Peninsula Pacific Entertainment On November 1, 2022, the Company completed the acquisition of substantially all of 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 P2E assets acquired included Colonial Downs Racetrack ("Colonial Downs") and six Historical Racing Machine ("HRM") entertainment venues in Virginia, del Lago Resort & Casino in New York ("del Lago"), and Hard Rock Hotel & Casino in Iowa ("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 the potential for ONE Casino and Resort in Virginia in collaboration with Urban One. Refer to Note 3, Acquisitions, for further information on the transaction. Acquisition of Ellis Park and Chasers Poker Room Chasers Poker Room Acquisition On September 2, 2022, the Company completed the acquisition of Chasers Poker Room ("Chasers") in Salem, New Hampshire (the "Chasers Transaction"). As part of the transaction, we made an initial payment to the sellers for rights to operate the poker room and to build an HRM venue. Additional payments will be made once all necessary permits are obtained, and the planned historical racing entertainment venue is opened. The Company plans to develop an expanded charitable gaming facility in Salem to accommodate HRMs and table games. Ellis Park Acquisition On September 26, 2022, the Company completed the acquisition of Ellis Park Racing & Gaming ("Ellis Park") in Henderson, Kentucky, from Enchantment Holdings, LLC, an affiliate of Laguna Development Corporation, for total consideration of $ 79.0 million in cash, subject to certain working capital and other purchase price adjustments (the "Ellis Park Transaction"). Refer to Note 3, Acquisitions, for further information on the transactions. 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. 51 Churchill Downs Incorporated Notes to Consolidated Financial Statements 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. The Company will maintain its retail Sports operations and has monetized two of its online market access licenses. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. We consolidate all subsidiaries in which we have a controlling financial interest and variable interest entities ("VIEs") for which we or one of our consolidated subsidiaries is the primary beneficiary. We consolidate a VIE when we have both the power to direct the activities that most significantly impact the results of the VIE and the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE. Use of Estimates Our financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("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. Goodwill and Indefinite-Lived Intangible Assets 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. The Greenfield Method is an income approach methodology that calculates the present value based on a projected cash flow stream. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others. These factors require judgments and estimates, and application of alternative assumptions could produce significantly 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 market values of our reporting units and assets. The estimated future revenue, operating expenses, start-up costs and discount rate are the primary inputs to the Greenfield Method. Changes in estimates or the application of alternative assumptions could produce significantly different results. 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 relevant 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 is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We are required to aggregate the components of an operating segment into one reporting unit if they have similar economic characteristics. Our 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. The indefinite lived-intangible assets carrying value are tested annually, or more frequently, if indicators of impairment exist, by comparing the fair value of the recorded assets to the associated carrying amount. If the carrying amount of the gaming rights and trademark intangible assets exceed fair value, an impairment loss is recognized. 52 Churchill Downs Incorporated Notes to Consolidated Financial Statements Property and Equipment We review the carrying value of our property and equipment to be held and used in our operations whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from the asset's use and eventual disposition. Adverse industry or economic trends, lower projections of profitability, or a significant adverse change in legal factors or in the business climate, among other items, may be indications of potential impairment issues. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, an impairment is recorded based on the fair value of the asset. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows: 10 to 40 years for grandstands and buildings, 2 to 10 years for equipment, 2 to 10 years for furniture and fixtures and 10 to 20 years for tracks and other improvements. Revenue Recognition We generate revenue from pari-mutuel wagering transactions with customers related to live races, simulcast races, and historical races as well as simulcast host fees earned from other wagering sites. Our racetracks that host live races also generate revenue through sponsorships, admissions (including luxury suites), personal seat licenses ("PSLs"), television rights, concessions, programs and parking. Concessions, programs, and parking revenue is recognized once the good or service is delivered. Our live racetracks' revenue and income are influenced by our racing calendar. Similarly, TwinSpires Horse Racing revenue and income is influenced by racing calendars. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby. For live races we present at our racetracks, we recognize revenue on wagers we accept from customers at our racetrack ("on-track revenue") and revenue we earn from exporting our live racing signals to other racetracks, off-track betting facilities ("OTBs"), and advance deposit wagering providers ("export revenue"). For simulcast races we display at our racetracks, OTBs, and TwinSpires' platforms, we recognize revenue we earn from providing a wagering service to our customers on these imported live races ("import revenue"). TwinSpires import revenue is generated through advance deposit wagering which consists of patrons wagering through an advance deposit account. Each wagering contract for on-track revenue, and import revenue contains a single performance obligation and our export revenue contracts contain a series of distinct services that form a single performance obligation. The transaction price for on-track revenue and import revenue is fixed based on the established commission rate we are entitled to retain. The transaction price for export revenue is variable based on the simulcast host fee we charge our customers for exporting our signal. We may provide cash incentives in conjunction with wagering transactions we accept from TwinSpires' customers. These cash incentives represent consideration payable to a customer and therefore are treated as a reduction of the transaction price for the wagering transaction. Our export revenue contracts generally have a duration of one year or less. These arrangements are licenses of intellectual property containing a usage-based royalty. As a result, we have elected to use the practical expedient to omit disclosure related to remaining performance obligations for our export revenue contracts. We recognize on-track revenue, export revenue, and import revenue once the live race event is made official by the relevant racing regulatory body. We recognize revenue we earn from providing a wagering service to our customers on historical races at our HRM facilities. The transaction price for HRM revenue is based on the established commission rate we are entitled to retain for each wager on the HRM. We recognize HRM revenue once the historical race has been completed on the HRM, net of the liability to the pool. We evaluate our on-track revenue, export revenue, import revenue, and HRM revenue contracts in order to determine whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity is a principal if it controls the specified service before that service is transferred to a customer. The revenue we recognize for on-track revenue, import revenue, and HRM revenue is the commission we are entitled to retain for providing a wagering service to our customers. For these arrangements, we are the principal as we control the wagering service; therefore, any charges, including any applicable simulcast fees, we incur for delivering the wagering service are presented as operating expenses. For export revenue, our customer is the third-party wagering site such as a racetrack, OTB, or advance deposit wagering provider. Therefore, the revenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third-party wagering site. Our admission contracts are either for a single live racing event day or multiple days. Our PSLs, sponsorships, and television rights contracts generally relate to multiple live racing event days. Multiple day admission, PSLs, sponsorships, and television 53 Churchill Downs Incorporated Notes to Consolidated Financial Statements rights contracts contain a distinct series of services that form single performance obligations. Sponsorship contracts generally include performance obligations related to admissions and advertising rights at our racetracks. Television rights contracts contain a performance obligation related to the rights to distribute certain live racing events on media platforms. The transaction prices for our admissions, PSLs, sponsorships, and television rights contracts are fixed. We allocate the transaction price to our sponsorship contract performance obligations based on the estimated relative standalone selling price of each distinct service. The revenue we recognize for admissions to a live racing event day is recognized once the related event is complete. For admissions, PSLs, sponsorships, and television rights contracts that relate to multiple live racing event days, we recognize revenue over time using an output method of each completed live racing event day as our measure of progress. Each completed live racing event day corresponds with the transfer of the relevant service to a customer and therefore is considered a faithful depiction of our efforts to satisfy the promises in these contracts. This output method results in measuring the value transferred to date to the customer relative to the remaining services promised under the contracts. Certain premium live racing event days such as the Kentucky Derby and Oaks result in a higher value of revenue allocated relative to other live racing event days due to, among other things, the quality of thoroughbreds racing, higher levels of on-track attendance, national broadcast audience, local and national media coverage, and overall entertainment value of the event. While these performance obligations are satisfied over time, the timing of when this revenue is recognized is directly associated with the occurrence of our live racing events, which is when the majority of our revenues recognized at a point in time are also recognized. Timing of revenue recognition may differ from the timing of invoicing to customers for our long-term contracts for racing event-related services. We generally invoice customers prior to delivery of services for our admissions, PSLs, sponsorships, and television rights contracts. We recognize a receivable and a contract liability at the time we have an unconditional right to receive payment. When cash is received in advance of delivering services under our contracts, we defer revenue and recognize it in accordance with our policies for that type of contract. In situations where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to allow our customers to secure the right to the specific services provided under our contracts, not to receive financing from our customers. Gaming revenue primarily consists of gaming transactions. Other operating revenue, such as food and beverage or hotel revenue, is recognized once delivery of the product or service has occurred. The transaction price for gaming transactions is the difference between gaming wins and losses. Gaming wager revenue is recognized when the wager settles. The majority of our HRM facilities and gaming properties offer loyalty programs that enable customers to earn loyalty points based on their play. HRM and gaming transactions involve two performance obligations for those customers earning loyalty points under the Company’s loyalty programs and a single performance obligation for customers who do not participate in the program. Loyalty points are primarily redeemable for free wagering activities and food and beverage. For purposes of allocating the transaction price in an HRM and gaming transaction between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a loyalty point that can be redeemed for wagering activities or food and beverage. For gaming transactions, an amount of the transaction price allocated to the gaming performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. For HRM transactions, the amount of the transaction price allocated to the HRM performance obligation is the commission rate we are entitled to retain. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a wagering transaction or food and beverage, and such goods or services are delivered to the customer. Income Taxes We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Adjustments to deferred taxes are determined based upon the changes in differences between the book basis and tax basis of our assets and liabilities and measured using enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision. 54 Churchill Downs Incorporated Notes to Consolidated Financial Statements When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that will be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Cash and Cash Equivalents We consider investments with original maturities of three months or less that are readily convertible to cash to be cash equivalents. We have, from time to time, cash in the bank in excess of federally insured limits. Under our cash management system, checks issued but not yet presented to banks that would result in negative bank balances when presented are classified as a current liability in the accompanying Consolidated Balance Sheets. Restricted Cash and Account Wagering Deposit Liabilities Restricted cash includes deposits collected from our TwinSpires' customers. Other amounts included in restricted cash represent amounts due to horsemen for purses, stakes and awards that are paid in accordance with the terms of our contractual agreements or statutory requirements. Allowance for Doubtful Accounts Receivable Upon our adoption of Accounting Standards Update ("ASU") of the Accounting Standards Codification ("ASC") No. 2016-13, Financial Instruments - Credit Losses ("ASC 326") on January 1, 2020, we maintain an allowance for doubtful accounts for current expected credit losses on our financial assets measured at amortized cost which are primarily included in Accounts receivable, net in the accompanying Consolidated Balance Sheets. The Company evaluates current expected credit losses on a collective (pool) basis when similar risk characteristics exist. Write-offs are recognized when the Company concludes that all or a portion of a financial asset is no longer collectible. Any subsequent recovery is recognized when it occurs. Internal Use Software Internal use software costs for our TwinSpires' segment software are capitalized in Property and equipment, net in the accompanying Consolidated Balance Sheets, in accordance with accounting guidance governing computer software developed or obtained for internal use. Once the software is placed in operation, we amortize the capitalized software over the software's estimated economic useful life, which is generally three years . We capitalized internal use software of approximately $ 11.2 million in 2022, $ 10.7 million in 2021, and $ 10.5 million in 2020. We incurred amortization expense of approximately $ 10.7 million in 2022, $ 10.3 million in 2021, and $ 9.4 million in 2020, for projects which had been placed in service. Fair Value of Assets and Liabilities We adhere to a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities; Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and Level 3: Unobservable inputs for the asset or liability. We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Investments in and Advances to Unconsolidated Affiliates We have investments in unconsolidated affiliates accounted for under the equity method. Under the equity method, carrying value is adjusted for our share of the investees' income and losses, amortization of certain basis differences as well as capital contributions to and distributions from these companies. We use the cumulative earnings approach to present distributions received from equity method investees. Distributions in excess of equity method income are recognized as a return of investment and recorded as investing cash inflows in the accompanying Consolidated Statements of Cash Flows. We classify income and losses as well as gains and impairments related to our investments in unconsolidated affiliates as a component of Other income (expense) in the accompanying Consolidated Statements of Comprehensive Income (Loss). We evaluate our investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may have experienced an "other-than-temporary" decline in value. If such conditions exist, we compare the estimated fair value of the investment to the investment's carrying value to determine if an impairment is 55 Churchill Downs Incorporated Notes to Consolidated Financial Statements indicated and determine whether the impairment is "other-than-temporary" based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss. We estimate fair value using a discounted cash flow analysis based on estimated future results of the investee. Business Combinations We account for acquisitions of businesses in accordance with ASC 805, Business Combinations . We initially allocate the purchase price of an acquisition to the assets acquired and liabilities assumed based on their estimated fair values, with any excess of consideration transferred recorded as goodwill. The results of operations of acquisitions are included in the consolidated financial statements from their respective dates of acquisition. Costs incurred to complete the business combination are not considered part of consideration and are expensed as incurred. Refer to Note 3, Acquisitions, for further information. Leases We determine if an arrangement is a lease at inception and categorize as either operating or finance based on the criteria of ASC 842. An arrangement contains a lease when the arrangement conveys the right to control the use of an identified asset over the lease term. Operating and finance leases are included in Property and equipment, net; Accrued expense and Other current liabilities; and Other liabilities in the accompanying Consolidated Balance Sheets. We generally do not separate lease and non-lease components for our lease contracts. We do not apply the right-of-use assets ("ROUA") and leases liability recognition requirements to short-term leases. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. These leases do not provide an implicit rate, so therefore we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments. ROUAs are recognized at the lease commencement date at the value of the lease liability, adjusted for any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred. The lease terms include all non-cancelable periods and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term for operating leases. Interest expense on the finance lease liabilities is recorded separately using the interest method. We do not have any material leases where we are the lessor. Debt Issuance Costs and Loan Origination Fees Debt issuance costs and loan origination fees associated with our term debt, revolver, and notes payable are amortized as interest expense over the term of each respective financial instrument. Debt issuance costs and loan origination fees associated with our term debt and notes payable are presented as a direct deduction from the carrying amount of the related liability. Debt issuance costs and loan origination fees associated with our revolver are presented as an asset. Casino and Pari-mutuel Taxes We recognize casino and pari-mutuel tax expense based on the statutory requirements of the federal, state, and local jurisdictions in which we conduct business. All of our casino taxes and the majority of our pari-mutuel taxes are gross receipts taxes levied on the gaming entity. We recognize these taxes as Live and Historical Racing, TwinSpires, Gaming, and All Other operating expenses in our Consolidated Statements of Comprehensive Income (Loss). In certain jurisdictions governing our pari-mutuel contracts with customers, there are specific pari-mutuel taxes that are assessed on winning wagers from our customers, which we collect and remit to the government. These taxes are presented on a net basis. Purse Expense We recognize purse expense based on the statutorily or contractually determined amount that is required to be paid out in the form of purses to the qualifying finishers of horse races run at our racetracks in the period in which wagering occurs. We incur a liability for all unpaid purses that will be paid out on a future live race event. Self-insurance Accruals We are self-insured up to certain limits for costs associated with general liability, workers’ compensation and certain employee health coverage costs, and we purchase insurance for claims that exceed our self-insurance retention or deductible levels. We record self-insurance reserves that include accruals of estimated settlements for known claims ("Case Reserves"), as well as accruals of third-party actuarial estimates for claims incurred but not yet reported ("IBNR"). Case Reserves represent estimated liabilities for unpaid losses, based on a claims administrator's estimates of future payments on individual reported claims, including allocated loss adjustment expense, which generally include claims settlement costs such as legal fees. IBNR includes the provision for unreported claims, changes in case reserves and future payments on reopened claims. 56 Churchill Downs Incorporated Notes to Consolidated Financial Statements Key variables and assumptions include, but are not limited to, loss development factors and trend factors such as changes in workers' compensation laws, medical care costs and wages. These loss development factors and trend factors are developed using our actual historical losses. It is possible that reasonable alternative selections would produce different reserve estimates. Advertising and Marketing We expense the costs of general advertising, marketing and associated promotional expenditures at the time the costs are incurred. We incurred advertising and marketing expense of approximately $ 52.9 million in 2022, $ 74.5 million in 2021, and $ 31.4 million in 2020 in our accompanying Consolidated Statements of Comprehensive Income (Loss). Stock-Based Compensation All stock-based payments to employees and directors, including grants of performance share units and restricted stock, are recognized as compensation expense over the service period based on the fair value on the date of grant. For awards that have a graded vesting schedule, we recognize expense on a straight-line basis for each separately vesting portion of the award. We recognize forfeitures of awards as incurred. Computation of Net Income per Common Share Net income per common share is presented for both basic earnings per common share ("Basic EPS") and diluted earnings per common share ("Diluted EPS"). Basic EPS is based upon the weighted average number of common shares outstanding, excluding unvested stock awards, during the period plus vested common stock equivalents that have not yet been converted to common shares. Diluted EPS is based upon the weighted average number of shares used to calculate Basic EPS and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from applying the treasury stock method to unvested stock awards. Common Stock Share Repurchases From time-to-time, we repurchase shares of our common stock under share repurchase programs and privately negotiated transactions authorized by our Board of Directors. Share repurchases constitute authorized but unissued shares under the Kentucky laws under which we are incorporated. Our common stock has no par or stated value. We record the full value of share repurchases, upon the trade date, against common stock on our Consolidated Balance Sheets except when to do so would result in a negative balance in such common stock account. In such instances, we record the cost of any further share repurchases as a reduction to retained earnings. Due to the large number of shares of our common stock repurchased over the past several years, our common stock balance will frequently be zero at the end of any given reporting period. Refer to Note 10, Shareholders' Equity, for additional information on our share repurchases. Insurance Recoveries The Company maintains insurance policies that provide coverage for property damages and business interruption. Losses due to physical damages are recognized during the accounting period in which the loss occurs, while the amount of monetary assets to be received from the insurance policy is recognized when receipt of insurance recoveries is probable. Losses, which are reduced by the related probable insurance recoveries, are recorded as operating expenses on the accompanying Consolidated Statements of Comprehensive Income (Loss). Anticipated proceeds in excess of recognized losses would be considered a gain contingency and recognized when the contingency related to the insurance claim has been resolved. Recent Accounting Pronouncements - Adopted on January 1, 2021 In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also clarify and amend existing guidance to improve consistent application of and simplify GAAP for other areas of Topic 740. This ASU was effective for public business entities for fiscal years and interim periods beginning after December 15, 2020. The adoption of this ASU did not have a material impact on our business. Recent Accounting Pronouncements - effective in 2023 or thereafter In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, and to simplify the accounting for transitioning from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance. In December 2022, the FASB deferred the date for which this guidance can be applied from December 31, 2022 to December 31, 2024. The use of LIBOR was phased out at the end of 2021, although the phase-out of U.S. dollar LIBOR for existing agreements has been delayed until June 2023. We continue to monitor developments related to the LIBOR transition and identification of an alternative, market-accepted rate. 57 Churchill Downs Incorporated Notes to Consolidated Financial Statements 3. ACQUISITIONS Chasers Poker Room On September 2, 2022, the Company completed the Chasers Transaction which was treated as an asset acquisition because substantially all the value of the gross assets acquired was concentrated in the gaming rights. The Company made an initial payment at closing and recorded a liability for the remaining payments due on a future date. In conjunction with the acquisition, the Company recorded an $ 82.2 million gaming rights intangible asset which represented its fair value at the date of acquisition. The fair value of the gaming rights acquired in the Chasers Transaction was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the gaming rights intangible asset based on a projected cash flow stream. This method assumes that the gaming rights intangible asset provides the opportunity to develop a gaming or historical racing facility in a specified region, and that the present value of the projected cash flows is 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, future operating expenses, start-up costs, and discount rate were the primary inputs in the valuation. The gaming rights intangible asset was assigned an indefinite useful life based on the Company's expected use of the asset and determination that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the gaming rights. Ellis Park On September 26, 2022, the Company completed the Ellis Park Transaction for total consideration of $ 79.0 million in cash, plus $ 3.5 million in working capital and other preliminary purchase price adjustments. The fair values of the Ellis Park Transaction were based upon preliminary valuations. Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The areas of the preliminary valuations that are not yet finalized relate to the amounts for income taxes, working capital adjustments and the final amount of residual goodwill. The Company expects to continue to obtain information to assist in determining fair values of net assets acquired at the acquisition date during the measurement period. The preliminary fair values of the assets acquired and liabilities assumed, net of cash acquired of $ 1.4 million, at the date of acquisition were as follows: property and equipment of $ 19.3 million, indefinite-lived gaming rights of $ 47.4 million, indefinite-lived trademark of $ 3.6 million, goodwill of $ 9.2 million, and net working capital of $ 1.6 million. The Company has not included other disclosures regarding the Chasers or Ellis Park Transactions as they are immaterial to our business. P2E Transaction On November 1, 2022, the Company completed the acquisition of substantially all the ass ets of P2E for a preliminary purchase consideration of $ 2,835.9 million, net of cash acquired. The P2E assets acquired included Colonial Downs and six HRM entertainment venues in Virginia, del Lago in New York, and Hard Rock Sioux City in Iowa, 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. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed, net of cash acquired of $ 126.4 million, as of November 1, 2022: 58 Churchill Downs Incorporated Notes to Consolidated Financial Statements (in millions) Total Accounts receivable, net $ 9.8 Other current assets 7.2 Property and equipment 611.2 Goodwill 347.8 Other intangible assets 1,941.5 Deferred taxes 20.8 Other assets 16.0 Total assets acquired $ 2,954.3 Accounts payable 4.0 Accrued expenses and other current liabilities 96.9 Other liabilities assumed 17.5 Total liabilities assumed $ 118.4 Net assets acquired (net of cash) $ 2,835.9 The fair value of the intangible assets consists of the following: (in millions) Fair Value Recognized Gaming rights $ 1,865.6 Trademark 75.9 Total intangible assets $ 1,941.5 Current assets and current liabilities were valued at the existing carrying values, as these items are short term in nature and represent management's estimated fair value of the respective items at November 1, 2022. The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures. The fair value of the land was determined using the market approach and the fair values of the remaining property and equipment were primarily determined using the cost replacement method which is based on replacement or reproduction costs of the assets. The fair value of the gaming rights was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream. This method assumes that the gaming rights intangible assets provide 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, and discount rates were the primary assumptions and estimates in the valuation of the gaming rights. The gaming rights intangible assets were assigned an indefinite useful life based on the Company's expected use of the assets and determination that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the gaming rights. The trademark intangible assets were valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible assets by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the assets. The estimated future revenue, royalty rates, and discount rates were the primary assumptions and estimates in the valuation of the trademarks. The trademarks were assigned an indefinite useful life based on the Company’s intention to keep the trademarks for an indefinite period of time. Goodwill of $ 347.8 million was recognized due to the expected contribution of P2E to the Company's overall business strategy. The goodwill was assigned to the Gaming segment in the amount of $ 129.1 million and to the Live and Historical Racing segment in the amount of $ 218.7 million and is mostly deductible for tax purposes. 59 Churchill Downs Incorporated Notes to Consolidated Financial Statements Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The preliminary purchase consideration is subject to adjustment upon finalization of customary post-closing adjustments related to working capital. The primary areas of the preliminary valuation that are not yet finalized relate to the fair values of amounts for income taxes, property and equipment, and intangible assets, adjustments to working capital, and the final amount of residual goodwill. The Company expects to continue to obtain information to assist in determining fair values of net assets acquired at the acquisition date during the measurement period. For the period November 1, 2022 through December 31, 2022, the operations of the properties acquired as part of the P2E Transaction, including the associated retail sportsbooks, generated net revenue of $ 109.7 million and net income of $ 42.9 million. The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the P2E Transaction had occurred as of January 1, 2021. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2021. (in millions) Year Ended December 31, 2022 Year Ended December 31, 2021 Net revenue $ 2,348.7 $ 2,153.6 Net income $ 535.4 $ 205.1 4. DISPOSITIONS, ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS 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 or approximately $ 2.5 million per acre 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). The gain consisted of cash proceeds of $ 279.0 million offset by the carrying value of the assets sold of $ 4.4 million. The proceeds were held by a qualifying intermediary in an interest-bearing account until they could be utilized in a like-kind exchange. The Company utilized proceeds and interest earned from the sale to purchase property as part of the P2E Transaction and to invest in other replacement properties that qualify as Internal Revenue Code §1031 transactions to defer the federal income tax on the gain on the Calder land sale. The Company completed one reverse like-kind exchange in June 2022 involving our $ 9.9 million investment in real property for the Derby City Gaming Downtown facility in Louisville, Kentucky, and one reverse like-kind exchange in December 2022 involving our $ 24.9 million investment in real property for the Terre Haute Casino Resort in Vigo County, Indiana ("Terre Haute"). The remaining proceeds were used to execute a forward like-kind exchange with the P2E Transaction to purchase real property associated with del Lago in November 2022. As of December 31, 2022, the Company recorded a $ 76.0 million deferred tax liability on the Condensed Consolidated Balance Sheets. As of December 31, 2021, the assets sold as part of the Calder land sale were classified as held for sale on the accompanying Condensed Consolidated Balance Sheets. Calder's operations and assets are included in the Gaming segment in our consolidated results. Assets Held for Sale On September 29, 2021, the Company announced an agreement to sell the 326 -acre property in Arlington Heights, Illinois (the "Arlington Property"), to the Chicago Bears for $ 197.2 million. The Company has classified certain assets of Arlington International Racecourse ("Arlington") totaling $ 82.0 million and $ 81.5 million as held for sale as of December 31, 2022 and December 31, 2021, respectively, on the accompanying Consolidated Balance Sheets. Arlington’s operations and assets are included in All Other in our consolidated results. The Company executed a forward like-kind exchange transaction by purchasing certain property as part of the P2E Transaction for $ 197.2 million. An exchange accommodation titleholder ("EAT"), a type of variable interest entity, was used to facilitate this reverse like-kind exchange. The Company determined that it is the primary beneficiary of the EAT, thus the property held by the EAT has been consolidated and recorded in Property and equipment, net on the Condensed Consolidated Balance Sheets. On February 15, 2023, the Company closed on the sale and fully realized all the planned tax savings. 60 Churchill Downs Incorporated Notes to Consolidated Financial Statements Discontinued Operations On January 9, 2018, the Company completed the sale of its mobile gaming subsidiary, Big Fish Games, Inc. ("Big Fish Games"). The Big Fish Games business met the criteria for discontinued operation presentation. The Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Cash Flows, and the Notes to Consolidated Financial Statements reflect Big Fish Games as discontinued operations for all periods presented. On May 22, 2020, we entered into an agreement in principle to settle Cheryl Kater v. Churchill Downs Incorporated and Manasa Thimmegowda v. Big Fish Games, Inc. The $ 124.0 million settlement was paid on March 25, 2021. During 2022, the Company received a $ 26.0 million tax refund related to the capital loss associated with this settlement. 5. PROPERTY AND EQUIPMENT Property and equipment, net is comprised of the following: December 31, (in millions) 2022 2021 Grandstands and buildings $ 1,217.8 $ 745.5 Equipment 574.5 491.9 Tracks and other improvements 304.3 221.7 Land 161.2 101.3 Furniture and fixtures 172.0 78.9 Construction in progress 353.7 65.8 2,783.5 1,705.1 Accumulated depreciation ( 837.1 ) ( 736.7 ) Subtotal 1,946.4 968.4 Operating lease right-of-use assets 31.9 26.5 Total $ 1,978.3 $ 994.9 Depreciation expense was $ 109.0 million in 2022, $ 98.4 million in 2021 and $ 88.0 million in 2020 and is classified in operating expense in the accompanying Consolidated Statements of Comprehensive Income (Loss) . 6. GOODWILL Goodwill, by segment, is comprised of the following: (in millions) Live and Historical TwinSpires Gaming All Other Total Balance, December 31, 2020 $ 52.4 $ 152.2 $ 161.2 $ 1.0 $ 366.8 Adjustments — — — — — Balance, December 31, 2021 52.4 152.2 161.2 1.0 366.8 Additions 227.9 — 129.1 — 357.0 Balance, December 31, 2022 $ 280.3 $ 152.2 $ 290.3 $ 1.0 $ 723.8 In 2022, we established goodwill of $ 9.2 million related to the Ellis Park Transaction and $ 347.8 million related to the P2E Transaction. Refer to Note 3 - Acquisitions for more information on the Ellis Park and P2E Transactions. We performed our annual goodwill impairment analysis as of April 1, 2022. We assessed goodwill for impairment by performing qualitative or quantitative analyses for each reporting unit. Based on the results of these analyses, no goodwill impairments were identified in connection with our annual impairment testing. 61 Churchill Downs Incorporated Notes to Consolidated Financial Statements 7. OTHER INTANGIBLE ASSETS Other intangible assets, net is comprised of the following: December 31, 2022 December 31, 2021 (in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Definite-lived intangible assets: Favorable contracts $ 11.0 $ ( 10.1 ) $ 0.9 $ 11.0 $ ( 9.4 ) $ 1.6 Other 10.2 ( 5.5 ) 4.7 10.4 ( 4.6 ) 5.8 Customer relationships 4.7 ( 3.3 ) 1.4 4.7 ( 2.8 ) 1.9 Gaming licenses 5.1 ( 2.5 ) 2.6 5.1 ( 2.3 ) 2.8 $ 31.0 $ ( 21.4 ) $ 9.6 $ 31.2 $ ( 19.1 ) $ 12.1 Indefinite-lived intangible assets: Trademarks 125.7 47.7 Gaming rights 2,256.5 288.2 Other — 0.1 Total $ 2,391.8 $ 348.1 During 2022 we established indefinite-lived intangibles assets of $ 5.0 million for gaming rights associated with the planned development of Terre Haute. We also established indefinite-lived intangible assets of $ 82.2 million for the gaming rights related to the Chasers Transaction, as well as, $ 47.4 million for gaming rights and $ 3.6 million for trademarks related to the Ellis Park Transaction. We also established indefinite-lived intangible assets of $ 1.9 billion for the gaming rights and $ 75.9 million for the trademarks related to the P2E Transaction. Refer to Note 3 - Acquisitions for more information on the Chasers, Ellis Park and P2E Transactions. Amortization expense for definite-lived intangible assets was $ 4.7 million in 2022, $ 4.8 million in 2021, and $ 4.9 million in 2020, and is classified in operating expense in the accompanying Consolidated Statements of Comprehensive Income (Loss). We submitted payments of $ 2.3 million in 2022 and 2021 for annual license fees for Calder, which are being amortized to expense over the annual license period. Indefinite-lived intangible assets consist primarily of trademarks and state gaming rights in Indiana, Maine, Maryland, Mississippi, Louisiana, Pennsylvania, Kentucky, New Hampshire, New York, Iowa, and Virginia. Refer to Note 8, Asset Impairments, for information regarding intangible asset impairments recognized during 2022. We performed our annual indefinite-lived intangible assets impairment analysis as of April 1, 2022, which included an assessment of qualitative and quantitative factors to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying amount. We concluded that the fair values of our indefinite-lived intangible assets exceeded their carrying value other than impairments described in Note 8, Assets Impairments. Future estimated aggregate amortization expense on existing definite-lived intangible assets for each of the next five fiscal years is as follows (in millions): Years Ended December 31, Estimated Amortization Expense 2023 $ 2.4 2024 1.8 2025 1.0 2026 0.5 2027 0.3 Future estimated amortization expense does not include additional payments of $ 2.3 million in 2023 and in each year thereafter for the ongoing amortization of future expected annual Calder license fees not yet incurred or paid. 62 Churchill Downs Incorporated Notes to Consolidated Financial Statements 8. ASSET IMPAIRMENTS Presque Isle Impairment 2022 During the quarter ended December 31, 2022, the Company evaluated whether it was more likely than not that any of the Company's intangible assets, goodwill, or property and equipment, were impaired. 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 the impact and uncertainty of current negative economic trends. Factors considered in this evaluation included, among other things, the amount of the fair value over carrying value from the annual impairment testing performed as of April 1, 2022, changes in carrying values, changes in discount rates, and the impact of negative economic trends on cash flows. Based on the 2022 trigger event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated the projected cash flow stream. As a result, the Company recognized an impairment of $ 33.4 million in the fourth quarter of 2022 for the Presque Isle gaming rights and trademark. The fair value of the Presque Isle reporting unit's goodwill was determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies. In accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other, the Company performed the impairment testing of the Presque Isle gaming rights and trademark prior to testing Presque Isle goodwill. Based on the trigger event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated the project cash flow stream. As a result, the Company did not recognize an impairment for Presque Isle goodwill in the fourth quarter of 2022 because the fair value exceeded the carrying value. Other Impairments On February 24, 2022, the Company announced plans to exit the direct online Sports and Casino business. The Company will maintain its retail Sports operations 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. Based on the Company’s evaluation, the Company concluded that a trigger event for impairment testing 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. During the quarter ended December 31, 2021, the Company recorded a $ 4.1 million non-cash impairment charge related to certain assets in the TwinSpires segment due to changes in expectations of future realization of certain third-party market access royalty prepayments related to our New Jersey sports betting and iGaming that resulted in projected future cash flows being less than carrying value in the fourth quarter of 2021. During the quarter ended June 30, 2021, the Company recorded an $ 11.2 million non-cash impairment charge related to certain assets at Churchill Downs Racetrack included in our Live and Historical Racing segment. The impairment was due to a change in the Churchill Downs Racetrack capital plans and the Company's planned use of these assets. Presque Isle Impairment 2020 During the quarter ended March 31, 2020, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of the Company's intangible assets, goodwill, or property and equipment, were impaired. The Company concluded that a trigger event for impairment testing occurred related to the Presque Isle gaming rights, trademark, and the reporting unit's goodwill due to the impact and uncertainty of the COVID-19 global pandemic. The initial fair value of Presque Isle gaming rights in the first quarter of 2019 was determined using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. This method assumes that the Presque Isle gaming rights provide the opportunity to develop a casino and online wagering platform 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, operating expenses, start-up costs, and discount rate were the primary inputs in the valuation. Based on the trigger event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated the projected cash flow stream. As a result, the Company recognized an impairment of $ 15.0 million in first quarter of 2020 for the Presque Isle gaming rights. 63 Churchill Downs Incorporated Notes to Consolidated Financial Statements 9. INCOME TAXES Components of the provision (benefit) for income taxes are as follows: Years Ended December 31, (in millions) 2022 2021 2020 Current provision (benefit): Federal $ 41.0 $ 66.1 $ ( 38.7 ) State and local 19.7 18.5 3.0 Foreign — 0.1 0.1 60.7 84.7 ( 35.6 ) Deferred provision: Federal 79.9 7.5 28.7 State and local 28.8 2.3 1.5 Foreign — — 0.1 108.7 9.8 30.3 Income tax provision (benefit) $ 169.4 $ 94.5 $ ( 5.3 ) Income from continuing operations before provision for income taxes were as follows: Years Ended December 31, (in millions) 2022 2021 2020 Domestic $ 608.9 $ 343.7 $ 8.2 Foreign ( 0.1 ) ( 0.1 ) ( 0.2 ) Income from continuing operations before provision for income taxes $ 608.8 $ 343.6 $ 8.0 Our income tax provision (benefit) is different from the amount computed by applying the federal statutory income tax rate to income from continuing operations before taxes as follows: Years Ended December 31, (in millions) 2022 2021 2020 Federal statutory tax on earnings before income taxes $ 127.9 $ 72.1 $ 1.7 State income taxes, net of federal income tax benefit 32.6 15.8 ( 0.6 ) Non-deductible officer's compensation 7.6 6.4 3.5 Valuation allowance - state and foreign net operating losses 2.5 1.8 1.1 Uncertain tax positions 2.3 0.1 1.7 Re-measurement of deferred taxes 1.3 ( 1.5 ) 1.9 Windfall deduction from equity compensation ( 2.3 ) ( 1.4 ) ( 1.3 ) Net operating loss carry back - CARES Act — — ( 13.3 ) Other ( 2.5 ) 1.2 — Income tax provision (benefit) $ 169.4 $ 94.5 $ ( 5.3 ) The CARES Act provided, among other things, that any net operating loss arising in a tax year beginning in 2018, 2019 or 2020 may be carried back five years or carried forward indefinitely, offsetting up to 100 % of taxable income in tax years beginning before 2021. The Company filed a refund claim in 2021 from carrying back our 2020 net operating loss to a year before the statutory corporate tax rate was reduced from 35% to 21% by the Tax Act. Due to the higher statutory rate applied to this net operating loss, the Company recognized an income tax benefit of $ 13.3 million for the year ended December 31, 2020. 64 Churchill Downs Incorporated Notes to Consolidated Financial Statements Components of our deferred tax assets and liabilities were as follows: December 31, (in millions) 2022 2021 Deferred tax assets: § 163(j) interest expense limitation carryforward $ 18.2 $ — Lease liabilities 12.6 10.2 Net operating losses and credits carryforward 8.1 8.8 Deferred liabilities 7.4 5.1 Deferred compensation plans 7.0 6.9 Deferred income 3.6 4.7 Research and experimental expenditures 3.0 — Deferred tax assets 59.9 35.7 Valuation allowance ( 5.7 ) ( 3.2 ) Net deferred tax asset 54.2 32.5 Deferred tax liabilities: Property and equipment in excess of tax basis 158.7 69.7 Equity investments in excess of tax basis 141.6 128.9 Intangible assets in excess of tax basis 78.1 74.1 Right-of-use assets 12.3 9.9 Other 4.3 2.8 Deferred tax liabilities 395.0 285.4 Net deferred tax liability $ ( 340.8 ) $ ( 252.9 ) As of December 31, 2022, we had U.S. state and foreign net operating losses with tax values of $ 7.7 million and $ 0.5 million, respectively. We have recorded a valuation allowance of $ 5.7 million due to the fact that it is unlikely that we will generate income in certain state and foreign jurisdictions which is necessary to utilize the deferred tax assets. We also had U.S. state tax credits with a tax value of $ 1.3 million that do not expire which we expect to fully utilize. The Internal Revenue Service has completed audits through 2012. Tax years 2019 and after are open to examination. Tax year 2015 and 2018 are open to examination as a result of the Company's claim for refund of 2015 and 2018 tax from carrying back its 2020 net operating loss and 2021 capital loss pursuant to the CARES Act. As of December 31, 2022, we had approximately $ 6.4 million of total gross unrecognized tax benefits, excluding interest of $ 0.5 million. If the total gross unrecognized tax benefits were recognized, there would be a $ 5.8 million effect to the annual effective tax rate. We anticipate a decrease in our unrecognized tax positions of approximately $ 2.8 million during the next twelve months primarily due to expected settlements with tax authorities and the expiration of statutes of limitation. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (in millions) 2022 2021 2020 Balance as of January 1 $ 3.9 $ 3.9 $ 1.8 Additions for tax positions related to the current year 0.1 0.1 0.1 Additions for tax positions of prior years 2.9 1.0 2.6 Reductions for tax positions of prior years ( 0.5 ) ( 1.1 ) ( 0.6 ) Balance as of December 31 $ 6.4 $ 3.9 $ 3.9 65 Churchill Downs Incorporated Notes to Consolidated Financial Statements 10. SHAREHOLDERS’ EQUITY Stock Repurchase Programs On October 30, 2018, the Board of Directors of the Company approved a common stock repurchase program of up to $ 300.0 million ("2018 Stock Repurchase Program"). The 2018 Stock Repurchase Program was in effect until September 29, 2021 and had unused authorization of $ 97.9 million. 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 any 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. We repurchased the following shares under the 2018 and 2021 Stock Repurchase Programs: For the year ending December 31, (in millions, except share data) 2022 2021 2020 Repurchase Program Shares Aggregate Purchase Price Shares Aggregate Purchase Price Shares Aggregate Purchase Price 2021 Stock Repurchase Program 873,922 $ 175.5 226,232 $ 54.4 — $ — 2018 Stock Repurchase Program — — 245,132 49.2 235,590 27.9 Total 873,922 $ 175.5 471,364 $ 103.6 235,590 $ 27.9 The Duchossois Group ("TDG") Share Repurchase On February 1, 2021, the Company entered into an agreement (the "Stock Repurchase Agreement") with an affiliate of TDG to repurchase 1,000,000 shares of the Company’s common stock for $ 193.94 per share in a privately negotiated transaction for an aggregate purchase price of $ 193.9 million. The repurchase of shares of common stock from TDG pursuant to the Stock Repurchase Agreement was approved by the Company's Board of Directors separately from, and did not reduce the authorized amount remaining under, the existing common stock repurchase program. The Company repurchased the shares using available cash and borrowings under the Revolver (as defined in Note 12, Debt). 11. STOCK-BASED COMPENSATION PLANS Our total compensation expense, which includes expense related to restricted stock awards, restricted stock unit awards, performance share unit awards, and stock options associated with our employee stock purchase plan, was $ 31.8 million in 2022, $ 27.8 million in 2021, and $ 23.7 million in 2020. We recorded a tax benefit related to stock-based compensation expense of $ 1.6 million in 2022, $ 1.5 million in 2021, and $ 1.9 million in 2020. Our stock-based employee compensation plans are described below. 2016 Omnibus Stock Incentive Plan We have a stock-based employee compensation plan with awards outstanding under the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan (the "2016 Plan") and Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan. The 2016 Plan is intended to advance our long-term success by encouraging stock ownership among key employees and the Board of Directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock awards ("RSA"), restricted stock units ("RSU"), performance share units ("PSU"), performance units, or performance cash. The 2016 Plan has a minimum vesting period of one year for awards granted. Restricted Stock, Restricted Stock Units, and Performance Share Units The 2016 Plan permits the award of RSAs, RSUs, or PSUs to directors and key employees responsible for the management, growth and protection of our business. The fair value of RSAs and RSUs that vest solely based on continued service under the Plan is determined by the product of the number of shares granted and the grant date market price of our common stock. RSAs and RSUs granted to employees under the 2016 Plan generally vest either in full upon three years from the date of grant or on a pro rata basis over a three-year term. RSAs are legally issued common stock at the time of grant, with certain restrictions placed on them. RSUs granted to employees are converted into shares of our common stock at vesting. The RSUs 66 Churchill Downs Incorporated Notes to Consolidated Financial Statements granted to directors under the 2016 Plan generally vests in full upon one year from the date of grant. RSUs granted to directors are converted into shares of our common stock at the time of the director's retirement. In 2020, 2021, and 2022, the Company granted three-year performance and total shareholder return ("TSR") PSU awards (the "PSU Awards") to certain named executive officers ("NEOs"). The two performance criteria for the PSU Awards are: (1) a cumulative Adjusted EBITDA target that was set at the beginning of the plan performance period for the three-year period; and (2) a cash flow metric that is the aggregate of the cash flow targets for the three individual years that is set annually at the beginning of each year. The cash flow metric is defined as cash flow from operating activities and discontinued operations excluding the change in restricted cash, plus distributions of capital from equity investments less capital maintenance expenditures. The Compensation Committee of the Board of Directors (the "Compensation Committee") can make adjustments as it may deem appropriate to these metrics. Measurement against these criteria will be determined against a payout curve which provides up to 200 % of performance share units based on the original award. The PSU Awards may be adjusted based on the Company’s TSR performance relative to the TSR performance during the performance period of the companies remaining in the Russell 2000 index and Russell 1000 index beginning with 2022 grants at the end of the performance period as follows: 1. The PSU Awards will increase by 25 % if the Company’s TSR is in the top quartile; 2. The PSU Awards will decrease by 25 % if the Company’s TSR is in the bottom quartile; and 3. The PSU Awards will not change if the Company’s TSR is in the middle two quartiles. The maximum number of PSU Awards, including the impact of the TSR performance, that can be earned for a performance period is 250 % of the original award. On February 12, 2020, the Compensation Committee offered, and the NEOs accepted, to settle the 2017 PSU Awards in cash. In October 2018, the Company granted a special equity award to two NEOs (" 7 -Year Grant") consisting of PSU Awards that may be adjusted up to 200 % based on the Company's relative TSR performance versus the Russell 2000 over a three-year period ending October 29, 2021, and service-based RSU awards, both of which vest in 25 % annual increments over four years beginning on the fourth anniversary of the grant date, totaling seven years to be fully vested. The performance period ended on October 29, 2021, and the TSR performance was 200 %. The total compensation cost recognized for PSU Awards is determined using the Monte Carlo valuation methodology, which factors in the value of the TSR when determining the grant date fair value of the award. Compensation cost for the PSU Awards is recognized during the three-year performance and service period based on the probable achievement of the two performance criteria, with the exception of the 7-Year Grant, which compensation cost is recognized during the seven-year service period. All PSUs awards are converted into shares of our common stock at the time the award value is finalized. A summary of the 2022 RSUs, and PSUs granted to certain NEOs, employees, and the Board of Directors is presented below (shares/units in thousands): Grant Year Award Type Number of Units Awarded (1) Vesting Terms 2022 RSU 62 Vest equally over three service periods ending in 2025 2022 PSU 34 Three -year performance and service period ending in 2024 2022 RSU 5 One year service period ending in 2023 (1) PSUs presented are based on the target number of units for the original PSU grant. 67 Churchill Downs Incorporated Notes to Consolidated Financial Statements Activity for our RSAs, RSUs, and PSUs is presented below (shares/units in thousands): PSUs RSAs and RSUs Total (in thousands, except grant date values) Number of Shares / Units Weighted Average Grant Date Fair Value Number of Shares / Units Weighted Average Grant Date Fair Value Number of Shares / Units Weighted Average Grant Date Fair Value Balance, December 31, 2019 314 $ 72.84 265 $ 85.07 579 $ 78.45 Granted 37 $ 182.45 94 $ 150.12 131 $ 159.30 Performance adjustment (1) 41 $ 90.73 — $ — 41 $ 90.73 Vested ( 90 ) $ 90.73 ( 121 ) $ 90.01 ( 211 ) $ 90.32 Canceled/forfeited — $ — ( 3 ) $ 121.39 ( 3 ) $ 121.39 Balance, December 31, 2020 302 $ 83.40 235 $ 107.90 537 $ 94.14 Granted 27 $ 254.29 68 $ 211.11 95 $ 223.25 Performance adjustment (1) 258 $ 68.87 — $ — 258 $ 68.87 Vested ( 108 ) $ 92.90 ( 112 ) $ 121.77 ( 220 ) $ 107.63 Canceled/forfeited — $ — ( 12 ) $ 160.42 ( 12 ) $ 160.42 Balance, December 31, 2021 479 $ 82.99 179 $ 135.01 658 $ 90.27 Granted 34 $ 220.25 67 $ 222.16 101 $ 221.52 Performance adjustment (1) 47 $ 182.45 — $ — 47 $ 182.45 Vested ( 184 ) $ 115.32 ( 92 ) $ 158.89 ( 276 ) $ 129.65 Canceled/forfeited ( 6 ) $ 213.8 ( 6 ) $ 204.71 ( 12 ) $ 208.82 Balance, December 31, 2022 370 $ 90.07 148 $ 160.18 518 $ 110.13 (1) Adjustment to number of target units awarded for PSUs based on achievement of underlying performance goals. The fair value of shares and units vested was $ 56.9 million in 2022, $ 45.4 million in 2021, and $ 36.9 million in 2020. A summary of total unrecognized stock-based compensation expense related to RSAs, RSUs, and PSUs (based on current performance estimates), on December 31, 2022, is presented below: (in millions, except years) December 31, 2022 Weighted Average Remaining Vesting Period (Years) Unrecognized expense: RSU $ 8.8 1.52 PSU 13.2 1.71 Total $ 22.0 1.63 Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (the "ESP Plan"), we are authorized to sell, pursuant to short-term stock options, shares of our common stock to our full-time and qualifying part-time employees at a discount from our common stock’s fair market value. The ESP Plan operates on the basis of recurring, consecutive one-year periods. Each period commences on August 1 and ends on the following July 31. Compensation expense related to the ESP Plan was not material for any year included in our accompanying Consolidated Statements of Comprehensive Income (Loss). 68 Churchill Downs Incorporated Notes to Consolidated Financial Statements 12. DEBT The following table presents our total debt outstanding: December 31, 2022 (in millions) Outstanding Principal Issuance Costs and Fees Long-Term Debt, Net Term Loan B due 2024 $ 380.0 $ 1.6 $ 378.4 Term Loan B-1 due 2028 294.7 3.1 291.6 Term Loan A due 2027 800.0 5.5 794.5 Revolver 664.1 — 664.1 2027 Senior Notes 600.0 4.7 595.3 2028 Senior Notes 700.0 1.6 698.4 2030 Senior Notes 1,200.0 16.6 1,183.4 Total debt 4,638.8 33.1 4,605.7 Current maturities of long-term debt 47.0 — 47.0 Total debt, net of current maturities $ 4,591.8 $ 33.1 $ 4,558.7 December 31, 2021 (in millions) Outstanding Principal Issuance Costs and Fees Long-Term Debt, Net Term Loan B due 2024 $ 384.0 $ 2.4 $ 381.6 Term Loan B-1 due 2028 297.8 3.8 294.0 2027 Senior Notes 600.0 5.7 594.3 2028 Senior Notes 700.0 1.9 698.1 Total debt 1,981.8 13.8 1,968.0 Current maturities of long-term debt 7.0 — 7.0 Total debt, net of current maturities $ 1,974.8 $ 13.8 $ 1,961.0 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 April 28, 2020, the Company entered into an amendment to the 2017 Credit Agreement (as amended, the "Credit Agreement"), which 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"). On February 1, 2021, the Company entered into an amendment to increase the amount of certain otherwise restricted payments permitted from $ 26.0 million to $ 226.0 million during the Financial Covenant Relief Period. 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. 69 Churchill Downs Incorporated Notes to Consolidated Financial Statements The Company capitalized $ 3.5 million of debt issuance costs associated with the Joinder which are being amortized as interest expense over the 7-year term of the Term Loan B-1. The 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. On April 13, 2022, the Company 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. Refer to Note 3, Acquisitions for more information regarding the P2E Transaction. The Company capitalized $ 3.2 million of debt issuance costs associated with the Revolver commitment increase and $ 6.4 million of debt issuance costs associated with the Delayed Draw Term Loan A which are being amortized as interest expense over the 5-year term. 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. Refer to Note 3, Acquisitions for more regarding the Chasers, Ellis Park and P2E Transactions. 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 in 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 Company used the net proceeds from the offering to repay the then-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. 70 Churchill Downs Incorporated Notes to Consolidated Financial Statements In connection with the issuance of the 2027 Senior Notes, the Company and the 2027 Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019. 2028 Senior Notes On December 27, 2017, we completed an offering of $ 500.0 million in aggregate principal amount of 4.75 % Senior Unsecured Notes that mature on January 15, 2028 (the "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. 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 Notes. 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. In connection with the offering, we capitalized $ 3.4 million of debt issuance costs which are being amortized as interest expense over the term of the Additional 2028 Notes. Upon completion of this offering, the aggregate principal amount outstanding of the Existing 2028 Notes, together with the Additional 2028 Notes (collectively, the "2028 Senior Notes"), is $ 700.0 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 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. 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. 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. In connection with the offering, we capitalized $ 18.3 million of debt issuance costs which are being amortized as interest expense over the term of the 2030 Senior Notes. 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. 71 Churchill Downs Incorporated Notes to Consolidated Financial Statements In connection with the issuance of the 2030 Senior Notes, the Escrow Issuer and the guarantors of the 2030 Senior Notes entered into a Registration Rights Agreement to register any 2030 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from April 13, 2022. Future aggregate maturities of total debt are as follows (in millions): Years Ended December 31, 2023 $ 47.0 2024 419.0 2025 43.0 2026 43.0 2027 1,907.0 Thereafter 2,179.8 Total $ 4,638.8 13. REVENUE FROM CONTRACTS WITH CUSTOMERS Performance Obligations As of December 31, 2022, our Live and Historical Racing segment had remaining performance obligations on contracts with a duration greater than one year relating to television rights, sponsorships, personal seat licenses, and admissions, with an aggregate transaction price of $ 154.4 million. The revenue we expect to recognize on these remaining performance obligations is $ 46.0 million in 2023, $ 39.6 million in 2024, $ 30.5 million in 2025, and the remainder thereafter. As of December 31, 2022, our remaining performance obligations on contracts with a duration greater than one year in segments other than Live and Historical Racing were not material. Contract Assets and Contract Liabilities Contract assets were not material as of December 31, 2022 and 2021. Contract liabilities were $ 58.7 million as of December 31, 2022 and $ 64.9 million as of December 31, 2021. Contract liabilities are included in current deferred revenue, non-current deferred revenue, and accrued expense and other current liabilities in the accompanying Consolidated Balance Sheets. Contract liabilities primarily relate to our Live and Historical Racing segment. The decrease in contract liabilities from December 31, 2021 to December 31, 2022 was due to the recognition of revenue for fulfilled performance obligations. We recognized $ 49.9 million of revenue during the year ended December 31, 2022 that was included in the contract liabilities balance on December 31, 2021. We recognized $ 33.0 million of revenue during the year ended December 31, 2021 that was included in the contract liabilities balance on December 31, 2020. Disaggregation of Revenue The Company has included its disaggregated revenue disclosures as follows: • For the Live and Historical Racing segment, revenue is disaggregated between Churchill Downs Racetrack and historical racing properties given that our racing facilities revenues primarily revolve around live racing events while our historical racing properties revenues primarily revolve around historical racing. This segment is also disaggregated by location given the geographic economic factors that affect the revenue of service offerings. Within the Live and Historical racing segment, revenue is further disaggregated between live and simulcast racing, historical racing, racing event-related services, and other services. • For the TwinSpires segment, revenue is disaggregated between live and simulcast racing, gaming, and other services. • For the Gaming segment, revenue is disaggregated by location given the geographic economic factors that affect the revenue of Gaming service offerings. Within the Gaming segment, revenue is further disaggregated between live and simulcast racing, racing event-related services, gaming, and other services. We believe that these disclosures depict how the amount, nature, timing, and uncertainty of cash flows are affected by economic factors. The tables below present net revenue from external customers and intercompany revenue from each of our segments: 72 Churchill Downs Incorporated Notes to Consolidated Financial Statements Years Ended December 31, (in millions) 2022 2021 2020 Net revenue from external customers: Live and Historical Racing: Churchill Downs Racetrack $ 196.8 $ 128.1 $ 63.3 Louisville 169.9 154.3 79.5 Northern Kentucky 46.1 26.0 10.2 Southwestern Kentucky 131.4 100.7 16.6 Western Kentucky 4.5 — — Virginia 62.4 — — New Hampshire 3.5 — — Total Live and Historical Racing $ 614.6 $ 409.1 $ 169.6 TwinSpires: $ 436.4 $ 451.4 $ 430.1 Gaming: Florida $ 106.2 $ 100.0 $ 51.8 Iowa 15.6 — — Louisiana 140.8 133.6 97.6 Maine 114.4 99.8 44.9 Maryland 105.3 100.6 60.2 Mississippi 101.8 117.3 87.0 New York 30.9 — — Pennsylvania 140.9 144.1 93.8 Total Gaming $ 755.9 $ 695.4 $ 435.3 All Other 2.9 41.3 19.0 Net revenue from external customers $ 1,809.8 $ 1,597.2 $ 1,054.0 Intercompany net revenues: Live and Historical Racing $ 31.8 $ 21.5 $ 19.2 TwinSpires 5.2 6.4 5.5 Gaming 5.9 3.0 2.5 All Other 0.4 7.9 7.8 Eliminations ( 43.3 ) ( 38.8 ) ( 35.0 ) Intercompany net revenue $ — $ — $ — 73 Churchill Downs Incorporated Notes to Consolidated Financial Statements Year Ended December 31, 2022 (in millions) Live and Historical Racing TwinSpires Gaming Total Segments All Other Total Net revenue from external customers Pari-mutuel: Live and simulcast racing $ 66.8 $ 367.4 $ 28.1 $ 462.3 $ — $ 462.3 Historical racing (a) 374.1 — 9.8 383.9 — 383.9 Racing event-related services 129.8 — 1.8 131.6 — 131.6 Gaming (a) 3.5 28.2 647.4 679.1 — 679.1 Other (a) 40.4 40.8 68.8 150.0 2.9 152.9 Total $ 614.6 $ 436.4 $ 755.9 $ 1,806.9 $ 2.9 $ 1,809.8 Year Ended December 31, 2021 (in millions) Live and Historical Racing TwinSpires Gaming Total Segments All Other Total Net revenue from external customers Pari-mutuel: Live and simulcast racing $ 64.0 $ 380.7 $ 28.2 $ 472.9 $ 29.7 $ 502.6 Historical racing (a) 253.0 — — 253.0 — 253.0 Racing event-related services 68.5 — 1.2 69.7 7.0 76.7 Gaming (a) — 34.8 622.0 656.8 — 656.8 Other (a) 23.6 35.9 44.0 103.5 4.6 108.1 Total $ 409.1 $ 451.4 $ 695.4 $ 1,555.9 $ 41.3 $ 1,597.2 Year Ended December 31, 2020 (in millions) Live and Historical Racing TwinSpires Gaming Total Segments All Other Total Net revenue from external customers Pari-mutuel: Live and simulcast racing $ 46.5 $ 387.5 $ 22.9 $ 456.9 $ 18.2 $ 475.1 Historical racing (a) 93.6 — — 93.6 — 93.6 Racing event-related services 21.0 — 3.4 24.4 0.3 24.7 Gaming (a) — 11.3 381.3 392.6 — 392.6 Other (a) 8.5 31.3 27.7 67.5 0.5 68.0 Total $ 169.6 $ 430.1 $ 435.3 $ 1,035.0 $ 19.0 $ 1,054.0 (a) Food and beverage, hotel, and other services furnished to customers for free as an inducement to wager or through the redemption of our customers' loyalty points are recorded at the estimated standalone selling prices in Other revenue with a corresponding offset recorded as a reduction in historical racing pari-mutuel revenue for HRMs or gaming revenue for our casino properties. These amounts were $ 33.9 million in 2022, $ 20.9 million in 2021, and $ 13.1 million in 2020 . 74 Churchill Downs Incorporated Notes to Consolidated Financial Statements 14. OTHER BALANCE SHEET ITEMS Accounts receivable Accounts receivable is comprised of the following: December 31, (in millions) 2022 2021 Trade receivables $ 12.5 $ 7.6 Simulcast and online wagering receivables 54.1 29.6 Other receivables 20.6 10.5 87.2 47.7 Allowance for doubtful accounts ( 5.7 ) ( 5.4 ) Total $ 81.5 $ 42.3 We recognized bad debt expense of $ 2.3 million in 2022, $ 3.2 million in 2021 and $ 2.5 million in 2020. Accrued expenses and other current liabilities Accrued expenses and other current liabilities consisted of the following: December 31, (in millions) 2022 2021 Account wagering deposits liability $ 57.8 $ 47.5 Accrued salaries and related benefits 39.6 39.9 Purses payable 46.1 28.6 Accrued interest 47.8 23.9 Accrued fixed assets 39.5 17.1 Other 130.2 74.7 Total $ 361.0 $ 231.7 15. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Investments in and advances to unconsolidated affiliates as of December 31, 2022 and 2021 primarily consisted of a 61.3 % interest in Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines ("Rivers Des Plaines"), a 50 % interest in Miami Valley Gaming ("MVG"), and other immaterial joint ventures. Rivers Des Plaines On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines to acquire approximately 42 % of Midwest Gaming from affiliates and co-investors of Clairvest Group Inc. ("Clairvest") and members of High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC and Casino Investors, LLC ("Casino Investors") for cash consideration of approximately $ 406.6 million and $ 3.5 million of certain transaction costs and working capital adjustments (the "Sale Transaction"). Following the closing of the Sale Transaction, the parties completed a recapitalization transaction on March 6, 2019 (the "Recapitalization"), pursuant to which Midwest Gaming used approximately $ 300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors. As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3 %. High Plaines retained ownership of 36.0 % of Midwest Gaming and Casino Investors retained ownership of 2.7 % of Midwest Gaming. We also recognized a $ 103.2 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership stake in Midwest Gaming. A new limited liability company agreement was entered into by the members of Midwest Gaming as a result of the change in ownership structure. Under the new limited liability company agreement, both the Company and High Plaines have participating rights over Midwest Gaming, and both must consent to Midwest Gaming's operating, investing and financing decisions. As a result, we account for Midwest Gaming using the equity method. 75 Churchill Downs Incorporated Notes to Consolidated Financial Statements The Company’s investment in Midwest Gaming is presented at our initial cost of investment plus the Company's accumulated proportional share of income or loss, including depreciation/accretion of the difference in the historical basis of the Company’s contribution, less any distributions it has received. Following the Sale Transaction and Recapitalization, the carrying value of the Company’s investment in Midwest Gaming was $ 835.0 million higher than the Company’s underlying equity in the net assets of Midwest Gaming. This equity method basis difference was comprised of $ 853.7 million related to goodwill and indefinite-lived intangible assets, $( 13.7 ) million related to non-depreciable land, $( 9.5 ) million related to buildings that will be accreted into income over a weighted average useful life of 35.3 years, and $ 4.5 million related to personal property that will be depreciated over a weighted average useful life of 3.7 years. As of December 31, 2022 , the net aggregate basis difference between the Company’s investment in Midwest Gaming and the amounts of the underlying equity in net assets was $ 835.0 million. Our investment in Rivers Des Plaines was $ 544.9 million as of December 31, 2022 and $ 554.8 million as of December 31, 2021. The Company received distributions from Rivers Des Plaines of $ 123.8 million in 2022, $ 67.2 million in 2021 and $ 10.7 million in 2020. Miami Valley Gaming Delaware North Companies Gaming & Entertainment Inc. ("DNC") owns the remaining 50 % interest in MVG. Since both we and DNC have participating rights over MVG, and both must consent to MVG's operating, investing and financing decisions, we account for MVG using the equity method. Our investment in MVG was $ 114.4 million as of December 31, 2022 and $ 108.7 million as of December 31, 2021. The Company received distributions from MVG of $ 33.0 million in 2022, $ 42.0 million in 2021 and $ 20.0 million in 2020. Summarized Financial Results for our Unconsolidated Affiliates The financial results for our unconsolidated affiliates are summarized below. The summarized income statement information for 2022 and 2021 and summarized balance sheet information as of December 31, 2022 and 2021 includes the following equity investments: MVG, Rivers Des Plaines, and other immaterial joint ventures. December 31, (in millions) 2022 2021 Assets Current assets $ 91.0 $ 96.0 Property and equipment, net 345.7 312.3 Other assets, net 265.0 264.1 Total assets $ 701.7 $ 672.4 Liabilities and Members' Deficit Current liabilities $ 97.9 $ 95.3 Long-term debt 838.6 786.9 Other liabilities 0.2 20.6 Members' deficit ( 235.0 ) ( 230.4 ) Total liabilities and members' deficit $ 701.7 $ 672.4 Years Ended December 31, (in millions) 2022 2021 2020 Net revenue $ 825.5 $ 740.0 $ 386.3 Operating and SG&A expense 509.1 434.2 252.1 Depreciation and amortization 25.8 17.6 17.0 Operating income 290.6 288.2 117.2 Interest and other expense, net ( 24.8 ) ( 38.6 ) ( 63.1 ) Net income $ 265.8 $ 249.6 $ 54.1 76 Churchill Downs Incorporated Notes to Consolidated Financial Statements 16. LEASES Our operating leases with terms greater than one year are primarily related to buildings and land. Our operating leases with terms less than one year are primarily related to equipment. Most of our building and land leases have terms of 2 to 10 years and include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Certain of our lease agreements include lease payments based on a percentage of net gaming revenue and others include rental payment adjustments periodically for inflation. The estimated discount rate for each of our leases is determined based on adjustments made to our secured debt borrowing rate. The components of total lease cost were as follows: Years Ended December 31, (in millions) 2022 2021 Short-term lease cost (a) (b) $ 12.5 $ 11.1 Operating lease cost (b) 8.1 7.8 Finance lease interest expense 0.4 0.3 Finance lease amortization expense (b) 0.7 0.5 Total lease cost $ 21.7 $ 19.7 (a) Includes leases with terms of one year or less. (b) Includes variable lease costs, which were not material. Supplemental cash flow information related to leases are as follows: Years Ended December 31, (in millions) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 6.5 $ 6.5 Operating cash flows from finance leases $ 0.5 $ 0.3 Financing cash flows from finance leases $ 0.4 $ 0.2 ROUAs obtained in exchange for lease obligations Operating leases $ 10.7 $ 9.8 Finance leases $ 6.2 $ 4.4 Other information related to operating leases was as follows: December 31, Weighted Average Remaining Lease Term 2022 2021 Operating leases 6.5 years 5.9 years Finance leases 14.9 years 16.0 years Weighted Average Discount Rate Operating leases 4.1 % 3.5 % Finance leases 4.1 % 3.3 % 77 Churchill Downs Incorporated Notes to Consolidated Financial Statements As of December 31, 2022, the future undiscounted cash flows associated with the Company's operating and financing lease liabilities were as follows: (in millions) Years Ended December 31, Operating Leases Finance Leases 2023 $ 7.6 $ 1.3 2024 7.1 1.4 2025 6.6 1.4 2026 6.2 1.4 2027 3.0 1.4 Thereafter 7.0 15.0 Total future minimum lease payments 37.5 21.9 Less: Imputed interest 4.5 5.8 Present value of lease liabilities $ 33.0 $ 16.1 Reported lease liabilities as of December 31, 2022 Accrued expense and other current liabilities (current maturities of leases) $ 7.0 $ 0.9 Other liabilities (non-current maturities of leases) 26.0 15.2 Present value of lease liabilities $ 33.0 $ 16.1 17. BOARD OF DIRECTOR AND EMPLOYEE BENEFIT PLANS Board of Directors and Officers Retirement Plan Under the 2005 Deferred Compensation Plan (the "Deferred Plan"), members of our Board of Directors may elect to invest the deferred director fee compensation into our common stock within the Deferred Plan. Investments in our common stock are credited as hypothetical shares of common stock based on the market price of the stock at the time the compensation was earned. Upon the end of the director's service, common stock shares are issued to the director. Prior to December 13, 2019, we provided eligible executives the opportunity to defer the receipt of base and bonus compensation to a future date and included a Company matching contribution on base compensation with certain limits through the Deferred Plan. On December 13, 2019, the Compensation Committee elected to freeze the Deferred Plan for eligible executives after the 2019 plan year. On December 13, 2019, the Compensation Committee adopted the Churchill Downs Incorporated Restricted Stock Unit Deferral Plan, effective January 1, 2020 (the "RSU Deferral Plan"). Under the RSU Deferral Plan, certain individual employees who are management or highly compensated employees of the Company may elect to defer settlement of RSUs granted pursuant to the 2016 Plan. Other Retirement Plans We have a profit-sharing plan for all employees with three months or more of service who are not otherwise participating in an associated profit-sharing plan. We match contributions made by employees up to 3 % of the employee’s annual compensation and match at 50 % any contributions made by the employee up to an additional 2 % of compensation with certain limits. We may also contribute a discretionary amount determined annually by the Board of Directors as well as a year-end discretionary match not to exceed 4 % of compensation. Our cash contribution to the plan was $ 4.3 million in 2022, $ 4.1 million in 2021, and $ 3.7 million in 2020. 18. FAIR VALUE OF ASSETS AND LIABILITIES We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate: 78 Churchill Downs Incorporated Notes to Consolidated Financial Statements Restricted Cash Our restricted cash accounts that are held in interest-bearing accounts qualify for Level 1 in the fair value hierarchy, which includes unadjusted quoted market prices in active markets for identical assets. Debt The fair value of the Company's Senior Secured Term Loan B, Term Loan B-1, Term Loan A and Revolver under the Credit Agreement approximate the gross carrying value of the variable rate debt and as such are Level 2 measurements. The fair value of the Company’s 2030 Senior Notes, 2028 Senior Notes and 2027 Senior Notes are estimated based on unadjusted quoted prices for identical or similar liabilities in markets that are not active and as such are Level 2 measurements. The carrying amounts and estimated fair values by input level of the Company's financial instruments are as follows: December 31, 2022 (in millions) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Restricted cash $ 74.9 $ 74.9 $ 74.9 $ — $ — Financial liabilities: Term Loan B $ 378.4 $ 380.0 $ — $ 380.0 $ — Term Loan B-1 291.6 294.8 — 294.8 — Term Loan A 794.5 800.0 — 800.0 — Revolver 664.1 664.1 — 664.1 — 2027 Senior Notes 595.3 574.5 — 574.5 — 2028 Senior Notes 698.4 626.5 — 626.5 — 2030 Senior Notes 1,183.4 1,079.4 — 1,079.4 — December 31, 2021 (in millions) Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Restricted cash $ 64.3 $ 64.3 $ 64.3 $ — $ — Financial liabilities: Term Loan B $ 381.6 $ 384.0 $ — $ 384.0 $ — Term Loan B-1 294.0 297.8 — 297.8 — 2027 Senior Notes 594.3 619.5 — 619.5 — 2028 Senior Notes 698.1 724.5 — 724.5 — 19. CONTINGENCIES We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages. We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of 79 Churchill Downs Incorporated Notes to Consolidated Financial Statements the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results of operations, or cash flows. Legal fees are expensed as incurred. If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business. 20. NET INCOME (LOSS) PER COMMON SHARE COMPUTATIONS The following is a reconciliation of the numerator and denominator of the net income (loss) per common share computations: Years Ended December 31, (in millions, except per share data) 2022 2021 2020 Numerator for basic net income (loss) per common share: Net income from continuing operations $ 439.4 $ 249.1 $ 13.3 Net loss attributable to noncontrolling interest — — ( 0.2 ) Net income from continuing operations, net of loss attributable to noncontrolling interests 439.4 249.1 13.5 Net loss from discontinued operations — — ( 95.4 ) Numerator for basic net income (loss) per common share $ 439.4 $ 249.1 $ ( 81.9 ) Numerator for diluted net income from continuing operations per common share $ 439.4 $ 249.1 $ 13.5 Numerator for diluted net income (loss) per common share $ 439.4 $ 249.1 $ ( 81.9 ) Denominator for net income (loss) per common share: Basic 37.9 38.6 39.6 Plus dilutive effect of stock awards 0.6 0.6 0.5 Diluted 38.5 39.2 40.1 Net income (loss) per common share data: Basic Continuing operations $ 11.58 $ 6.45 $ 0.34 Discontinued operations — — ( 2.41 ) Net income (loss) per common share - basic $ 11.58 $ 6.45 $ ( 2.07 ) Diluted Continuing operations $ 11.42 $ 6.35 $ 0.33 Discontinued operations (1) — — ( 2.41 ) Net income (loss) per common share - diluted $ 11.42 $ 6.35 $ ( 2.08 ) (1) Amounts exclude all potential common equivalent shares for periods when there is a net loss from discontinued operations. 21. SEGMENT INFORMATION We manage our operations through three reportable segments: Live and Historical Racing, TwinSpires, and Gaming. Refer to Note 1, Description of Business, for additional information regarding the changes we made to our segments during the first quarters of 2021 and 2022. Prior year amounts have been reclassified to conform to this presentation. Our operating segments reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources. • Live and Historical Racing The Live and Historical Racing segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and our historical racing properties in Kentucky, Virginia, and New Hampshire. 80 Churchill Downs Incorporated Notes to Consolidated Financial Statements Our Live and Historical Racing properties earn commissions primarily from pari-mutuel wagering on live and historical races; simulcast fees earned from other wagering sites, fees from racing event-related services including admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services, and revenue from food and beverage services. • TwinSpires The TwinSpires segment includes the revenue and expenses for TwinSpires Horse Racing, TwinSpires Sports and Casino and United Tote businesses and these businesses are headquartered in Louisville, Kentucky. TwinSpires Horse Racing operates the online horse racing wagering business for TwinSpires.com, BetAmerica.com, and other white-label platforms; facilitates high dollar wagering by international customers; and provides the Bloodstock Research Information Services platform for horse racing statistical data. Our sports betting and casino business includes the retail and online TwinSpires sports betting and online casino gaming operations. Our TwinSpires Sports and Casino business includes the results of our nine retail sportsbooks at our wholly-owned gaming properties and our casino platform in Pennsylvania. Rivers Des Plaines retail and online BetRivers sportsbook is included in the Gaming segment. The Company exited the direct online Sports and Casino business during 2022 in every state except Pennsylvania and Arizona. United Tote manufactures and operates pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering businesses. United Tote provides totalisator services which accumulate wagers, calculate payoffs and displays wagering data to patrons who wager on horse races. United Tote has contracts to provide totalisator services to third-party racetracks, OTBs and other pari-mutuel wagering businesses and also provides these services at our facilities. • Gaming The Gaming segment includes revenue and expenses for the casino properties and associated racetrack facilities which support the casino license as applicable. The Gaming segment has approximately 13,980 slot machines and video lottery terminals ("VLTs") and 358 table games located in ten states. The Gaming segment revenue and expenses includes the following properties: ◦ Florida - Calder Casino ("Calder") ◦ Iowa - Hard Rock Hotel & Casino ("Hard Rock Sioux City") ◦ Louisiana - Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI") ◦ Maryland - Ocean Downs Casino & Racetrack ("Ocean Downs") ◦ Maine - Oxford Casino & Hotel ("Oxford") ◦ Mississippi ▪ Harlow’s Casino Resort and Spa ("Harlow's") ▪ Riverwalk Casino Hotel ("Riverwalk") ◦ New York - del Lago Resort & Casino ("del Lago") ◦ Pennsylvania ▪ Presque Isle Downs & Casino ("Presque Isle") ▪ Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") management agreement The Gaming segment also includes net income for our ownership portion of the Company’s equity investments in the following: ◦ Illinois - 61.3 % equity investment in Midwest Gaming, the parent company of Rivers Des Plaines ◦ Ohio - 50 % equity investment in MVG The Gaming segment includes revenue and expenses for the casino properties and associated racetracks which support the casino license. The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, HRMs, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and other miscellaneous operations. We have aggregated Arlington as well as certain corporate operations, and other immaterial joint ventures in All Other to reconcile to consolidated results. 81 Churchill Downs Incorporated Notes to Consolidated Financial Statements Eliminations include the elimination of intersegment transactions. We utilize non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA includes the following adjustments: 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: – 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 ceased racing and simulcast operations. On February 15, 2023, the Company closed on the sale of the property to the Chicago Bears. Refer to Note 4, Dispositions and Assets Held for Sale for additional information. 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. We utilize the Adjusted EBITDA metric to provide a more accurate measure of our core operating results and enable management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. 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. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying Consolidated Statements of Comprehensive Income (Loss). The tables below present net revenue from external customers and intercompany revenue from each of our segments, Adjusted EBITDA by segment and reconciles comprehensive income to Adjusted EBITDA: Net revenue by segment is comprised of the following: Years Ended December 31, (in millions) 2022 2021 2020 Live and Historical Racing $ 614.6 $ 409.1 $ 169.6 TwinSpires 436.4 451.4 430.1 Gaming 755.9 695.4 435.3 All Other 2.9 41.3 19.0 Net Revenue $ 1,809.8 $ 1,597.2 $ 1,054.0 82 Churchill Downs Incorporated Notes to Consolidated Financial Statements Adjusted EBITDA by segment is comprised of the following: Year Ended December 31, 2022 (in millions) Live and Historical Racing TwinSpires Gaming Revenue $ 646.4 $ 441.6 $ 761.8 Taxes and purses ( 168.6 ) ( 27.0 ) ( 278.1 ) Marketing and advertising ( 19.8 ) ( 13.0 ) ( 18.9 ) Salaries and benefits ( 63.4 ) ( 26.8 ) ( 102.7 ) Content expense ( 3.4 ) ( 203.3 ) ( 8.3 ) Selling, general and administrative expense ( 18.6 ) ( 9.7 ) ( 31.3 ) Other operating expense ( 85.5 ) ( 47.8 ) ( 91.5 ) Other income 0.4 0.1 190.9 Adjusted EBITDA $ 287.5 $ 114.1 $ 421.9 Year Ended December 31, 2021 (in millions) Live and Historical Racing TwinSpires Gaming Revenue $ 430.6 $ 457.8 $ 698.4 Taxes and purses ( 126.3 ) ( 30.7 ) ( 264.4 ) Marketing and advertising ( 12.9 ) ( 49.4 ) ( 11.8 ) Salaries and benefits ( 48.4 ) ( 27.0 ) ( 87.1 ) Content expense ( 2.5 ) ( 206.6 ) ( 4.7 ) Selling, general and administrative expense ( 12.8 ) ( 11.0 ) ( 27.9 ) Other operating expense ( 53.0 ) ( 50.4 ) ( 72.3 ) Other income 0.3 — 181.7 Adjusted EBITDA $ 175.0 $ 82.7 $ 411.9 Year Ended December 31, 2020 (in millions) Live and Historical Racing TwinSpires Gaming Revenue $ 188.8 $ 435.6 $ 437.8 Taxes and purses ( 64.1 ) ( 25.1 ) ( 171.6 ) Marketing and advertising ( 6.2 ) ( 16.5 ) ( 7.5 ) Salaries and benefits ( 32.5 ) ( 24.6 ) ( 75.9 ) Content expense ( 1.5 ) ( 202.7 ) ( 3.5 ) Selling, general and administrative expense ( 8.7 ) ( 10.4 ) ( 25.4 ) Other operating expense ( 36.8 ) ( 40.5 ) ( 59.7 ) Other income 0.1 0.1 78.9 Adjusted EBITDA $ 39.1 $ 115.9 $ 173.1 83 Churchill Downs Incorporated Notes to Consolidated Financial Statements Years Ended December 31, (in millions) 2022 2021 2020 Reconciliation of Comprehensive Income (Loss) to Adjusted EBITDA: Net income (loss) and comprehensive income (loss) attributable to Churchill Downs Incorporated $ 439.4 $ 249.1 $ ( 81.9 ) Net loss attributable to noncontrolling interest — — 0.2 Net income (loss) 439.4 249.1 ( 82.1 ) Loss from discontinued operations, net of tax — — 95.4 Income from continuing operations, net of tax 439.4 249.1 13.3 Additions: Depreciation and amortization 113.7 103.2 92.9 Interest expense 147.3 84.7 80.0 Income tax provision (benefit) 169.4 94.5 ( 5.3 ) EBITDA $ 869.8 $ 531.5 $ 180.9 Adjustments to EBITDA: Selling, general and administrative: Stock-based compensation expense $ 31.8 $ 27.8 $ 23.7 Legal reserves 3.8 — — Other charges 7.4 0.2 0.8 Pre-opening expense and other expense 13.2 5.8 11.2 Other income, expense: Interest, depreciation and amortization expense related to equity investments 42.8 41.5 38.5 Changes in fair value of Rivers Des Plaines' interest rate swaps ( 12.6 ) ( 12.9 ) 12.9 Rivers Des Plaines' legal reserves and transactions costs 0.6 9.9 — Other charges and recoveries, net 1.0 — — Gain on Calder land sale ( 274.6 ) — — Transaction expense, net 42.1 7.9 1.0 Asset impairments 38.3 15.3 17.5 Total adjustments to EBITDA ( 106.2 ) 95.5 105.6 Adjusted EBITDA $ 763.6 $ 627.0 $ 286.5 Adjusted EBITDA by segment: Live and Historical Racing $ 287.5 $ 175.0 $ 39.1 TwinSpires 114.1 82.7 115.9 Gaming 421.9 411.9 173.1 Total segment Adjusted EBITDA 823.5 669.6 328.1 All Other ( 59.9 ) ( 42.6 ) ( 41.6 ) Total Adjusted EBITDA $ 763.6 $ 627.0 $ 286.5 84 Churchill Downs Incorporated Notes to Consolidated Financial Statements The table below presents total asset information for each of our segments: December 31, (in millions) 2022 2021 Total assets: Live and Historical Racing $ 3,345.4 $ 682.7 TwinSpires 287.9 289.6 Gaming 1,824.2 1,003.3 Total segment assets 5,457.5 1,975.6 All Other 749.3 1,006.0 $ 6,206.8 $ 2,981.6 The table below presents total capital expenditures for each of our segments: Years Ended December 31, (in millions) 2022 2021 2020 Capital expenditures: Live and Historical Racing $ 307.0 $ 60.1 $ 213.3 TwinSpires 87.6 18.6 6.7 Gaming 11.8 10.3 11.6 Total segment capital expenditures 406.4 89.0 231.6 All Other 17.1 2.8 2.6 Total capital expenditures $ 423.5 $ 91.8 $ 234.2 22. RELATED PARTY TRANSACTIONS Directors and employees may from time to time own or have interests in horses racing at our racetracks. All such races are conducted under the regulations of each state’s respective regulatory agency, as applicable, and no director or employee receives any extra or special benefit with regard to having his or her horses selected to run in races or in connection with the actual running of races. There is no material financial statement impact attributable to directors or employees who may have interests in horses racing at our racetracks. In the ordinary course of business, we may enter into transactions with certain of our officers and directors for the sale of personal seat licenses, suite accommodations, and tickets for our live racing events. We believe that each such transaction has been on terms no less favorable for us than could have been obtained in a transaction with a third party, and no officer or director received any extra or special benefit in connection with such transactions. Stock Repurchase Agreement On February 1, 2021, the Company entered into an agreement (the "Stock Repurchase Agreement") with an affiliate of TDG to repurchase 1,000,000 shares of the Company’s common stock for $ 193.94 per share in a privately negotiated transaction. The aggregate purchase price was $ 193.9 million. The Stock Repurchase Agreement contains customary representations, warranties and covenants of the parties. The repurchase of shares of common stock from TDG pursuant to the Stock Repurchase Agreement was approved by the Company's Board of Directors separately from, and did not reduce the authorized amount remaining under, the existing common stock repurchase program from October 2018. The Company repurchased the shares using available cash and borrowings under the Revolver. Amendment to Credit Agreement Also, on February 1, 2021, the Company entered into an amendment to the Credit Agreement to increase the amount of certain otherwise restricted payments permitted during the Financial Covenant Relief Period from $ 26.0 million to $ 226.0 million to accommodate the repurchase of shares of common stock from TDG described above. 85 Churchill Downs Incorporated Notes to Consolidated Financial Statements 23. SUBSEQUENT EVENTS On February 15, 2023, we closed on the sale of 326 -acres of property in Arlington Heights, Illinois, to the Chicago Bears for $ 197.2 million per the agreement announced in September 2021. 86 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Churchill Downs Incorporated Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Churchill Downs Incorporated and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the properties acquired as part of the Peninsula Pacific Entertainment LLC (“P2E) acquisition and Ellis Park Racing & Gaming (“Ellis Park) from its assessment of internal control over financial reporting as of December 31, 2022, because they were acquired by the Company in purchase business combinations during 2022. We have also excluded the properties acquired as part of the P2E acquisition and Ellis Park from our audit of internal control over financial reporting. The properties acquired as part of the P2E acquisition and Ellis Park are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 11.3% and less than 1% of total assets, respectively and approximately 6.1% and less than 1% of total revenues, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures 87 that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Acquisition of Peninsula Pacific Entertainment LLC – Valuation of Indefinite-Lived Gaming Rights Intangible Assets As described in Notes 1 and 3 to the consolidated financial statements, on November 1, 2022, the Company completed the acquisition of substantially all of the assets of Peninsula Pacific Entertainment LLC (“P2E”) for a preliminary purchase consideration of $2.835.9 million, net of cash acquired, which resulted in $1,865.6 million of indefinite-lived gaming rights intangible assets being recorded. The fair value of the gaming rights was determined using the Greenfield method, which is an income approach methodology. In estimating the fair value of the indefinite-lived gaming rights intangible assets, management makes significant estimates and assumptions about future revenue and operating expenses, start-up costs, and the discount rates. The principal considerations for our determination that performing procedures relating to the indefinite-lived gaming rights intangible assets acquired in the acquisition of P2E is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the indefinite-lived gaming rights, (ii) a high degree of auditor judgment, subjectivity, and effort in applying procedures and evaluating management’s significant assumptions related to estimated future revenue and operating expenses, start-up costs, and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the gaming rights intangible assets. These procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for developing the fair value estimate of the indefinite-lived gaming rights intangible assets, (iii) evaluating the appropriateness of the income approach methodology, (iv) testing the completeness and accuracy of the data used in the methodology, and (v) evaluating the reasonableness of significant assumptions related to the future revenue and operating expenses, start-up costs, and discount rates. Evaluating the reasonableness of the future revenue and operating expenses and start-up costs involved considering the past performance of P2E, economic and industry forecasts, and whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company's income approach methodology and the reasonableness of the discount rates assumption. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky February 22, 2023 We have served as the Company’s auditor since 1990. 88 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.