Churchill Downs Inc 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), which provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this report are made pursuant to the Act. The reader is cautioned that such forward-looking statements are based on information available at the time and / or management’s good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date that the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as “anticipate,” "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "seek," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations include the following: • the occurrence of extraordinary events, such as terrorist attacks, public health threats, civil unrest, and inclement weather, including as a result of climate change; • the effect of economic conditions on our consumers' confidence and discretionary spending or our access to credit, including the impact of inflation; • additional or increased taxes and fees; • the impact of the novel coronavirus (COVID-19) pandemic, including the emergence of variant strains, and related economic matters on our results of operations, financial conditions and prospects; • lack of confidence in the integrity of our core businesses or any deterioration in our reputation; • loss of key or highly skilled personnel, as well as general disruptions in the general labor market; • cyber security risk, including breaches, or loss or misuse of our stored information as a result of a breach, including customers’ personal information, could lead to government enforcement actions or other litigation; • the impact of significant competition, and the expectation the competition levels will increase; • changes in consumer preferences, attendance, wagering, and sponsorships; • risks associated with equity investments, strategic alliances and other third-party agreements; • inability to respond to rapid technological changes in a timely manner; • concentration and evolution of slot machine and historical racing machine ("HRM") manufacturing and other technology conditions that could impose additional costs; • failure to enter into or maintain agreements with industry constituents, including horsemen and other racetracks; inability to successfully focus on market access and retail operations for our TwinSpires Sports and Casino business and effectively compete; • reliance on our technology services and catastrophic events and system failures disrupting our operations; • inability to identify, complete, or fully realize the benefits of, our proposed acquisitions, divestitures, development of new venues or the expansion of existing facilities on time, on budget, or as planned; • difficulty in integrating recent or future acquisitions into our operations; • cost overruns and other uncertainties associated with the development of new venues and the expansion of existing facilities; FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 30 • general risks related to real estate ownership and significant expenditures, including risks related to environmental liabilities; • personal injury litigation related to injuries occurring at our racetracks; • compliance with the Foreign Corrupt Practices Act or applicable money-laundering regulations; • payment-related risks, such as risk associated with fraudulent credit card and debit card use; • work stoppages and labor issues; • risks related to pending or future legal proceedings and other actions; • highly regulated operations and changes in the regulatory environment could adversely affect our business; • restrictions in our debt facilities limiting our flexibility to operate our business; • failure to comply with the financial ratios and other covenants in our debt facilities and other indebtedness; • increase to interest rates (due to inflation or otherwise); • disruptions in the credit markets or changes to our credit ratings may adversely affect our business; • increase in our insurance costs, or inability to obtain similar insurance coverage in the future, and inability to recover under our insurance policies for damages sustained at our properties in the event of inclement weather and casualty events; and • other factors described in our most recent Annual Report on Form 10-K and in other filings we make with the Securities and Exchange Commission. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts assume dilution unless otherwise noted. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, including Part I - Item 1A, "Risk Factors" of our Form 10-K for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 31 Our Business Churchill Downs Incorporated ("CDI" or the "Company") has been creating extraordinary entertainment experiences for nearly 150 years, beginning with the Company’s most iconic and enduring asset, the Kentucky Derby. Headquartered in Louisville, Kentucky, CDI has expanded through the development of live and historical racing entertainment venues, the growth of the TwinSpires horse racing online wagering business and the operation and development of regional casino gaming properties. We conduct our business through three reportable segments: Live and Historical Racing, TwinSpires, and Gaming. We aggregate our other businesses as well as certain corporate operations, in All Other. For additional information about our segments, refer to Note 17, Segment Information in the notes to our Condensed Consolidated Financial Statements. Acquisition of Exacta Systems On August 22, 2023, the Company completed its previously-announced acquisition of Exacta Systems, LLC ("Exacta"). Refer to Note 3, Acquisitions in the notes to our Condensed Consolidated Financial Statements for further information on the transaction. Lady Luck Casino Nemacolin On June 26, 2023, the Company's management agreement for Lady Luck Casino Nemacolin ("Lady Luck") in Farmington, Pennsylvania expired and was not renewed. The Company completed the sale of substantially all its assets at Lady Luck for an immaterial amount. Stock Split Effective May 22, 2023, the Company's common stock was split two-for-one with a proportionate increase in the number of its authorized shares of common stock. Presque Isle Impairment During the second quarter, we evaluated economic conditions subsequent to the date of our annual impairment assessment on April 1, 2023, including competition in the market and inflationary pressures, which increased during the second quarter of 2023, and impacted the performance and outlook of Presque Isle Downs and Casino ("Presque Isle"). As a result, 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 at the end of the second quarter. Based on the 2023 trigger event, the Company evaluated and subsequently updated the projected cash flows and discount rate to reflect the current environment. As a result, the Company recognized a non-cash impairment charge of $24.5 million in the second quarter of 2023 for the Presque Isle gaming rights and trademark. Refer to Note 5, Asset Impairments in the notes to our Condensed Consolidated Financial Statements for further information on the impairment. Arlington Sale On February 15, 2023, we closed on the sale of the Arlington property in Arlington Heights, Illinois. We sold 326-acres to the Chicago Bears for $197.2 million. The net proceeds of $195.7 million were used to pay down the outstanding balance amount on our Revolver that was drawn on to fund the acquisition of substantially all the assets of Peninsula Pacific Entertainment ("P2E"). Refer to Note 4, Dispositions in the notes to our Condensed Consolidated Financial Statements for further information on the transaction. Financing Transactions On April 25, 2023, we completed an offering of $600.0 million in aggregate principal amount of 6.750% senior notes that mature in 2031. The Company used a portion of the net proceeds from the offering to repay indebtedness outstanding under its Term Loan B Facility due 2024 and to fund related transaction fees and expenses, working capital and other general corporate purposes. On February 24, 2023, we entered into an incremental joinder to our senior secured credit agreement to increase the loans under the existing Term Loan A credit facility due 2027 by $500.0 million. This joinder increases the existing Term Loan A credit facility due 2027 from $800.0 million to $1.3 billion and makes certain other changes to the existing credit agreement. The Company used the net proceeds from the borrowings under the increased Term Loan A to repay outstanding loans under its senior secured revolving credit facility, pay related transaction fees and expenses, and for general corporate purposes. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 32 Transaction Update On August 11, 2022, the Company entered into an agreement to sell 49% of United Tote, a wholly-owned subsidiary of the Company to NYRA Content Management Solutions, LLC, a subsidiary of the New York Racing Association. The transaction is subject to usual and customary closing conditions, including applicable regulatory notices and approvals, and is expected to close during the fourth quarter of 2023. Key Indicators to Evaluate Business Results and Financial Condition Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend. Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following: Adjusted EBITDA includes our portion of EBITDA from our equity investments. Adjusted EBITDA excludes: • Transaction expense, net which includes: – Acquisition, disposition, and property 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 property and asset sales; • Legal reserves; • Pre-opening expense; and • Other charges, recoveries and expenses On June 26, 2023, the Company's management agreement for Lady Luck expired and was not renewed. The Company completed the sale of substantially all its assets at Lady Luck for an immaterial amount. As of December 31, 2021, Arlington ceased racing and simulcast operations and the property was sold on February 15, 2023 to the Chicago Bears. Arlington's results and exit costs in 2022 and 2023 are treated as an adjustment to EBITDA. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 33 For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the Condensed Consolidated Statements of Comprehensive Income. See the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information. Governmental Regulations and Legislative Changes We are subject to various federal, state, and international laws and regulations that affect our businesses. The ownership, operation and management of our Live and Historical Racing, TwinSpires, and Gaming segments, as well as our other operations, are subject to regulation under the laws and regulations of each of the jurisdictions in which we operate. The ownership, operation, and management of our businesses and properties are also subject to legislative actions at both the federal and state level. The following update on our regulatory and legislative actions should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, including Part I - Item 1, "Business" for a discussion of regulatory and legislative changes. Specific State Gaming Regulations Kentucky In 2023, the Kentucky General Assembly passed a bill to authorize the Kentucky Horse Racing Commission to regulate sports betting. Only licensed racetracks and their extensions can operate retail sports betting. Each racetrack is allowed to contract with up to three providers to carryout online or retail sports betting. Retail sports betting commenced on September 7, 2023 and online sports betting began on September 28, 2023. Consolidated Financial Results The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change Net Revenue $ 572.5 $ 383.1 $ 189.4 $ 1,900.5 $ 1,329.7 $ 570.8 Operating income 112.3 63.0 49.3 457.8 310.1 147.7 Operating income margin 20 % 16 % 24 % 23 % Net income 61.0 57.0 4.0 359.7 438.4 (78.7) Adjusted EBITDA 218.2 163.2 55.0 804.8 582.9 221.9 Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 • Net revenue increased $189.4 million driven by a $127.2 million increase in Live and Historical Racing revenue primarily due to the Virginia properties acquired in the P2E Transaction, the properties acquired in the Ellis Park and Chasers Transactions, the opening of Turfway Park in Northern Kentucky in September 2022, and continued growth at our other Kentucky properties, a $60.9 million increase in Gaming revenue primarily due to the New York and Iowa properties acquired in the P2E Transaction, and a $2.3 million increase in TwinSpires primarily due to the Exacta Transaction. These increases were partially offset by a $1.0 million decrease in All Other net revenue. • Operating income increased $49.3 million driven by a $49.1 million increase in Live and Historical Racing income primarily from the Virginia properties acquired in the P2E Transaction, an $18.3 million increase in Gaming income primarily from the New York and Iowa properties acquired in the P2E Transaction, and a $0.6 million increase in All Other. These increases were partially offset by an $11.8 million increase in selling, general and administrative expenses primarily due to the P2E Transaction, a $6.6 million decrease in TwinSpires income, and a $0.3 million increase in transaction costs. • Net income increased $4.0 million. The following items impacted comparability of the Company's net income from continuing operations for the three months ended September 30, 2023, compared to three months ended September 30, 2022: a $0.9 million after-tax net increase in other nonrecurring expenses. Excluding these items, net income increased $4.9 million due to a $34.5 million after-tax increase primarily driven by the addition of the properties acquired as part of the P2E Transaction in the results of our operations, partially offset by a $22.7 million after-tax increase in interest expense associated with higher outstanding debt balances and higher interest rates, and a $6.9 million after-tax decrease in the equity income from our unconsolidated affiliates. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 34 • Adjusted EBITDA increased $55.0 million driven by a $46.4 million increase in Live and Historical Racing Adjusted EBITDA primarily from the Virginia properties acquired in the P2E Transaction and continued growth at our Kentucky HRM properties, a $10.7 million increase in Gaming Adjusted EBITDA primarily from the New York and Iowa properties acquired in the P2E Transaction, and a $2.8 million increase in TwinSpires Adjusted EBITDA primarily due to the Exacta Transaction, partially offset by a $4.9 million increase in corporate general administrative expenses. Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 • Net revenue increased $570.8 million driven by a $379.7 million increase in Live and Historical Racing revenue primarily attributable to the Virginia properties acquired in the P2E Transaction, the opening of Turfway Park in Northern Kentucky in September 2022, a record-breaking Derby Week at Churchill Downs Racetrack, the properties acquired in the Ellis Park and Chasers Transactions, and continued growth at our other Kentucky properties and a $195.2 million increase in Gaming revenue primarily due to our New York and Iowa properties acquired in the P2E Transaction. These increases were partially offset by a $2.6 million decrease in TwinSpires revenue primarily due to the exit of the direct online Sports and Casino business in the first quarter of 2022 and a $1.5 million decrease in All Other net revenue. • Operating income increased $147.7 million driven by a $143.2 million increase in Live and Historical Racing income primarily from the Virginia properties acquired in the P2E Transaction, a $53.9 million increase in Gaming income primarily from the New York and Iowa properties acquired in the P2E Transaction, a $7.2 million increase in TwinSpires income, and a $5.6 million decrease in transaction costs. These increases were partially offset by a $37.9 million increase in selling, general and administrative expenses primarily due to the P2E Transaction, a $19.6 million increase in non-cash impairment costs due to the 2023 impairment of Presque Isle intangible assets, and a $4.7 million decrease in All Other operating income primarily related to Arlington exit costs. • Net income decreased $78.7 million. The following items impacted comparability of the Company's net income from continuing operations for the nine months ended September 30, 2023, compared to nine months ended September 30, 2022: a $107.4 million decrease in after-tax gains on property sales, a $14.9 million increase in after-tax non-cash impairment costs, a $9.2 million after-tax benefit related to our equity portion of the non-cash change in the fair value of Rivers Des Plaines' interest rate swap that did not recur in 2023, and a $2.4 million increase in other nonrecurring costs. Excluding these items, net income increased $55.2 million due to a $135.5 million after-tax increase primarily driven by the addition of the properties acquired as part of the P2E Transaction in the results of our operations, partially offset by a $76.0 million after-tax increase in interest expense associated with higher outstanding debt balances and higher interest rates, and a $4.3 million after-tax decrease in the equity income from our unconsolidated affiliates. • Adjusted EBITDA increased $221.9 million driven by a $160.2 million increase in Live and Historical Racing Adjusted EBITDA primarily from the Virginia properties acquired in the P2E Transaction, a record-breaking Derby Week at Churchill Downs Racetrack, and continued growth at our other Kentucky properties, a $65.7 million increase in Gaming Adjusted EBITDA primarily from the New York and Iowa properties acquired in the P2E Transaction, and an $8.1 million increase in TwinSpires Adjusted EBITDA primarily due to the exit of the direct online Sports and Casino business in the first quarter of 2022 and the Exacta Transaction, partially offset by a $12.1 million increase in corporate general administrative expenses. Revenue by Segment The following table presents revenue for our segments, including intercompany revenue: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change Live and Historical Racing $ 225.5 $ 102.4 $ 123.1 $ 849.3 $ 465.5 $ 383.8 TwinSpires 112.4 107.4 5.0 347.8 347.3 0.5 Gaming 244.9 185.9 59.0 744.4 549.6 194.8 All Other 0.2 1.2 (1.0) 0.7 2.2 (1.5) Eliminations (10.5) (13.8) 3.3 (41.7) (34.9) (6.8) Net Revenue $ 572.5 $ 383.1 $ 189.4 $ 1,900.5 $ 1,329.7 $ 570.8 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 35 Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 • Live and Historical Racing revenue increased $123.1 million driven by an $89.0 million increase attributable to the Virginia properties acquired in the P2E Transaction, a $14.7 million increase attributable to the properties acquired in the Ellis Park and Chasers Transactions, an $8.8 million increase primarily due to the opening of Turfway Park in Northern Kentucky in September 2022, a $7.4 million increase from our Derby City Gaming property in Louisville, and a $4.3 million increase from our Oak Grove property in Southwestern Kentucky. These increases were partially offset by a $1.1 million decrease at Churchill Downs Racetrack due to the decision to move July race days as part of the Churchill Downs Racetrack Spring Meet to Ellis Park. • TwinSpires revenue increased $5.0 million driven by a $5.5 million increase attributable to the Exacta Transaction and a $0.9 million increase in all other Horse Racing revenue primarily from the B2B expansion strategy associated with United Tote totalisator fees. These increases were partially offset by a $1.4 million reduction in Sports and Casino revenue. • Gaming revenue increased $59.0 million driven by a $70.2 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction, partially offset by an $8.7 million decrease in Pennsylvania primarily due to our decision not to renew the management agreement at Lady Luck, and a $2.5 million net decrease from our other gaming properties. Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 • Live and Historical Racing revenue increased $383.8 million driven by a $281.3 million increase attributable to the Virginia properties acquired in the P2E Transaction, a $34.8 million increase primarily due to the opening of Turfway Park in Northern Kentucky in September 2022, a $34.2 million increase attributable to properties acquired in the Ellis Park and Chasers Transactions, a $20.7 million increase due to a record-breaking Derby Week at Churchill Downs Racetrack, a $14.0 million increase from our Oak Grove property in Southwestern Kentucky, and a $9.6 million increase from our Derby City Gaming property in Louisville. These increases were partially offset by a $10.8 million decrease for non-Derby Week racing operations primarily due to the decision to move a portion of the Churchill Downs Racetrack Spring Meet to Ellis Park. • TwinSpires revenue increased $0.5 million driven by a $5.5 million increase attributable to the Exacta Transaction and a $5.2 million increase in all other Horse Racing revenue primarily from the B2B expansion strategy associated with United Tote totalisator fees, partially offset by a $10.2 million reduction in Sports and Casino revenue due to the exit of the direct online Sports and Casino business in the first quarter of 2022. • Gaming revenue increased $194.8 million driven by a $207.8 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction, partially offset by an $11.4 million decrease in Pennsylvania primarily due to our decision not to renew the management agreement at Lady Luck, and a $1.6 million net decrease from our other gaming properties. Consolidated Operating Expense The following table is a summary of our consolidated operating expense: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change Taxes and purses $ 149.1 $ 108.9 $ 40.2 $ 468.7 $ 345.5 $ 123.2 Salaries and benefits 70.6 45.3 25.3 211.3 137.5 73.8 Content expense 46.1 39.1 7.0 135.4 135.4 — Selling, general and administrative expense 50.2 38.4 11.8 150.6 112.7 37.9 Depreciation and amortization 42.1 27.5 14.6 121.8 78.7 43.1 Marketing and advertising 18.0 10.0 8.0 62.4 36.8 25.6 Transaction expense, net 1.5 1.2 0.3 1.8 7.4 (5.6) Asset impairments — — — 24.5 4.9 19.6 Other operating expense 82.6 49.7 32.9 266.2 160.7 105.5 Total expense $ 460.2 $ 320.1 $ 140.1 $ 1,442.7 $ 1,019.6 $ 423.1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 36 Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Significant items affecting comparability of consolidated operating expense include: • Taxes and purses, salaries and benefits, selling, general and administrative, marketing and advertising, depreciation and amortization, and other operating expenses increased due to the P2E, Ellis Park and Chasers Transactions, as well as the opening of Turfway Park in September of 2022. Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Significant items affecting comparability of consolidated operating expense include: • Taxes and purses, salaries and benefits, selling, general and administrative, marketing and advertising, depreciation and amortization, and other operating expenses increased due to the P2E, Ellis Park and Chasers Transactions, as well as the opening of Turfway Park in September of 2022. • Asset impairments increased $19.6 million due to the non-cash impairment of Presque Isle intangible assets in the second quarter of 2023. • Transaction expenses decreased $5.6 million due to the 2022 P2E Transaction. Adjusted EBITDA We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change Live and Historical Racing $ 80.9 $ 34.5 $ 46.4 $ 386.5 $ 226.3 $ 160.2 TwinSpires 33.9 31.1 2.8 97.2 89.1 8.1 Gaming 122.3 111.6 10.7 375.2 309.5 65.7 Total Segment Adjusted EBITDA 237.1 177.2 59.9 858.9 624.9 234.0 All Other (18.9) (14.0) (4.9) (54.1) (42.0) (12.1) Total Adjusted EBITDA $ 218.2 $ 163.2 $ 55.0 $ 804.8 $ 582.9 $ 221.9 Thr ee Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 • Live and Historical Racing Adjusted EBITDA increased $46.4 million driven by a $38.3 million increase attributable to the Virginia properties acquired in the P2E Transaction and a portion of the benefit from the Exacta Transaction, a $7.3 million increase from continued growth at our Derby City Gaming property in Louisville and our Oak Grove property in Southwestern Kentucky, and a $2.9 million increase attributable to our other Live and Historical Racing properties. These increases were partially offset by a $2.1 million decrease at Churchill Downs Racetrack primarily due to the decision to move July race days as part of the Churchill Downs Racetrack Spring Meet to Ellis Park. • TwinSpires Adjusted EBITDA increased $2.8 million driven by a $3.1 million increase attributable to the Exacta Transaction, partially offset by a $0.3 million net decrease in Horse Racing and Sports and Casino. • Gaming Adjusted EBITDA increased $10.7 million driven by a $25.0 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction, partially offset by a $6.5 million decrease from our equity investments, a $4.9 million decrease from our other wholly-owned gaming properties, and a $2.9 million decrease attributable to proceeds for business interruption insurance claims related to Hurricane Ida. We received $4.1 million of proceeds in the third quarter of 2022, compared to $1.2 million received during the third quarter of 2023. • All Other Adjusted EBITDA decreased $4.9 million primarily driven by increased corporate compensation and benefits related expenses and legal and professional fees. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 37 Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 • Live and Historical Racing Adjusted EBITDA increased $160.2 million driven by a $128.8 million increase attributable to the Virginia properties acquired in the P2E Transaction and a portion of the benefit from the Exacta Transaction, a $16.3 million increase due to a record-breaking Derby Week at Churchill Downs Racetrack, a $14.3 million increase from continued growth at our Derby City Gaming property in Louisville and our Oak Grove property in Southwestern Kentucky, and an $8.5 million increase attributable to our other Live and Historical Racing properties. These increases were partially offset by an $7.7 million decrease for non-Derby Week racing operations primarily driven by the decision to move a portion of the Churchill Downs Racetrack Spring Meet to Ellis Park in June 2023. • TwinSpires Adjusted EBITDA increased $8.1 million driven by a $9.6 million increase in Sports and Casino from significant cost reductions associated with the exit of the direct online Sports and Casino business in the first quarter of 2022, a $3.3 million increase in Horse Racing primarily from the B2B expansion strategy associated with United Tote totalisator fees, and a $3.1 million increase from the Exacta Transaction. These increases were partially offset by a $7.9 million decrease primarily as a result of lower retail Horse Racing handle due to industry race day cancellations and the decision to move a portion of the Churchill Downs Racetrack Spring Meet to Ellis Park in June 2023 as well as higher content related expenses and higher advance deposit wagering taxes in certain jurisdictions. • Gaming Adjusted EBITDA increased $65.7 million driven by a $72.8 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction and a $6.9 million increase from our equity investments. These increases were partially offset by an $11.5 million decrease from our other wholly-owned gaming properties and a $2.5 million decrease attributable to proceeds for business interruption insurance claims related to Hurricane Ida. We received $4.1 million of proceeds in 2022 compared to $1.6 million received in 2023. • All Other Adjusted EBITDA decreased $12.1 million primarily driven by increased corporate compensation and benefits related expenses and legal and professional fees. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 38 Reconciliation of Comprehensive Income to Adjusted EBITDA Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 Change 2023 2022 Change Net income and comprehensive income $ 61.0 $ 57.0 $ 4.0 $ 359.7 $ 438.4 $ (78.7) Additions: Depreciation and amortization 42.1 27.5 14.6 121.8 78.7 43.1 Interest expense, net 67.9 36.2 31.7 197.8 92.6 105.2 Income tax provision 20.8 16.4 4.4 130.2 173.5 (43.3) EBITDA $ 191.8 $ 137.1 $ 54.7 $ 809.5 $ 783.2 $ 26.3 Adjustments to EBITDA: Stock-based compensation expense $ 8.1 $ 9.1 $ (1.0) $ 24.8 $ 23.5 $ 1.3 Legal reserves — — — — 3.2 (3.2) Pre-opening expense 5.0 4.2 0.8 11.4 8.9 2.5 Arlington exit costs 0.1 1.4 (1.3) 9.4 5.7 3.7 Other expense, net 0.7 — 0.7 7.6 — 7.6 Transaction expense, net 1.5 1.2 0.3 1.8 7.4 (5.6) Asset impairments — — — 24.5 4.9 19.6 Other income, expense: Interest, depreciation and amortization expense related to equity investments 10.1 10.1 — 29.8 31.7 (1.9) Changes in fair value of Rivers Des Plaines' interest rate swaps — — — — (12.6) 12.6 Rivers Des Plaines' legal reserves and transactions costs — 0.1 (0.1) — 0.6 (0.6) Other charges and recoveries, net 0.9 — 0.9 — 1.0 (1.0) Gain on sale of assets — — — (114.0) (274.6) 160.6 Total adjustments to EBITDA 26.4 26.1 0.3 (4.7) (200.3) 195.6 Adjusted EBITDA $ 218.2 $ 163.2 $ 55.0 $ 804.8 $ 582.9 $ 221.9 Consolidated Balance Sheet The following is a summary of our overall financial position: (in millions) September 30, 2023 December 31, 2022 Change Total assets $ 6,750.5 $ 6,206.8 $ 543.7 Total liabilities 5,861.8 5,655.3 206.5 Total shareholders' equity 888.7 551.5 337.2 Significant items affecting the comparability of our Condensed Consolidated Balance Sheets include: • Total assets increased $543.7 million primarily driven by increased capital expenditures and assets acquired in the Exacta Transaction, partially offset by the sale of our Arlington property and the Presque Isle impairment in 2023. • Total liabilities increased $206.5 million primarily driven by a net increase in long-term debt, income tax liabilities and increased accrued interest, partially offset by decreased dividends payable due to the payment of our annual dividends. • Total shareholders’ equity increased $337.2 million driven by increased net income and stock-based compensation, partially offset by share repurchases. Liquidity and Capital Resources The following table is a summary of our liquidity and cash flows: FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 39 (in millions) Nine Months Ended September 30, Cash flows from: 2023 2022 Change Operating activities $ 498.8 $ 424.5 $ 74.3 Investing activities (549.5) (107.0) (442.5) Financing activities 38.7 1,020.1 (981.4) Nine Months Ended September 30, 2023, Compared to the Nine Months Ended September 30, 2022 • Cash flows provided by operating activities increased $74.3 million driven by increased operating income and increased distributions from unconsolidated affiliates. These increases were partially offset by an increase in net interest paid and net income taxes paid. We anticipate that cash flows from operations and availability of borrowings under our credit facility over the next twelve months will be adequate to fund our business operations and capital expenditures. • Cash flows used in investing activities increased $442.5 million driven by increased capital project expenditures in 2023 primarily at Churchill Downs Racetrack and for the Dumfries project in Virginia, increased cash used in acquisitions, and decreased proceeds from the sale of assets. • Cash flows provided by financing activities decreased $981.4 million primarily driven by repayments of long-term debt in 2023 and higher levels of financing than in the prior year period. We have spent $445.7 million year to date on project capital investments. We expect to spend approximately $575 to $675 million for the year on project capital investments. The significant project capital investments planned for the fourth quarter of 2023 include: Churchill Downs Racetrack Paddock Project, Derby City Gaming Downtown, the Ellis Park HRM facility in Eastern Daviess County, Kentucky, the Terre Haute Casino Resort in Vigo County, Indiana, a New Hampshire HRM Facility, and the Virginia HRM entertainment venue in Dumfries. The planned amount may vary significantly based on the timing of work completed, unanticipated delays, and timing of payments to third parties. Common Stock Repurchase Program On September 29, 2021, the Board of Directors of the Company approved a common stock repurchase program of up to $500.0 million ("2021 Stock Repurchase Program"). 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. The Company repurchased $37.3 million of its common stock during the three months ended September 30, 2023 and had $232.9 million of repurchase authority remaining under this program on September 30, 2023, based on trade date. Credit Facilities and Indebtedness The following table presents our debt outstanding: (in millions) September 30, 2023 December 31, 2022 Change Revolver $ 118.7 $ 664.1 $ (545.4) Term Loan B due 2024 — 380.0 (380.0) Term Loan B-1 due 2028 292.5 294.7 (2.2) Term Loan A due 2027 1,251.3 800.0 451.3 2027 Senior Notes 600.0 600.0 — 2028 Senior Notes 700.0 700.0 — 2030 Senior Notes 1,200.0 1,200.0 — 2031 Senior Notes 600.0 — 600.0 Total debt 4,762.5 4,638.8 123.7 Current maturities of long-term debt (68.0) (47.0) (21.0) Total debt, net of current maturities 4,694.5 4,591.8 102.7 Issuance costs, net of premiums and discounts (39.7) (33.1) (6.6) Net debt $ 4,654.8 $ 4,558.7 $ 96.1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 40 Credit Agreement At September 30, 2023, the Company’s senior secured credit facility (as amended from time to time, the “Credit Agreement") consisted of a $1.2 billion revolving credit facility (the "Revolver"), $300.0 million senior secured term loan B-1 due 2028 (the "Term Loan B-1"), $1.3 billion senior secured term loan A due 2027 (the "Term Loan A"), and $100.0 million swing line commitment. Certain amendments to the Credit Agreement entered into during 2022 and 2023, are described below. On April 13, 2022, we amended the Credit Agreement to extend the maturity date of its Revolver to April 13, 2027, to increase the commitments under the existing revolving credit facility from $700.0 million to $1.2 billion, and to increase the swing line commitment from $50.0 million to $100.0 million. This amendment also provided for the senior secured 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 in the notes to our Condensed Consolidated Financial Statements for further information regarding the P2E Transaction. The Company capitalized $3.5 million of debt issuance costs associated with the Revolver commitment increase and $6.4 million of debt issuance costs associated with the Term Loan A which are being amortized as interest expense over the 5-year term. On February 24, 2023, we amended our Credit Agreement to increase the loans under the existing Term Loan A due 2027 from $800.0 million to $1.3 billion and made certain other changes to the existing credit agreement. The Company used the net proceeds from the borrowings under the increased Term Loan A to repay outstanding loans under its Revolver, pay related transaction fees and expenses, and for general corporate purposes. The Company capitalized $2.6 million of debt issuance costs associated with the increased Term Loan A which are being amortized as interest expense over the remainder of the 5-year term. 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 September 30, 2023, the Company's commitment fee rate was 0.25%. The Revolver and Term Loan A bear interest at SOFR plus 10 basis points, plus a variable applicable margin which is determined by the Company's net leverage ratio. As of September 30, 2023, that applicable margin was 150 basis points. The Term Loan B-1 bears interest at SOFR plus 210 basis points. The estimated contractual payments, including interest, under the Credit Agreement for the next twelve months are estimated to be $181.2 million assuming no change in the weighted average borrowing rate of 7.01%, which was in place as of September 30, 2023. During the nine months ended September 30, 2023, we had net repayments of principal and interest on the Revolver of $548.6 million. The Company completed the transition of its financing from LIBOR to SOFR during the second quarter of 2023. These transition activities did not have a material impact on the Company’s financial statements. 2027 Senior Notes As of September 30, 2023, we had $600.0 million in aggregate principal amount of 5.500% senior unsecured notes that mature on April 1, 2027 (the "2027 Senior Notes"). The 2027 Senior Notes were issued at par in a private offering to qualified institutional buyers, with interest payable in arrears on April 1st and October 1st of each year, commencing on October 1, 2019. The Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture. 2028 Senior Notes As of September 30, 2023, we had a total of $700.0 million in aggregate principal amount of 4.750% senior unsecured notes (collectively, the “2028 Senior Notes”) maturing on January 15, 2028. The 2028 Senior Notes consist of $500.0 million notes issued at par and $200.0 million notes issued at 103.25%. The 2028 Senior Notes were issued in a private offering to qualified institutional buyers, with interest payable in arrears on January 15th and July 15th of each year, commencing on July 15, 2018. The 3.25% premium is being amortized through interest expense, net over the term of the notes. The Company may redeem some or all the 2028 Senior Notes at redemption prices set forth in the 2028 Indenture. 2030 Senior Notes As of September 30, 2023, we had $1.2 billion in aggregate principal amount of 5.750% senior unsecured notes that mature on April 13, 2030 (the "2030 Senior Notes"). The 2030 Senior Notes were issued at par in a private offering to qualified institutional buyers, with interest payable in arrears on April 1st and October 1st of each year, commencing on October 1, 2022. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023 41 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. The Company may redeem some or all the 2030 Senior Notes at redemption prices set forth in the 2030 Indenture. 2031 Senior Notes On April 25, 2023, the Company completed an offering of $600.0 million in aggregate principal amount of 6.750% senior unsecured notes that mature on April 25, 2031 (the "2031 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The Company used a portion of the net proceeds from the offering to repay indebtedness outstanding under its Term Loan B Facility due 2024 and to fund related transaction fees and expenses, working capital and other general corporate purposes. The Company recognized a loss on extinguishment on Term Loan B of $1.3 million, which is included in miscellaneous, net in the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company capitalized $10.7 million of debt issuance costs associated with the 2031 Senior Notes which are being amortized as interest expense over the remainder of the 8-year term. The 2031 Senior Notes were issued at 100% of the principal amount, plus interest deemed to have accrued from April 25, 2023, with interest payable in arrears on May 1st and November 1st of each year, commencing on November 1, 2023. The 2031 Senior Notes will vote as one class under the indenture governing the 2031 Senior Notes. The Company may redeem some or all of the 2031 Senior Notes at any time prior to April 25, 2025, at redemption prices set forth in the 2031 offering memorandum. Leases The Company leases certain real estate and other property. 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. As of September 30, 2023, minimum rent payable under operating leases was $28.0 million, with $6.3 million due in the next twelve months. As of September 30, 2023, minimum rent payable accounted for as financing obligations was $56.3 million, with $4.4 million due in the next twelve months. Other Contractual Obligations The Company has other contractual obligations that consist primarily of minimum guarantees with commitments of $21.6 million, $0.9 million of which is due within the next twelve months.