Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in Part II, Item 8. Financial Statements and Supplementary Data. The following discussion provides an analysis of our results of operations and reasons for material changes therein for 2023 as compared to 2022. Discussion regarding our financial condition and results of operations for 2022 as compared to 2021 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023.
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, expanded pari-mutuel content and technology services to B2C platforms, and the operation and development of regional casino gaming properties.
For additional information, refer to Note 21, Segment Information to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
2023 Transactions
Exacta Systems, LLC Acquisition
On August 22, 2023, the Company completed its previously announced acquisition of Exacta Systems, LLC ("Exacta Transaction"). Exacta Systems ("Exacta") is a leading provider of central determinate system technology in HRMs across the country. Exacta’s system architecture supports multiple game vendors and virtually unlimited math modeling capabilities on a single central determinate system enabling Exacta to deliver a diverse gaming library to Company owned and third-party HRM entertainment venues in Kentucky, Virginia, Wyoming, and New Hampshire. For additional information, refer to Note 3, Acquisitions to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
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 revolving credit facility that was drawn on to fund the acquisition of substantially all the assets of Peninsula Pacific Entertainment ("P2E"). For additional information, refer to Note 4, Dispositions to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
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.
2022 Transactions
Peninsula Pacific Entertainment Acquisition
On November 1, 2022, the Company completed the acquisition of substantially all the assets of P2E with a base purchase price of $2.75 billion ("P2E Transaction") subject to working capital and other purchase price adjustments. The Company acquired the following properties as part of the P2E Transaction: Colonial Downs Racetrack in New Kent, Virginia, six historical racing entertainment venues in Virginia, del Lago Resort & Casino in Waterloo, New York, and the Hard Rock Hotel & Casino in Sioux City, Iowa. The P2E Transaction also included HRM development rights for two properties in Emporia, Virginia and Dumfries, Virginia. The Company invested $30.0 million in a seventh Virginia based HRM entertainment venue that opened on September 26, 2023 in Emporia, Virginia. The Company is also investing approximately $460.0 million to construct The Rose Gaming Resort (“The Rose”) in Dumfries, Virginia with an expected completion late in the third quarter of 2024.
Ellis Park Acquisition
On September 26, 2022, the Company completed the acquisition of Ellis Park Racing & Gaming ("Ellis Park Transaction"). Ellis Park Racing & Gaming ("Ellis Park") is a racetrack and gaming facility venue with HRMs. As part of the acquisition, the Company also acquired the rights to construct an HRM entertainment venue as an annex of Ellis Park. In June 2023, the
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Company announced it planned to invest approximately $100 million in a new HRM entertainment venue on the east side of Owensboro, Kentucky with an expected completion in the first quarter of 2025.
Chasers Poker Room Acquisition
On September 2, 2022, the Company completed the acquisition of Chasers Poker Room ("Chasers") in Salem, New Hampshire ("Chasers Transaction"). Chasers is a charitable gaming facility located approximately 30 miles from Boston, Massachusetts that offers poker and a variety of table games. The Company plans to develop an expanded charitable gaming facility in Salem to accommodate HRMs and table games.
Calder Land Sale
On June 17, 2022, the Company closed on the sale of 115.7 acres of land near Calder Casino for $291.0 million to Link Logistics Real Estate, a Blackstone portfolio company. The Company received cash proceeds of $279.0 million which was net of $12.0 million of transaction costs. We recognized a gain of $274.6 million on the sale of the land.
Other Business Activities
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. For additional information, refer to Note 10, Shareholders' Equity to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Presque Isle Impairment
During the quarter ended June 30, 2023, the Company 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 ("2023 Trigger Event"). Based on the 2023 Trigger Event, the Company evaluated and subsequently updated the projected cash flows and discount rate to reflect the economic environment at that time. 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. For additional information, refer to Note 8, Asset Impairments to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
During the quarter ended December 31, 2022, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of the Company's intangible assets, goodwill, or property and equipment, were impaired. Based on the Company's evaluation, the Company concluded that a trigger event for impairment testing occurred related to the Presque Isle gaming rights, trademark, and the reporting unit's goodwill due to negative economic conditions ("2022 Trigger Event"). Based on the 2022 Trigger Event, the Company evaluated and subsequently updated the projected cash flows and discount rate to reflect the economic environment at that time. As a result, the Company recorded a $33.4 million non-cash impairment charge in fourth quarter of 2022 for the Presque Isle gaming rights and trademark.
Exit of the Direct Online Sports and Casino Business
In 2022, the Company exited the direct online Sports and Casino business in every state except for Pennsylvania and Arizona. During the quarter ended March 31, 2022, the Company evaluated whether this planned exit would indicate it is more likely than not that any of the Company’s intangible assets, long-lived assets, current assets, or property and equipment, were impaired. Based on the Company’s evaluation, the Company recorded a $4.9 million non-cash impairment charge related to certain assets in the TwinSpires segment. As of December 31, 2023, the Company has exited every state for the direct online Sports and Casino business. The Company will maintain its retail sports betting operations and has monetized four of its online market access licenses.
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 due 2027 by $500.0 million. This joinder increased the existing Term Loan A due 2027 from $800.0
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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.
On April 13, 2022, we completed an offering of $1.2 billion in aggregate principal amount of 5.75% senior notes that mature in 2030. The offering of the 2030 Senior Notes was part of the financing utilized for the P2E Transaction.
For additional information on these transactions, refer to Note 12, Debt to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
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 Company has received a deposit on the pending transaction of $14.4 million. The transaction is subject to usual and customary closing conditions, including applicable regulatory notices and approvals and is expected to close in the first half of 2024.
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 sale of assets;
• 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 International Racecourse ("Arlington") ceased racing and simulcast operations. On February 15, 2023, the Company closed on the sale of the property to the Chicago Bears. For more information, refer to Note 4, Dispositions, to the notes to consolidated financial statements included in this Annual Report on Form 10-K. Arlington's results and exit costs in 2022 and 2023 are treated as an adjustment to EBITDA.
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For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the Consolidated Statements of Comprehensive Income. See the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information.
Business Highlights
In 2023, we delivered strong performance while continuing the execution of several organic investments. We delivered strong growth in net revenue, operating income, and Adjusted EBITDA compared to fiscal year 2022:
• Net revenue was $2.5 billion, up $651.9 million or 36%.
• Operating income was $564.0 million, up $242.2 million or 75%.
• Net income was $417.3 million, down $22.1 million or 5%.
• Adjusted EBITDA was $1.0 billion, up $260.3 million, or 34%.
Live and Historical Racing Segment:
• Adjusted EBITDA was $475.4 million, up $187.9 million or 65% from fiscal year 2022.
• Churchill Downs Racetrack:
◦ Churchill Downs Racetrack ran the 149 th Kentucky Derby with record Derby Week all-sources handle and record Derby Week contribution to Adjusted EBITDA with over 150,000 fans gathered in person to watch the most exciting two minutes in sports on the first Saturday in May.
◦ We successfully completed the First Turn Experience prior to the 149 th Kentucky Derby.
◦ We continued construction of the Paddock Project which is scheduled to be finished in time for the 150 th Kentucky Derby the first weekend in May 2024.
• Kentucky HRMs :
◦ Derby City Gaming: Delivered record net revenue and Adjusted EBITDA and completed the expansion of the gaming floor and opened a new hotel.
◦ Derby City Gaming Downtown : Opened in Louisville, Kentucky, on December 6, 2023.
◦ Oak Grove: Delivered record net revenue and Adjusted EBITDA for a second year in a row.
◦ Owensboro: Announced plans to invest approximately $100 million in a new HRM entertainment venue on the east side of Owensboro with an expected completion in the first quarter of 2025.
• Virginia HRMs:
◦ Southern Virginia - Rosie's Gaming Emporium: Opened in Emporia, Virginia on September 26, 2023.
◦ Northern Virginia - The Rose Gaming Resort (Dumfries): We continued construction of a $460 million gaming and entertainment resort and hotel in Dumfries, Virginia with a scheduled completion late in the third quarter of 2024.
TwinSpires Segment:
• Adjusted EBITDA was $132.1 million, up $18.0 million or 16% from fiscal year 2022.
• TwinSpires Horse Racing:
◦ We launched a multi-year agreement with FanDuel to enable FanDuel to create a fully integrated and seamless wagering experience with a single wallet for their customers who want to bet on sports and horse racing with FanDuel.
◦ We launched a multi-year agreement with DraftKings to provide ADW technology and other services.
• Exacta: We completed the acquisition of Exacta, a leading provider of central determinate system technology in HRMs across the country.
• Sports Betting: We opened seven retail sports books and monetized three of our Kentucky online sports betting licenses upon the authorization of sports betting in Kentucky.
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Gaming Segment:
• Adjusted EBITDA was a record $488.6 million, up $66.7 million or 16% from fiscal year 2022.
• Terre Haute Casino Resort : We continued construction of a $290 million casino, hotel, and entertainment venue in Terre Haute, Indiana scheduled to open in the second quarter of 2024.
All Other:
• We closed the sale of our Arlington Heights, Illinois property to the Chicago Bears for $197.2 million on February 15, 2023.
• We completed the offering of $600.0 million in 6.750% senior notes that mature in 2031.
• We amended our senior secured credit agreement to increase the loans under the existing Term Loan A due 2027 by $500 million.
• Effective May 22, 2023, the Company's common stock was split two-for-one with a proportionate increase in the number of authorized shares of common stock.
• In December 2023 we announced a repurchase of 1,000,000 shares of our common stock for $123.75 per share from an affiliate of The Duchossois Group, Inc that closed on January 2, 2024.
The Company’s total shareholder return was 28% for 2023 compared to 26.5% for the Russell 1000 and 26.3% for the S&P 500. The Company’s five-year total shareholder return for 2023 was 237% compared to 106% for the Russell 1000 and 107% for the S&P 500. The preceding shareholder return calculations assume dividends are reinvested.
We delivered strong financial results in 2023 and remain committed to driving long-term sustainable growth. Our company generates strong cash flow and our balance sheet is solid and able to support our organic growth and strategic acquisitions that we believe will create long-term value for our shareholders.
Environmental, Social, and Governance
• We expanded our ESG efforts including the ongoing promotion of responsible gaming; initiatives at our properties to lessen energy and water usage, to decrease carbon emissions, and to responsibly manage waste; increasing investments in the communities in which we operate and supporting our teams through educational and leadership development; and further diversification of our Board of Directors and increasing engagement with our shareholders.
• We also continued our diversity, equity, and inclusion initiatives (DE&I) including the roll-out of our mission, vision, culture statement, and core values company-wide.
Our Operations
We manage our operations through three reportable segments: Live and Historical Racing, TwinSpires, and Gaming.
Refer to Part I, Item 1. Business, of this Annual Report on Form 10-K for more information on our segments and a description of our competition and government regulations and potential legislative changes that affect our business.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:
Years Ended December 31, Change
(in millions) 2023 2022
Net revenue $ 2,461.7 $ 1,809.8 $ 651.9
Operating income 564.0 321.8 242.2
Operating income margin 22.9 % 17.8 %
Net income $ 417.3 $ 439.4 $ (22.1)
Adjusted EBITDA 1,023.9 763.6 260.3
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
• Net revenue increased $651.9 million driven by a $432.7 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, a $212.7
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million increase in Gaming revenue primarily due to our New York and Iowa properties acquired in the P2E Transaction, and an $8.5 million increase in TwinSpires revenue primarily attributable to the Exacta Transaction, partially offset by a $2.0 million decrease in All Other revenue.
• Operating income increased $242.2 million due to a $171.4 million increase in Live and Historical Racing income primarily attributable to the Virginia properties acquired in the P2E Transaction, the opening of Turfway Park in Northern Kentucky in September 2022, the properties acquired in the Ellis Park and Chasers Transactions, and continued growth at our other Kentucky properties, a $50.6 million increase in Gaming income primarily from the New York and Iowa properties acquired in the P2E Transaction, a $13.9 million increase in TwinSpires income primarily due to the exit of the direct online Sports and Casino business in the first quarter of 2022 and an increase attributable to the Exacta Transaction, a $37.3 million decrease in transaction costs, and a $13.7 million decrease in non-cash impairment costs. These increases were partially offset by a $38.1 million increase in selling, general and administrative expenses primarily due to the P2E Transaction, and a $6.6 million decrease in All Other operating income primarily related to Arlington exit costs.
• Net income from decreased $22.1 million. The following items impacted comparability of the Company's net income for the year ended December 31, 2023 compared to the prior year: a $112.4 million decrease in after-tax gains on property sales and 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. Offsetting these decreases to net income were a $16.6 million after-tax decrease in transaction, pre-opening and other expenses, a $10.1 million after-tax decrease in non-cash asset impairments, and a $3.1 million decrease of other charges. Excluding these items, net income increased $69.7 million due to a $197.1 million after-tax increase primarily driven by the results of our operations, partially offset by a $127.4 million after-tax increase in interest expense associated with higher outstanding debt balances.
• Adjusted EBITDA increased $260.3 million driven by a $187.9 million increase in Live and Historical Racing Adjusted EBITDA primarily attributable to 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 $66.7 million increase in Gaming Adjusted EBITDA primarily from the New York and Iowa properties acquired in the P2E Transaction, and an $18.0 million increase in TwinSpires Adjusted EBITDA primarily due to the exit of the direct online Sports and Casino business and an increase attributable to the Exacta Transaction, partially offset by a $12.3 million increase in corporate general administrative expenses.
Revenue by Segment
The following table presents net revenue for our segments, including intercompany revenues:
Years Ended December 31, Change
(in millions) 2023 2022
Live and Historical Racing $ 1,084.6 $ 646.4 $ 438.2
TwinSpires 458.4 441.6 16.8
Gaming 974.6 761.8 212.8
All Other 0.9 3.3 (2.4)
Eliminations (56.8) (43.3) (13.5)
Net Revenue $ 2,461.7 $ 1,809.8 $ 651.9
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
• Live and Historical Racing revenue increased $438.2 million driven by a $313.9 million increase attributable to the Virginia properties acquired in the P2E Transaction, a $41.2 million increase in Northern Kentucky primarily due to the opening of Turfway Park in September 2022, a $36.4 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 $19.2 million increase from our Derby City Gaming property and the opening of Derby City Gaming Downtown in December 2023 in Louisville, Kentucky, and a $16.5 million increase from our Oak Grove property in Southwestern Kentucky. These increases were partially offset by a $9.7 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 $16.8 million driven by a $19.1 million increase attributable to the Exacta Transaction, a $5.3 million increase primarily from the B2B expansion strategy associated with United Tote totalisator fees, a $1.9
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million increase from our retail sports betting business, and a $1.8 million increase in all other Horse Racing revenue primarily driven by increased handle from our higher-wagering volume customer base, partially offset by 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 2023 and an $11.3 million reduction primarily due to the exit of the direct online Sports and Casino business in the first quarter of 2022.
• Gaming revenue increased $212.8 million driven by a $230.0 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction, partially offset by a $16.9 million decrease in Pennsylvania primarily due to our decision not to renew the management agreement at Lady Luck and a $0.3 million net decrease from our other gaming properties.
Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
Years Ended December 31, Change
(in millions) 2023 2022
Gaming taxes and purses $ 613.4 $ 473.7 $ 139.7
Content expense 173.0 173.7 (0.7)
Salaries and benefits 285.3 196.0 89.3
Selling, general and administrative expense 202.3 164.2 38.1
Depreciation and amortization 169.0 113.7 55.3
Marketing and advertising expense 83.4 52.9 30.5
Maintenance, insurance and utilities 88.9 61.5 27.4
Property and other taxes 26.4 16.0 10.4
Asset impairments 24.6 38.3 (13.7)
Transaction expense 4.8 42.1 (37.3)
Other operating expense 226.6 155.9 70.7
Total expense $ 1,897.7 $ 1,488.0 $ 409.7
Year Ended December 31, 2023 Compared to the Year Ended December 31, 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, maintenance, insurance and utilities, property and other taxes, and other operating expenses increased due to the P2E, Ellis Park, Chasers, and Exacta Transactions, as well as the opening of Turfway Park in September of 2022.
• The decrease in asset impairments was driven by reduced non-cash impairment charges in 2023 compared to 2022 primarily at Presque Isle.
• Transaction expenses decreased $37.3 million primarily driven by expenses incurred in 2022 in connection with the P2E Transaction.
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Adjusted EBITDA by Segment
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
Year Ended December 31, Change
(in millions) 2023 2022
Live and Historical Racing $ 475.4 $ 287.5 $ 187.9
TwinSpires 132.1 114.1 18.0
Gaming 488.6 421.9 66.7
Total segment Adjusted EBITDA 1,096.1 823.5 272.6
All Other (72.2) (59.9) (12.3)
Total Adjusted EBITDA $ 1,023.9 $ 763.6 $ 260.3
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
• Live and Historical Racing Adjusted EBITDA increased $187.9 million driven by a $145.0 million increase attributable to the Virginia properties acquired in the P2E Transaction and savings as a result of the Exacta Transaction, a $15.7 million increase due to a record-breaking Derby Week at Churchill Downs Racetrack, a $13.1 million increase from continued growth at Oak Grove in Southwestern Kentucky, an $8.6 million increase in Northern Kentucky primarily due to the opening of Turfway Park in September 2022, a $7.2 million increase due to growth from our Derby City Gaming property and the opening of Derby City Gaming Downtown in December 2023 in Louisville, Kentucky, and a $5.4 million increase attributable to our other Live and Historical Racing properties. These increases were partially offset by a $7.1 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 2023.
• TwinSpires Adjusted EBITDA increased $18.0 million driven by an $11.8 million increase attributable to the Exacta Transaction, an $11.3 million increase primarily from significant cost reductions associated with the exit of the direct online Sports and Casino business in the first quarter of 2022, and a $3.7 million increase primarily from the B2B expansion strategy associated with United Tote totalisator fees. These increases were partially offset by an $8.8 million decrease primarily as a result of lower retail Horse Racing handle as well as higher content-related expenses and higher advance deposit wagering taxes in certain jurisdictions.
• Gaming Adjusted EBITDA increased $66.7 million driven by a $78.9 million increase attributable to the New York and Iowa properties acquired in the P2E Transaction and a $7.1 million increase from our equity investments. These increases were partially offset by a $14.6 million decrease from our other wholly owned Gaming properties primarily driven by Florida, Mississippi, and Pennsylvania, and a $4.7 million decrease attributable to proceeds for business interruption insurance claims related to Hurricane Ida. We received $6.3 million of insurance proceeds in 2022 compared to $1.6 million in 2023.
• All Other Adjusted EBITDA decreased $12.3 million primarily driven by increased corporate compensation expenses.
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Reconciliation of Comprehensive Income to Adjusted EBITDA
Years Ended December 31, Change
(in millions) 2023 2022
Net income and comprehensive income $ 417.3 $ 439.4 $ (22.1)
Additions:
Depreciation and amortization 169.0 113.7 55.3
Interest expense 268.4 147.3 121.1
Income tax provision 144.5 169.4 (24.9)
EBITDA $ 999.2 $ 869.8 $ 129.4
Adjustments to EBITDA:
Stock-based compensation expense $ 32.9 $ 31.8 $ 1.1
Legal reserves (1.2) 3.8 (5.0)
Pre-opening expense 18.6 13.2 5.4
Arlington exit costs 9.4 5.7 3.7
Other expense, net 7.0 1.7 5.3
Transaction expense, net 4.8 42.1 (37.3)
Asset impairments 24.6 38.3 (13.7)
Other income, expense:
Interest, depreciation and amortization expense related to equity investments 40.2 42.8 (2.6)
Changes in fair value of Rivers Des Plaines' interest rate swaps — (12.6) 12.6
Rivers Des Plaines' legal reserves and transactions costs — 0.6 (0.6)
Other charges and recoveries, net 2.4 1.0 1.4
Gain on the sale of assets (114.0) (274.6) 160.6
Total adjustments to EBITDA 24.7 (106.2) 130.9
Adjusted EBITDA $ 1,023.9 $ 763.6 $ 260.3
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
As of December 31, Change
(in billions) 2023 2022
Total assets $ 7.0 $ 6.2 $ 0.8
Total liabilities 6.1 5.6 0.5
Total shareholders’ equity 0.9 0.6 0.3
• Total assets increased $0.8 billion 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 $0.5 billion driven by increased notes payable, accrued capital expenditures, and increased deferred revenue primarily due to increased advanced ticket sales related to the 150 th Kentucky Derby, partially offset by a net pay down of long-term debt.
• Total shareholders’ equity increased $0.3 billion driven by increased net income and stock-based compensation, partially offset by share repurchases.
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Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been and will continue to be cash flow from operations, borrowings under our credit facility, and proceeds from the issuance of debt securities. Our ongoing liquidity will depend on several factors, including available cash resources, cash flow from operations, acquisitions, or equity investments, funding of construction for development projects, and our compliance with our covenants under our credit facility.
The following table is a summary of our liquidity and cash flows:
Year Ended December 31, Change
(in billions) 2023 2022
Cash Flows from:
Operating activities $ 0.6 $ 0.5 $ 0.1
Investing activities (0.7) (3.1) 2.4
Financing activities 0.1 2.4 (2.3)
Operating Cash Flow
Cash flows provided by operating activities increased $0.1 billion driven by increased operating income and increased deferred revenue from advanced ticket sales and sponsorships related to the 150 th Kentucky Derby . 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.
Investing Cash Flow
Cash used in investing activities decreased $2.4 billion driven by the P2E Transaction in 2022, partially offset by increased capital project expenditures in 2023 primarily at Churchill Downs Racetrack, Terre Haute Casino Resort, and The Rose Gaming Resort in Dumfries, Virginia, and decreased proceeds from the sale of assets.
Financing Cash Flow
Cash provided by financing activities decreased $2.3 billion primarily driven by a $2.4 billion decrease in net borrowings from long-term debt and notes payable and a $119.0 million decrease in common stock repurchases.
Capital Expenditures
Included in cash flows from investing activities are capital maintenance expenditures, and capital project expenditures. Capital maintenance expenditures relate to the replacement of existing fixed assets with a useful life greater than one year that are obsolete, exhausted, or no longer cost effective to repair. Capital project expenditures represent fixed asset additions related to land or building improvements to new or existing assets or purchases of new (non-replacement) equipment or software related to specific projects deemed necessary expenditures.
We have spent $599.5 million in 2023 on project capital investments including: Churchill Downs Racetrack Paddock Project, Derby City Gaming Downtown, Owensboro Racing & Gaming in Eastern Daviess County, Kentucky, the Terre Haute Casino Resort in Vigo County, Indiana, a New Hampshire HRM Facility, and The Rose Gaming Resort in Dumfries. We currently expect our project capital to be approximately $450.0 to $550.0 million in 2024, although this amount may vary significantly based on the timing of work completed, unanticipated delays, and timing of payments to third parties.
Common Stock Repurchase Program
On September 29, 2021, the Board of Directors of the Company approved a common stock repurchase program of up to $500.0 million ("2021 Stock Repurchase Program"). 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 $214.9 million of repurchase authority remaining under this program on December 31, 2023.
On December 18, 2023, the Company entered into an agreement (the “2023 Stock Repurchase Agreement”) with an affiliate of The Duchossois Group ("TDG") to repurchase 1,000,000 shares of the Company’s common stock, for $123.75 per share representing a discount of 4.03% to the closing price on December 15, 2023 of $128.95 for an aggregate purchase price of $123.8 million. The repurchase of the shares of Company's common stock pursuant to the 2023 Stock Repurchase Agreement closed on January 2, 2024, and contains customary representations, warranties, and covenants of the parties. The repurchase of shares of common stock from TDG pursuant to the 2023 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
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program. The repurchase of the shares was funded using available cash and borrowings under the Company’s senior secured credit facility.
Dividends
On October 24, 2023, the Company's Board of Directors approved an annual cash dividend on our common stock of $0.382 per outstanding share, which represented a 7% increase over the prior year on a split adjusted basis. The dividend was payable on January 5, 2024 to shareholders of record as of the close of business on December 1, 2023. The 7% increase marked the thirteenth consecutive year that the Company has increased the dividend per share. The payment and amount of future dividends will be determined by the Board of Directors and will depend upon, among other things, our operating results, financial condition, cash requirements, and general business conditions at the time such payment is considered.
Credit Facilities and Indebtedness
The following table presents our debt outstanding, bond premium and debt issuance costs:
As of December 31, Change
(in millions) 2023 2022
Term Loan B due 2024 $ — $ 380.0 $ (380.0)
Term Loan B-1 due 2028 291.8 294.7 (2.9)
Term Loan A due 2027 1,235.0 800.0 435.0
Revolver 247.2 664.1 (416.9)
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 4,874.0 4,638.8 235.2
Current maturities of long-term debt (68.0) (47.0) (21.0)
Total debt, net of current maturities 4,806.0 4,591.8 214.2
Issuance cost and fees (37.7) (33.1) (4.6)
Total debt $ 4,768.3 $ 4,558.7 $ 209.6
Credit Agreement
At December 31, 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, 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 provided for a 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 accompanying Consolidated Financial Statements for more 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 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.
Term Loan B-1 bears interest at Secured Overnight Financing Rate ("SOFR") plus 210 basis points and requires quarterly payments of 0.25% of the original $300.0 million balance. The Term Loan B-1 may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement.
The 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 December 31, 2023, that applicable margin was 150 basis points which
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was based on the pricing grid in the Credit Agreement. The Company had $947.6 million available borrowing capacity, after consideration of $5.3 million in outstanding letters of credit, under the Revolver as of December 31, 2023.
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, 2023, the Company's commitment fee rate was 0.25%.
The Company completed the transition of its financing from London Interbank Offered Rate to SOFR during the second quarter of 2023. These transition activities did not 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, 2023 Requirement
Interest coverage ratio 4.0 to 1.0 > 2.5 to 1.0
Consolidated total secured net leverage ratio 1.1 to 1.0 < 4.0 to 1.0
The Company was compliant with all applicable covenants on December 31, 2023.
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 Company used the net proceeds from the offering to repay the then-outstanding balance on the Revolver. 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 at par, with interest payable on April 1 st and October 1 st of each year, commencing on October 1, 2019. T he 2027 Senior Notes will vote as one class under the indenture governing the 2027 Senior Notes.
The Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture.
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 may redeem some or all the 2028 Senior Notes at redemption prices set forth in the 2028 Indenture.
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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 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.
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 Consolidated Statements of Comprehensive Income. The Company capitalized $10.5 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 1 st and November 1 st 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.
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Contractual Obligations
Our commitments to make future payments as of December 31, 2023, are estimated as follows:
(in millions) 2024 2025-2026 2027-2028 Thereafter Total
Dividends $ 28.5 $ — $ — $ — $ 28.5
Revolver — — 247.2 — 247.2
Interest on Revolver (1)
17.4 34.8 4.9 — 57.1
Term Loan B-1 3.0 6.0 282.8 — 291.8
Interest on Term Loan B-1 (1)
22.0 43.3 25.8 — 91.1
Term Loan A 65.0 130.0 1,040.0 — 1,235.0
Interest on Term Loan A (1)
85.7 157.1 20.7 — 263.5
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
Interest on 2027 Senior Notes 33.0 66.0 16.5 — 115.5
Interest on 2028 Senior Notes 33.3 66.5 49.9 — 149.7
Interest on 2030 Senior Notes 69.0 138.0 138.0 106.0 451.0
Interest on 2031 Senior Notes 40.5 81.0 81.0 101.3 303.8
Operating and Finance Leases 10.3 19.5 14.5 37.0 81.3
All other
1.6 3.1 2.9 6.5 14.1
Total $ 409.3 $ 745.3 $ 3,224.2 $ 2,050.8 $ 6,429.6
(1) Interest includes the estimated contractual payments under our Credit Facility assuming no change in the weighted average borrowing rate of 7.05%, which was the rate in place as of December 31, 2023.
As of December 31, 2023, we had approximately $4.8 million of unrecognized tax benefits.
Critical Accounting Policies and Estimates
Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2, Significant Accounting Policies to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates, judgments, and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.
Our critical accounting estimates relate to goodwill and certain indefinite-lived intangible assets.
Goodwill and certain intangible assets
Acquisition of certain identifiable intangible assets
In conjunction with the acquisition of a business, the Company records identifiable intangible assets acquired at their respective fair values as of the date of acquisition. Our indefinite-lived intangible assets primarily consist of gaming rights and trademarks. Certain of 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. Our definite-lived intangible assets primarily consist of technology and other assets.
We use various valuation methods to determine initial fair value of our intangible assets, including the Greenfield Method and relief-from-royalty method of the income approach, all of which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. The use of these valuation methods requires us to make significant estimates and assumptions about future revenue and operating expenses, expected start-up costs, capital expenditures, royalty rate, and the discount rate. The fair values of gaming rights are generally determined using the Greenfield Method, which is an income
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approach methodology that calculates the present value based on a projected cash flow stream. This method assumes that the gaming rights provides the opportunity to develop a casino or historical racing facility in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses, start-up costs of the acquired business, and the discount rate are the primary assumptions and estimates used in these valuations. The fair values of trademarks are generally determined using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the trademarks. The estimated future revenue, royalty rate, and the discount rate are the primary assumptions and estimates used in these valuations. The fair value of technology assets are generally determined using the relief-from-royalty method of the income approach, which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The estimated future revenue, royalty rate, and discount rate are the primary assumptions and estimates used in the valuations. The discount rates used to discount expected future cash flows to present value are generally derived from the weighted average cost of capital analysis and adjusted for the size and/or risk of the asset. Changes in estimates or the application of alternative assumptions could produce significantly different results.
Assessments of goodwill and indefinite-lived intangible assets
We perform our annual review for impairment of goodwill and indefinite-lived intangible assets on April 1 st of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not the asset is impaired. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues which are triggering events requiring the testing of an asset’s carrying value for recoverability.
Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired. An entity may first assess qualitative factors to determine whether it is necessary to complete the impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies. If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield Method for gaming rights and relief-from-royalty method of the income approach for trademarks. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others. These factors require significant judgments and estimates, and application of alternative assumptions could produce materially different results. Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values, and fair values of our reporting units and assets. The impairment tests for goodwill and indefinite-lived intangible assets are subject to uncertainties arising from such events as changes in competitive conditions, the current economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions. If any of these factors were to materially change, such change may require a reevaluation of our goodwill and indefinite-lived intangible assets. Changes in estimates or the application of alternative assumptions could produce significantly different results.
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