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,” “scheduled”, and similar words or similar expressions (or negative versions of such words or expressions), 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 any pandemics, epidemics, or outbreaks of infectious diseases, 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; • the impact of significant competition, and the expectation that 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 betting business and effectively compete; • online security risk, including cyber-security breaches, or loss or misuse of our stored information as a result of a breach including customers’ personal information could lead to government enforcement actions or other litigation; • 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; • 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; FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 28 • compliance with the Foreign Corrupt Practices Act or other similar laws and regulations, or applicable anti-money laundering regulations; • payment-related risks, such as risk associated with fraudulent credit card or debit card use; • work stoppages and labor problems; • 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; • increases to interest rates (due to inflation or otherwise); • disruption 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 any 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 under the heading “Risk Factors” 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, 2023, 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, 2024 29 Our Business Churchill Downs Incorporated ("CDI" or the "Company") has been creating extraordinary entertainment experiences for over 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. 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. 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 and the portion of EBITDA attributable to a noncontrolling interest. Adjusted EBITDA excludes: • Transaction expense, net which includes: – Acquisition, disposition, and property sale related charges; – Other transaction expense, including legal, accounting and other deal-related expense; • Stock-based compensation expense; • Asset impairments; • Gain on property sales; • Legal reserves; • Pre-opening expense; and • Other charges, recoveries and expenses As of December 31, 2021, our property in Arlington Heights, Illinois ("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 2023 are treated as an adjustment to EBITDA . 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. 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. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 30 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, 2023, including Part I - Item 1, "Business" for a discussion of regulatory and legislative changes. Specific State Gaming Regulations Louisiana In Louisiana, the 2021 Historical Horse Racing Act (the "2021 HHR Act") allows off-track betting facilities ("OTBs") to have up to 50 HRMs. On October 25, 2022, a number of individual plaintiffs associated with video poker and truckstops, filed a lawsuit in the 19th Judicial District Court in East Baton Rouge, Louisiana against certain racetracks in Louisiana, including our Fair Grounds Racecourse and Slots property, alleging that the 2021 HHR Act is unconstitutional to the extent it purports to permit historical racing in a parish without a referendum. On June 8, 2023, plaintiffs filed a motion for summary judgment on the constitutional issues raised in their complaint and a hearing was conducted on September 11, 2023. On February 23, 2024, the judge issued a ruling in favor of plaintiffs granting summary judgment stating that: (i) historical horseracing is a new form of gaming not specifically authorized by law prior to 1996; (ii) historical horseracing may not be conducted in any parish of the state unless voters approve it through referendum; and (iii) the 2021 HHR Act that authorized historical horseracing is unconstitutional. The summary judgment, which was certified as final for purposes of appeal, was entered on March 18, 2024, and the Company, along with other interested parties including the Louisiana Racing Commission, filed a joint motion for a suspensive appeal, which was entered on March 26, 2024. The suspensive appeal allows the continued operation of HHR during the pendency of the appeal before the Louisiana Supreme Court. The case was lodged in the Louisiana Supreme Court on August 7, 2024 and the Company, and other appellants, including the Louisiana Attorney General on behalf of the Louisiana Racing Commission, filed opening briefs on October 9, 2024. The Company intends to vigorously defend the constitutionality of the HHR Act. As of September 30, 2024, the Company had approximately 500 HRMs in OTBs in Louisiana. If the 2021 HHR Act is determined to be unconstitutional it could have an adverse impact on our Louisiana HRM results which are reported in our Gaming segment. Consolidated Financial Results The following table reflects our net revenue, operating income, net income attributable to Churchill Downs Incorporated, Adjusted EBITDA, and certain other financial information: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2024 2023 Change 2024 2023 Change Net revenue $ 628.5 $ 572.5 $ 56.0 $ 2,110.1 $ 1,900.5 $ 209.6 Operating income 125.9 112.3 13.6 582.2 457.8 124.4 Operating income margin 20 % 20 % 28 % 24 % Net income attributable to Churchill Downs Incorporated 65.4 61.0 4.4 355.1 359.7 (4.6) Adjusted EBITDA 235.3 218.2 17.1 922.6 804.8 117.8 Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023 • Net revenue increased $56.0 million driven by a $28.0 million increase from the Live and Historical Racing segment primarily due to the opening of the Rosie's Emporia property in September 2023 and growth at our other HRM properties, a $25.4 million increase from the Gaming segment primarily driven by the opening of the Terre Haute Casino Resort in April 2024, and a $2.8 million increase from the TwinSpires segment primarily due to Exacta. All Other net revenue decreased $0.2 million. • Operating income increased $13.6 million driven by a $14.9 million increase from the Live and Historical Racing segment primarily due to the opening of the Rosie's Emporia property in September 2023 and growth at our other HRM properties, a $6.2 million increase from the Gaming segment primarily due to opening of the Terre Haute Casino FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 31 Resort in April 2024 that was partially offset by regional gaming softness and increased competition, a $5.5 million decrease in transaction costs primarily driven by the settlement of certain liabilities recorded at the time of the Company's acquisition of substantially all of the assets of Peninsula Pacific Entertainment LLC in 2022, and a $3.9 million increase in the TwinSpires segment primarily due to Exacta. Partially offsetting these increases to operating income was a $9.6 million increase in selling, general and administrative expenses, a $3.9 million write-off of HRMs in Virginia that are no longer in use, and a $3.4 million decrease in All Other operating income. • Net income attributable to Churchill Downs Incorporated increased $4.4 million. The following impacted the comparability of the Company's net income for the three months ended September 30, 2024 compared to the three months ended September 30, 2023: a $3.0 million increase in after-tax non-cash impairment costs, partially offset by a $1.7 million after-tax net decrease in transaction, pre-open and other expenses, and a $0.6 million after-tax decrease of other items. Excluding these items, net income increased $5.1 million due to a $10.5 million after-tax increase primarily driven by the results of our operations, partially offset by a $5.4 million after-tax increase in interest expense associated primarily with higher outstanding debt balances. • Adjusted EBITDA increased $17.1 million driven by a $12.1 million increase from the Live and Historical Racing segment primarily due to growth at our Virginia HRM properties, an $8.6 million increase from the TwinSpires segment primarily due to Exacta, and a $1.0 million increase from the Gaming segment driven by the opening of the Terre Haute Casino Resort in April 2024 that was partially offset by regional gaming softness and increased competition. These increases were partially offset by a decrease of All Other adjusted EBITDA of $4.6 million. Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023 • Net revenue increased $209.6 million driven by a $138.4 million increase from the Live and Historical Racing segment primarily due to a record-breaking Derby Week at Churchill Downs Racetrack, the opening of the Rosie's Emporia property in September 2023 and growth at our other HRM properties, a $42.9 million increase from the Gaming segment primarily driven by the opening of the Terre Haute Casino Resort in April 2024, and a $28.9 million increase from the TwinSpires segment primarily due to Exacta. All Other net revenue decreased $0.6 million. • Operating income increased $124.4 million driven by a $94.2 million increase from the Live and Historical Racing segment primarily due to a record-breaking Derby Week at Churchill Downs Racetrack, Exacta savings, the opening of the Rosie's Emporia property in September 2023, and growth at our other HRM properties, a $20.6 million increase attributable to a $24.5 million non-cash impairment of Presque Isle intangible assets in the second quarter of 2023 compared to a $3.9 million write-off of HRMs in Virginia that are no longer in use in the third quarter of 2024, a $19.2 million increase in the TwinSpires segment primarily due to Exacta, a $9.5 million increase from the Gaming segment primarily due to opening of the Terre Haute Casino Resort in April 2024, partially offset by inclement weather in January, regional gaming softness, and increased competition, a $1.2 million increase in All Other operating income, and a $1.1 million decrease in transaction costs. Partially offsetting these increases to operating income was a $21.4 million increase in selling, general and administrative expenses. • Net income attributable to Churchill Downs Incorporated decreased $4.6 million. The following impacted the comparability of the Company's net income for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023: an $86.2 million after-tax gain on the sale of the Arlington property in the prior year, partially offset by a $15.7 million decrease in after-tax non-cash impairment costs, a $4.8 million after-tax increase of other recoveries, net related to non-recurring insurance claim recoveries, and a $3.2 million decrease of other items. Excluding these items, net income increased $57.9 million primarily due to a $72.0 million after-tax increase primarily driven by the results of our operations, partially offset by a $14.1 million after-tax increase in interest expense associated with higher outstanding debt balances and higher interest rates. • Adjusted EBITDA increased $117.8 million driven by an $86.5 million increase from the Live and Historical Racing segment primarily due to a record-breaking Derby Week at Churchill Downs Racetrack and growth at our HRM properties, a $31.1 million increase from the TwinSpires segment primarily due to Exacta, and an $11.6 million increase from the Gaming segment driven by the opening of the Terre Haute Casino Resort in April 2024 that was partially offset by inclement weather in January 2024, regional gaming softness, and increased competition. These increases were partially offset by a decrease of All Other adjusted EBITDA of $11.4 million. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 32 Revenue by Segment The following table presents net revenue for our segments, including intercompany revenue: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2024 2023 2024 2023 Live and Historical Racing $ 252.4 $ 225.5 $ 26.9 $ 991.5 $ 849.3 $ 142.2 TwinSpires 118.7 112.4 6.3 392.7 347.8 44.9 Gaming 270.3 244.9 25.4 787.9 744.4 43.5 All Other 2.6 0.2 2.4 4.5 0.7 3.8 Eliminations (15.5) (10.5) (5.0) (66.5) (41.7) (24.8) Net Revenue $ 628.5 $ 572.5 $ 56.0 $ 2,110.1 $ 1,900.5 $ 209.6 Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023 • Live and Historical Racing revenue increased $26.9 million due to a $21.6 million increase attributable to growth at our Virginia properties and the opening of the Rosie's Emporia property in September 2023, a $3.8 million increase attributable to growth at our Northern Kentucky properties, and a $1.5 million net increase at our other Live and Historical Racing properties. • TwinSpires revenue increased $6.3 million due to a $9.6 million increase attributable to Exacta and a $1.3 million increase attributable to our online sports betting market access agreements and our retail sports betting business. These increases were partially offset by a $4.6 million decrease primarily attributable to a decline in TwinSpires Horse Racing handle due to market access and shifts in race days at other tracks. • Gaming revenue increased $25.4 million due to a $32.5 million increase attributable to the opening of the Terre Haute Casino Resort in April 2024, partially offset by a $7.1 million decrease primarily due to regional gaming softness and increased competition. • All Other revenue increased due to intercompany revenue related to the captive insurance company that was established in April 2024. All captive revenue is eliminated in consolidation. Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023 • Live and Historical Racing revenue increased $142.2 million due to a $54.5 million increase at Churchill Downs Racetrack, which includes a $38.6 million increase due to a record-breaking Derby Week, a $52.5 million increase attributable to growth at our Virginia properties and the opening of the Rosie's Emporia property in September 2023, a $34.0 million increase attributable to growth at our Kentucky HRM properties, and a $1.2 million increase at our New Hampshire property. • TwinSpires revenue increased $44.9 million due to a $38.6 million increase attributable to Exacta, a $5.5 million increase attributable to our online sports betting market access agreements and our retail sports betting business, and a $0.8 million increase attributable to TwinSpires Horse Racing. • Gaming revenue increased $43.5 million due to a $66.3 million increase attributable to the opening of the Terre Haute Casino Resort in April 2024, partially offset by a $12.5 million decrease primarily due to inclement weather in January 2024, regional gaming softness, and increased competition, and a $10.3 million decrease due to our decision not to renew the management agreement at Lady Luck at the end of June 2023. • All Other revenue increased due to intercompany revenue related to the captive insurance company that was established in April 2024. All captive revenue is eliminated in consolidation. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 33 Consolidated Operating Expense The following table is a summary of our consolidated operating expense: Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2024 2023 2024 2023 Gaming taxes and purses $ 160.1 $ 149.1 $ 11.0 $ 501.2 $ 468.7 $ 32.5 Salaries and benefits 83.5 70.6 12.9 244.1 211.3 32.8 Content expense 43.4 46.1 (2.7) 132.4 135.4 (3.0) Selling, general and administrative expense 59.8 50.2 9.6 172.0 150.6 21.4 Depreciation and amortization 49.6 42.1 7.5 145.7 121.8 23.9 Marketing and advertising 21.9 18.0 3.9 68.6 62.4 6.2 Maintenance, insurance and utilities 27.3 24.1 3.2 70.5 66.0 4.5 Property and other taxes 6.3 5.6 0.7 17.9 21.1 (3.2) Transaction expense, net (4.0) 1.5 (5.5) 0.7 1.8 (1.1) Asset impairments 3.9 — 3.9 3.9 24.5 (20.6) Other operating expense 50.8 52.9 (2.1) 170.9 179.1 (8.2) Total expense $ 502.6 $ 460.2 $ 42.4 $ 1,527.9 $ 1,442.7 $ 85.2 Three and Nine Months Ended September 30, 2024, Compared to Three and Nine Months Ended September 30, 2023 Operating expenses increased $42.4 million and $85.2 million for the three and nine months ended September 30, 2024 compared to September 30, 2023 primarily due to the Exacta Transaction in August 2023, the opening of Rosie's Emporia in September 2023, Derby City Gaming Downtown in December 2023, and Terre Haute Casino Resort in Indiana on April 5, 2024 and the hotel on May 15, 2024, and The Rose Gaming Resort in Virginia. Transaction expenses, net for the three months ended September 30, 2024, includes the settlement of certain liabilities recorded at the time of the Company's acquisition of substantially all of the assets of Peninsula Pacific Entertainment LLC in 2022 which resulted in a reduction in transaction expenses of $5.1 million. Asset impairments for the nine months ended September 30, 2024 include a $3.9 million write-off in the third quarter of 2024 of HRMs in Virginia that are no longer in use. Asset impairments for the nine months ended September 30, 2024 include the $24.5 million non-cash impairment of Presque Isle intangible assets in the second quarter of 2023. 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, Change Nine Months Ended September 30, Change (in millions) 2024 2023 2024 2023 Live and Historical Racing $ 93.0 $ 80.9 $ 12.1 $ 473.0 $ 386.5 $ 86.5 TwinSpires 42.5 33.9 8.6 128.3 97.2 31.1 Gaming 123.3 122.3 1.0 386.8 375.2 11.6 Total Segment Adjusted EBITDA 258.8 237.1 21.7 988.1 858.9 129.2 All Other (23.5) (18.9) (4.6) (65.5) (54.1) (11.4) Total Adjusted EBITDA $ 235.3 $ 218.2 $ 17.1 $ 922.6 $ 804.8 $ 117.8 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 34 Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023 • Live and Historical Racing Adjusted EBITDA increased $12.1 million due to a $15.2 million increase attributable to growth at our Virginia properties, which includes $3.9 million related to Exacta savings, and a $3.2 million increase attributable primarily to growth at our Northern Kentucky and Southwestern Kentucky HRM properties. These increases were partially offset by a $4.1 million decrease attributable to our Louisville and Western Kentucky HRM properties, a $1.4 million decrease attributable to Churchill Downs Racetrack, and a $0.8 million decrease attributable to proceeds for business interruption insurance claims in the third quarter 2023 that did not reoccur. • TwinSpires Adjusted EBITDA increased $8.6 million due to a $7.5 million increase attributable to Exacta and a $1.1 million increase primarily attributable to our online sports betting market access agreements and our retail sports betting business. • Gaming Adjusted EBITDA increased $1.0 million due to a $12.4 million increase attributable to the opening of the Terre Haute Casino Resort in April 2024, partially offset by a $10.2 million decrease primarily due to regional gaming softness, increased competition, and higher labor and benefit expense, and a $1.2 million decrease attributable to proceeds for business interruption insurance claims in the third quarter 2023 that did not reoccur. • All Other Adjusted EBITDA decreased $4.6 million driven primarily by increased corporate compensation related expenses and other corporate administrative expenses. Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023 • Live and Historical Racing Adjusted EBITDA increased $86.5 million due to a $44.1 million increase attributable to growth at our Virginia properties, which includes $15.3 million related to Exacta savings, a $33.9 million increase at Churchill Downs Racetrack, which includes a $31.3 million increase due to a record-breaking Derby Week, and an $8.5 million increase from growth at our other HRM properties. • TwinSpires Adjusted EBITDA increased $31.1 million due to a $27.0 million increase attributable to Exacta and a $4.9 million increase attributable to our online sports betting market access agreements and our retail sports betting business, partially offset by a $0.8 million decrease attributable to TwinSpires Horse Racing. • Gaming Adjusted EBITDA increased $11.6 million due to a $33.1 million increase attributable to the opening of the Terre Haute Casino Resort in April 2024, partially offset by a $20.3 million decrease primarily due to inclement weather in January 2024, regional gaming softness, and increased competition, and a $1.2 million decrease attributable to proceeds for business interruption insurance claims in the third quarter 2023 that did not reoccur. • All Other Adjusted EBITDA decreased $11.4 million driven primarily by increased corporate compensation related expenses and other corporate administrative expenses. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 35 Reconciliation of Comprehensive Income to Adjusted EBITDA Three Months Ended September 30, Change Nine Months Ended September 30, Change (in millions) 2024 2023 2024 2023 Net income attributable to Churchill Downs Incorporated $ 65.4 $ 61.0 $ 4.4 $ 355.1 $ 359.7 $ (4.6) Net income attributable to noncontrolling interest 0.8 — 0.8 1.7 — 1.7 Net income and comprehensive income 66.2 61.0 5.2 356.8 359.7 (2.9) Additions: Depreciation and amortization 49.6 42.1 7.5 145.7 121.8 23.9 Interest expense 73.1 67.9 5.2 217.0 197.8 19.2 Income tax provision 19.9 20.8 (0.9) 125.4 130.2 (4.8) EBITDA $ 208.8 $ 191.8 $ 17.0 $ 844.9 $ 809.5 $ 35.4 Adjustments to EBITDA: Stock-based compensation expense $ 7.1 $ 8.1 $ (1.0) $ 23.2 $ 24.8 $ (1.6) Pre-opening expense 7.8 5.0 2.8 23.6 11.4 12.2 Arlington exit costs — 0.1 (0.1) — 9.4 (9.4) Other expense, net 1.0 0.7 0.3 1.3 7.6 (6.3) Asset impairments 3.9 — 3.9 3.9 24.5 (20.6) Transaction expense, net (4.0) 1.5 (5.5) 0.7 1.8 (1.1) Other income, expense: — Interest, depreciation and amortization expense related to equity investments 10.6 10.1 0.5 31.4 29.8 1.6 Rivers Des Plaines' legal reserves and transactions costs — — — 0.3 — 0.3 Other charges and recoveries, net 0.1 0.9 (0.8) (6.7) — (6.7) Gain on sale of Arlington — — — — (114.0) 114.0 Total adjustments to EBITDA 26.5 26.4 0.1 77.7 (4.7) 82.4 Adjusted EBITDA $ 235.3 $ 218.2 $ 17.1 $ 922.6 $ 804.8 $ 117.8 Consolidated Balance Sheet The following is a summary of our overall financial position: (in millions) September 30, 2024 December 31, 2023 Change Total assets $ 7,172.5 $ 6,955.5 $ 217.0 Total liabilities 6,057.6 6,061.9 (4.3) Total equity 1,114.9 893.6 221.3 Significant items affecting the comparability of our Condensed Consolidated Balance Sheets include: • Total assets increased $217.0 million driven by increased capital expenditures primarily at the Terre Haute Casino Resort, Churchill Downs Racetrack, Owensboro Racing and Gaming in Western Kentucky, and The Rose Gaming Resort in Virginia. • Total liabilities decreased $4.3 million driven primarily by decreased deferred revenue due to the recognition of revenue related to the 150th Kentucky Derby and the payment of dividends, partially offset by increased accounts payables. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 36 • Total equity increased $221.3 million driven by net income and the addition of a redeemable noncontrolling interest, partially offset by share repurchases. Liquidity and Capital Resources The following table is a summary of our liquidity and cash flows: (in millions) Nine Months Ended September 30, Change Cash flows from: 2024 2023 Operating activities $ 641.1 $ 498.8 $ 142.3 Investing activities (415.8) (549.5) 133.7 Financing activities (216.7) 38.7 (255.4) Nine Months Ended September 30, 2024, Compared to the Nine Months Ended September 30, 2023 • Cash flows provided by operating activities increased $142.3 million driven primarily a decrease in cash used for working capital and an increase in operating income, partially offset by increased interest paid and decreased distributions from our unconsolidated affiliates in 2024. 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 decreased $133.7 million primarily driven by decreased funds used in acquisitions and capital expenditures in 2024, partially offset by proceeds from the Arlington sale received in 2023. • Cash flows used in financing activities increased $255.4 million primarily driven by share repurchases in 2024 and decreased net proceeds from long-term debt in 2024 compared to 2023. We have announced several project capital investments, including the following: Starting Gate Pavilion and Courtyard at Churchill Downs Racetrack, The Rose Gaming Resort in Northern Virginia, Owensboro Racing and Gaming in Western Kentucky, and a Calvert City HRM Venue in Southwestern Kentucky. 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 (the "2021 Stock Repurchase Program"). The 2021 Stock Repurchase Program includes and is not in addition to the unspent amount remaining under the prior authorization. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended or discontinued at any time. During the third quarter of 2024, we repurchased 67,139 shares of the Company's common stock under the 2021 Stock Repurchase Program for a total cost of approximately $9.0 million. We had approximately $170.9 million of repurchase authority remaining under this program on September 30, 2024, based on trade date. On January 2, 2024, the Company closed on an agreement, dated December 18, 2023, 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 in a privately negotiated transaction for an aggregate purchase price of $123.8 million. This represented a discount of 4.03% to the closing price on December 15, 2023 of $128.95. The repurchase of shares of common stock from TDG was approved by the Company's Board of Directors separately from and did not reduce the authorized amount remaining under the existing common stock repurchase program. The repurchase of the shares was funded using available cash and borrowings under the Company’s senior secured credit facility. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 37 Credit Facilities and Indebtedness The following table presents our debt outstanding: (in millions) September 30, 2024 December 31, 2023 Change Revolver $ 290.0 $ 247.2 $ 42.8 Term Loan B-1 due 2028 289.5 291.8 (2.3) Term Loan A due 2029 1,187.4 1,235.0 (47.6) 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 4,866.9 4,874.0 (7.1) Current maturities of long-term debt (63.1) (68.0) 4.9 Total debt, net of current maturities 4,803.8 4,806.0 (2.2) Issuance costs, net of premiums and discounts (33.2) (37.7) 4.5 Net debt $ 4,770.6 $ 4,768.3 $ 2.3 Credit Agreement At September 30, 2024, 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"), $289.5 million senior secured term loan B-1 (the "Term Loan B-1"), $1.2 billion senior secured term loan A (the "Term Loan A"), and $100.0 million swing line commitment. On July 3, 2024, the Company closed an amendment of the Credit Agreement to (i) extend the maturity date of the Revolver and Term Loan A from 2027 to 2029 and (ii) amend certain other provisions to the Credit Agreement. Term Loan B-1 bears interest at the 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 September 30, 2024, that applicable margin was 150 basis points which was based on the pricing grid in the Credit Agreement. The Company had $902.4 million available borrowing capacity, after consideration of $7.6 million in outstanding letters of credit, under the Revolver as of September 30, 2024. 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, 2024, the Company's commitment fee rate was 0.25%. The estimated contractual payments, including interest, under the Credit Agreement for the next twelve months are estimated to be $178.5 million assuming no change in the weighted average borrowing rate of 6.5%, which was in place as of September 30, 2024. During the nine months ended September 30, 2024, we had repayments of principal and interest on the Credit Agreement of $858.2 million. 2027 Senior Notes As of September 30, 2024, 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 1st, 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, 2024, we had a total of $700.0 million in aggregate principal amount of 4.750% senior unsecured notes (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 15th, 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. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024 38 2030 Senior Notes As of September 30, 2024, 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 1st, 2022. The Company may redeem some or all the 2030 Senior Notes at redemption prices set forth in the 2030 Indenture. 2031 Senior Notes As of September 30, 2024, we had $600.0 million in aggregate principal amount of 6.750% senior unsecured notes that mature on April 25, 2031 (the "2031 Senior Notes"). The 2031 Senior Notes were issued at par in a private offering to qualified institutional buyers, with interest payable in arrears on May 1st and November 1st of each year, commencing on November 1st, 2023. 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, 2024, minimum rent payable under operating leases was $26.9 million, with $6.0 million due in the next twelve months. As of September 30, 2024, minimum rent payable accounted for as financing obligations was $56.3 million, with $5.0 million due in the next twelve months. Other Contractual Obligations The Company has other contractual obligations with commitments of $12.4 million, $1.6 million of which is due within the next twelve months.