Document

 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission file number 001-33998
https://cdn.kscope.io/da73163243bdc8381a3c190ba5625871-logocdia02.jpg
(Exact name of registrant as specified in its charter)
Kentucky
61-0156015
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
600 North Hurstbourne Parkway, Suite 400 Louisville, Kentucky 40222
(502) 636-4400
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
The number of shares outstanding of Registrant’s common stock at October 26, 2017 was 15,425,618 shares.
 
 
 



CHURCHILL DOWNS INCORPORATED
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per common share data)
2017
 
2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Racing
$
38.8

 
$
38.5

 
$
228.0

 
$
220.8

Casinos
87.5

 
83.0

 
263.3

 
253.9

TwinSpires
65.9

 
55.1

 
198.4

 
173.1

Big Fish Games
117.9

 
122.3

 
342.5

 
369.6

Other Investments
4.7

 
4.5

 
14.0

 
12.9

Total net revenue
314.8


303.4

 
1,046.2

 
1,030.3

Operating expense:
 
 
 
 
 
 
 
Racing
40.8

 
41.5

 
153.7

 
149.4

Casinos
60.7

 
61.4

 
185.5

 
182.8

TwinSpires
42.8

 
36.8

 
130.6

 
112.8

Big Fish Games
95.2

 
94.5

 
271.5

 
309.5

Other Investments
4.3

 
3.9

 
13.1

 
11.9

Corporate
0.6

 
0.5

 
1.8

 
1.5

Selling, general and administrative expense
26.8

 
27.6

 
77.6

 
75.3

Research and development
9.7

 
8.8

 
29.9

 
29.3

Calder exit costs
0.2

 
0.5

 
0.8

 
2.4

Acquisition expense, net
0.7

 
1.1

 
1.7

 
4.9

Total operating expense
281.8

 
276.6

 
866.2

 
879.8

Operating income
33.0

 
26.8

 
180.0

 
150.5

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(12.6
)
 
(11.1
)
 
(36.0
)
 
(32.8
)
Equity in income of unconsolidated investments
8.9

 
4.9

 
22.7

 
13.5

Miscellaneous, net
(1.0
)
 
(0.2
)
 
(0.8
)
 
(0.3
)
Total other income (expense)
(4.7
)
 
(6.4
)
 
(14.1
)
 
(19.6
)
Income from operations before provision for income taxes
28.3

 
20.4

 
165.9

 
130.9

Income tax provision
(11.6
)
 
(11.7
)
 
(63.6
)
 
(49.6
)
Net income
$
16.7

 
$
8.7

 
$
102.3

 
$
81.3

 
 
 
 
 
 
 
 
Net income per common share data:
 
 
 
 
 
 
 
Basic net income
$
1.09

 
$
0.52

 
$
6.43

 
$
4.85

Diluted net income
$
1.08

 
$
0.52

 
$
6.32

 
$
4.79

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
15.3

 
16.4

 
15.9

 
16.5

Diluted
15.5

 
16.9

 
16.2

 
17.0

 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation, net of tax
0.5

 

 
0.1

 
0.2

Change in pension benefits, net of tax
0.1

 

 
0.1

 

Other comprehensive gain
0.6

 

 
0.2

 
0.2

Comprehensive income
$
17.3

 
$
8.7

 
$
102.5

 
$
81.5

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions)
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
57.8

 
$
48.7

Restricted cash
37.3

 
34.3

Accounts receivable, net of allowance for doubtful accounts of $3.9 at September 30, 2017 and $3.5 at December 31, 2016
74.0

 
81.4

Receivable from escrow

 
13.6

Income taxes receivable

 
7.6

Game software development, net
6.4

 
9.6

Other current assets
59.3

 
50.8

Total current assets
234.8

 
246.0

Property and equipment, net
619.4

 
574.4

Game software development, net
13.3

 
6.3

Investment in and advances to unconsolidated affiliates
173.9

 
139.1

Goodwill
848.3

 
832.2

Other intangible assets, net
425.4

 
445.7

Other assets
12.3

 
10.7

Total assets
$
2,327.4

 
$
2,254.4

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
61.6

 
$
53.2

Purses payable
19.2

 
12.5

Account wagering deposit liabilities
25.9

 
25.0

Accrued expense
111.2

 
100.1

Income taxes payable
16.9

 

Deferred revenue - Big Fish Games
85.6

 
81.3

Deferred revenue - all other
12.0

 
64.3

Big Fish Games deferred payment, current
28.3

 
27.8

Big Fish Games earnout liability, current
33.9

 
67.9

Current maturities of long-term debt
17.7

 
14.2

Dividends payable

 
21.8

Total current liabilities
412.3

 
468.1

Long-term debt (net of current maturities and loan origination fees of $0.5 at both September 30, 2017 and December 31, 2016)
510.7

 
312.8

Notes payable (including premium of $2.1 at September 30, 2017 and $2.5 at December 31, 2016 and net of debt issuance costs of $6.5 at September 30, 2017 and $7.8 at December 31, 2016)
595.6

 
594.7

Deferred revenue - all other
23.1

 
24.4

Deferred income taxes
140.2

 
153.1

Other liabilities
19.2

 
16.3

Total liabilities
1,701.1

 
1,569.4

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Preferred stock, no par value; 0.3 shares authorized; no shares issued

 

Common stock, no par value; 50.0 shares authorized; 15.4 shares issued at September 30, 2017 and 16.5 shares issued at December 31, 2016

 
116.5

Retained earnings
627.3

 
569.7

Accumulated other comprehensive loss
(1.0
)
 
(1.2
)
Total shareholders' equity
626.3

 
685.0

Total liabilities and shareholders' equity
$
2,327.4

 
$
2,254.4

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
102.3

 
$
81.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
73.3

 
81.4

Game software development amortization
13.5

 
11.7

Acquisition expenses, net
1.7

 
4.9

Distributed earnings from equity investments
11.7

 
12.3

Earnings from equity investments, net
(22.7
)
 
(13.5
)
Stock-based compensation
17.5

 
14.3

Deferred income taxes
(13.0
)
 
0.5

Big Fish Games earnout payment
(2.5
)
 
(19.7
)
Other
1.0

 
1.6

Increase (decrease) in cash resulting from changes in operating assets and liabilities, net of business acquisitions and dispositions:
 
 
 
Other current assets and liabilities
(0.8
)
 
11.7

Game software development
(17.1
)
 
(16.3
)
Income taxes
24.5

 
28.1

Deferred revenue
(27.4
)
 
(7.5
)
Other assets and liabilities
2.2

 
(1.8
)
Net cash provided by operating activities
164.2

 
189.0

Cash flows from investing activities:
 
 
 
Capital maintenance expenditures
(26.7
)
 
(24.2
)
Capital project expenditures
(62.4
)
 
(19.9
)
Acquisition of gaming licenses
(2.3
)
 
(2.5
)
Acquisition of a business
(23.1
)
 

Receivable from escrow
13.6

 

Investment in unconsolidated affiliates
(24.0
)
 

Other
0.3

 
0.4

Net cash used in investing activities
(124.6
)
 
(46.2
)
Cash flows from financing activities:
 
 
 
Borrowings on bank line of credit
769.1

 
564.7

Repayments of bank line of credit
(567.7
)
 
(427.2
)
Big Fish Games earnout payment
(31.7
)
 
(261.9
)
Payment of dividends
(21.8
)
 
(19.1
)
Repurchase of common stock
(181.1
)
 
(20.0
)
Common stock issued
2.1

 
2.2

Loan origination fees and debit issuance costs

 
(1.4
)
Other
(0.6
)
 
2.7

Net cash used in financing activities
(31.7
)
 
(160.0
)
Net increase (decrease) in cash and cash equivalents
7.9

 
(17.2
)
Effect of exchange rate changes on cash
1.2

 
(0.4
)
Cash and cash equivalents, beginning of period
48.7

 
74.5

Cash and cash equivalents, end of period
$
57.8

 
$
56.9

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

 
Nine Months Ended September 30,
(in millions)
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
25.4

 
$
21.8

Income taxes
48.0

 
21.6

Schedule of non-cash investing and financing activities:
 
 
 
Issuance of common stock in connection with the Company's restricted stock plans
18.5

 
18.8

Property and equipment additions included in accounts payable and accrued expenses
5.6

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. DESCRIPTION OF BUSINESS
Basis of Presentation
The Churchill Downs Incorporated (the "Company", "we", "us", "our") financial statements are presented in conformity with the requirements of this Quarterly Report on Form 10-Q and consequently do not include all of the disclosures normally required by U.S. generally accepted accounting principles ("U.S. GAAP") or those normally made in our Annual Report on Form 10-K. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
The following information is unaudited. 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, 2016.
In the opinion of management, all adjustments necessary for a fair statement of this information have been made, and all such adjustments are of a normal, recurring nature.
Our critical accounting policies are revenue recognition, goodwill and indefinite intangible assets, property and equipment, and income taxes. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2016.
Seasonality
Racing
Due to the seasonal nature of our live racing business, revenue and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. Historically, we have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter, with the running of the Kentucky Derby and the Kentucky Oaks. We conducted 57 live thoroughbred race days in the third quarter of 2017 and 60 live thoroughbred race days in the third quarter of 2016. For the nine months ended September 30, 2017, we conducted 176 live thoroughbred racing days, which compares to 175 live thoroughbred racing days during the nine months ended September 30, 2016.
Casinos
Revenue from our casino properties has a seasonal component and is typically higher during the first and second quarters.
TwinSpires
Due to the seasonal nature of the racing business, revenue and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. Historically, our revenue is higher in the second quarter with the running of the Kentucky Derby and the Kentucky Oaks.
Big Fish Games
Revenue from our Big Fish Games, Inc. ("Big Fish Games") segment also has a seasonal component and is typically lower during the summer months.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. This new standard provides clarity about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting for stock compensation expense. The guidance will become effective in 2018. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This new guidance simplifies the accounting for goodwill impairments by removing step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. The new guidance is effective in 2020 with early adoption permitted for any goodwill impairment test performed between January 1, 2017 and January 1, 2020. We are currently evaluating the timing of adoption and impact of the new accounting guidance on our financial statements and related disclosures.

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will become effective in 2018. We will assess the impact of the new accounting guidance as necessary for future transactions.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires that the statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash. Entities will also be required to reconcile to the balance sheet and disclose the nature of the restrictions. The guidance will become effective in 2018. While we are continuing to assess all potential impacts of the standard, we believe the most significant impact relates to the presentation of our statement of cash flows where we will be required to reconcile to total cash, cash equivalents, and restricted cash. Currently, our statement of cash flows reconciles to total cash and cash equivalents.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance will become effective in 2018. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The guidance will become effective in 2020. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 will be effective in our first quarter of fiscal 2019 on a modified retrospective basis and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02, and we currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance will become effective in 2018 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. During 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients; each of which clarified the guidance on certain items such as reporting revenue gross versus net and presentation of sales tax, among other things.
While we are continuing to assess all potential impacts of the new standard under ASU No. 2014-09, we have identified a few areas of impact at this time. The first area is significant and relates to our accounting for breakage revenue for our outstanding premium game club credits for Big Fish Games. Currently, we record breakage revenue for our outstanding premium game credits for Big Fish Games when the credits have legally expired. Under the new standard, we will be required to recognize the expected breakage related to our outstanding premium game club credits as revenue in proportion to the pattern of game club credits redeemed by our customers. The second area relates to our accounting for loyalty points under our various rewards programs which are earned by our customers at our casinos. Our accumulated loyalty points are redeemable for free complimentaries, including gaming play and food and beverage. The estimated liability for unredeemed points is currently accrued based on expected redemption rates and the estimated costs of the services or merchandise to be provided. Under the new standard, we will defer the standalone selling price of the complimentaries until the future revenue transaction occurs. Although the exact amount of the increase to our point liabilities has not yet been determined, we do not anticipate it will have a significant impact on our earnings. In addition to the impact on loyalty points at our casinos, the new standard will impact all gaming transactions that contain multiple performance obligations, such as certain benefits provided under our rewards programs. Specifically, we will defer revenue based on standalone selling prices and recognize the revenue as each of those performance obligations are fulfilled. We are continuing to assess the significance of this impact on our operations.
Due to the change in our accounting related to breakage revenue for Big Fish Games, we anticipate the standard under ASU No. 2014-09 may have a material impact on our consolidated financial statements. At this time, we expect to adopt this new standard using the modified retrospective method on January 1, 2018.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


3. ACQUISITIONS
On April 24, 2017, we completed the acquisition of certain assets of BAM Software and Services, LLC ("BetAmerica"), which has not had a material impact on our results of operations, financial condition or cash flows. The results of operations and financial condition of BetAmerica have been included in our Condensed Consolidated Financial Statements from the acquisition date. The pro forma financial information assuming the acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.
4. RECEIVABLE FROM ESCROW
On November 8, 2016, we established a $14.0 million qualified intermediary trust with a portion of the proceeds from the sale of excess land at Calder Race Course ("Calder") that was used to purchase previously identified real property within six months post- closing. We utilized the entire escrow amount, resulting in a zero balance at September 30, 2017, compared to our $13.6 million from the qualified intermediary trust at December 31, 2016.
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Ocean Downs
In August 2016, we signed a limited liability company operating agreement with Saratoga Casino Holdings LLC ("SCH"), with each entity having a 50% interest, and formed Old Bay Gaming and Racing LLC ("Old Bay"). The Old Bay agreement provides both the Company and SCH equal participating rights, and both entities must consent to Old Bay's operating, investing and financing decisions.
On January 3, 2017, Old Bay acquired all of the equity interests of Ocean Enterprise 589 LLC, Ocean Downs LLC and Racing Services LLC (collectively, "Ocean Downs"). The Company's portion of the initial equity investment in Ocean Downs was $24.0 million. Ocean Downs, located near Ocean City, Maryland, owns and operates video lottery terminals ("VLT") at the Casino at Oceans Downs and conducts harness racing at Ocean Downs Racetrack. The Company's 25% interest in SCH provides an additional 12.5% interest, resulting in an effective 62.5% interest in Ocean Downs. Since both the Company and SCH have participating rights and both must consent to Old Bay's operating, investing and financing decisions, the Company accounts for Ocean Downs using the equity method of accounting.
Miami Valley Gaming
We have a 50% joint venture in Miami Valley Gaming ("MVG"), which has a harness racetrack and VLT gaming facility in Lebanon, Ohio, with Delaware North Companies Gaming & Entertainment Inc.
Summarized below is financial information for our MVG equity investment:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Casino revenue
$
38.4

 
$
36.1

 
$
117.9

 
$
108.7

Non-casino revenue
1.2

 
1.2

 
5.1

 
5.2

Net revenue
39.6

 
37.3

 
123.0

 
113.9

Operating and SG&A expense
28.1

 
26.4

 
85.7

 
79.7

Depreciation & amortization
3.2

 
3.4

 
9.5

 
9.9

Operating income
8.3

 
7.5

 
27.8

 
24.3

Interest and other expense, net
(0.6
)
 
(0.8
)
 
(1.9
)
 
(2.6
)
Net income
$
7.7

 
$
6.7

 
$
25.9

 
$
21.7


9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(in millions)
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets
$
16.5

 
$
18.7

Property and equipment, net
104.6

 
109.8

Other assets, net
107.7

 
105.0

Total assets
$
228.8

 
$
233.5

 
 
 
 
Liabilities and Members' Equity
 
 
 
Current liabilities
$
9.0

 
$
12.5

Current portion of long-term debt
8.3

 
8.3

Long-term debt, excluding current portion
8.9

 
14.0

Other liabilities
0.1

 
0.1

Members' equity
202.5

 
198.6

Total liabilities and members' equity
$
228.8

 
$
233.5

Our Condensed Consolidated Statements of Comprehensive Income include our 50% share of MVG's results as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Equity in income of unconsolidated investments
$
3.8

 
$
3.4

 
$
12.9

 
$
10.9

6. GOODWILL AND OTHER INTANGIBLE ASSETS
We performed our annual goodwill and indefinite-lived intangible impairment analysis for 2017 in accordance with ASU No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment, and ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, as of March 31, 2017 and again as of April 1, 2017, and no adjustment to the carrying value of goodwill or indefinite-lived intangible assets was required. We assessed goodwill and indefinite-lived intangible assets by performing step one fair value calculations on a quantitative basis for each reporting unit and indefinite-lived intangible asset. We concluded that the fair values of our reporting units and indefinite-lived intangible assets exceeded their carrying value and therefore step two of the assessment was not required.
During 2017, the Company changed its annual goodwill and indefinite-lived impairment testing date from March 31 to April 1 of each year. As a result, the annual impairment tests were performed as of March 31, 2017 and April 1, 2017. The change was made to better align with our forecasting process and to provide the Company with additional time to complete its annual goodwill and indefinite-lived intangible impairment testing in advance of its quarterly reporting. The Company believes this change in measurement date, which represents a change in method of applying an accounting principle, is preferable under the circumstances. We believe the resulting change in accounting principle related to changing the annual impairment testing date will not delay, accelerate, or avoid an impairment charge.
Goodwill is comprised of the following:
(in millions)
Racing
 
Casinos
 
TwinSpires
 
Big Fish Games
 
Total
Balances as of December 31, 2016
$
51.7

 
$
117.6

 
$
132.1

 
$
530.8

 
$
832.2

Additions

 

 
16.1

 

 
16.1

Balances as of September 30, 2017
$
51.7

 
$
117.6

 
$
148.2

 
$
530.8

 
$
848.3

In 2017, we established goodwill of $16.1 million related to the BetAmerica acquisition.

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Other intangible assets are comprised of the following:
 
September 30, 2017
 
December 31, 2016
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Definite-lived intangible assets
$
180.4

 
$
(113.3
)
 
$
67.1

 
$
187.4

 
$
(100.0
)
 
$
87.4

Indefinite-lived intangible assets
 
 
 
 
358.3

 
 
 
 
 
358.3

Total


 


 
$
425.4

 
 
 
 
 
$
445.7

In 2017, we reduced our customer relationships intangible asset and accumulated amortization for TwinSpires by $15.1 million as the amounts were fully amortized. Finally, we established definite-lived intangible assets of $8.1 million related to the BetAmerica acquisition.
7. INCOME TAXES
The Company’s income tax rate for the three and nine months ended September 30, 2017 was higher than the U.S. federal statutory rate of 35.0% primarily due to state income taxes and certain expenses that are not deductible for the purposes of income taxes, partially offset by benefits from tax credits, the manufacturing deduction, and tax deductions from vesting of restricted stock units in excess of the book deductions.
The Company's income tax rate for the three months ended September 30, 2016 was higher than the U.S. federal statutory rate of 35.0% primarily due to state income taxes, certain expenses that are not deductible for the purposes of income taxes and a decrease to the manufacturing deduction, partially offset by benefits from tax credits. The Company’s income tax rate for the nine months ended September 30, 2016 was higher than the U. S federal statutory rate of 35.0% primarily due to state income taxes and certain expenses that are not deductible for the purposes of income taxes, partially offset by benefits from tax credits, the manufacturing deduction, and a $3.1 million tax benefit resulting from tax deductions from vesting restricted stock units in excess of the book deductions that were recognized upon our adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.
8. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following tables present our assets and liabilities measured at fair value on a recurring basis:
 
September 30, 2017
(in millions)
Level 1
 
Level 3
Cash equivalents and restricted cash
$
36.0

 
$

Big Fish Games deferred payments

 
28.3

Big Fish Games earnout liability

 
33.9

Total
$
36.0


$
62.2

 
December 31, 2016
(in millions)
Level 1
 
Level 3
Cash equivalents and restricted cash
$
34.1

 
$

Big Fish Games deferred payments

 
27.8

Big Fish Games earnout liability

 
67.9

Total
$
34.1

 
$
95.7


11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the change in fair value of our Level 3 liabilities:
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in millions)
Big Fish Games Deferred Payments
 
Big Fish Games Earnout Liability
 
Total
Balances as of December 31, 2016
$
27.8

 
$
67.9

 
$
95.7

Payments

 
(34.2
)
 
(34.2
)
Change in fair value
0.5

 
0.2

 
0.7

Balances as of September 30, 2017
$
28.3

 
$
33.9

 
$
62.2

Our cash equivalents and restricted cash, which are held in interest-bearing accounts, qualify for Level 1 in the fair value hierarchy which includes unadjusted quoted market prices in active markets for identical assets.
We estimated the fair value of the Big Fish Games deferred payment and earnout liability as of September 30, 2017 using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate of 2.7% based on our cost of debt. The cost of debt was based on the observed market yields of our $600.0 million, 5.375% Senior Unsecured Notes ("Senior Unsecured Notes"), a Level 3 fair value measurement, and was adjusted for the difference in seniority and term of the deferred payments and earnout liability. The increase in fair values of the Big Fish Games deferred payments and earnout liability of $0.7 million during the nine months ended September 30, 2017 was recorded as acquisition-related charges in the Condensed Consolidated Statements of Comprehensive Income. During 2015, Big Fish Games achieved its earnout milestones, and we have made earnout payments of $34.2 million in March 2017 and $281.6 million in March 2016.
We currently have no other assets or liabilities subject to fair value measurement on a recurring basis. Our Senior Unsecured Notes are disclosed at fair value which is based on unadjusted quoted prices for similar liabilities in markets that are not active. The Level 3 fair value of the Senior Unsecured Notes was $620.3 million at September 30, 2017 and $622.5 million at December 31, 2016.
The following methods and assumptions were used in estimating our fair value disclosures for financial instruments:
Cash Equivalents—The carrying amount reported in the balance sheet for cash equivalents approximates our fair value due to the short-term maturity of these instruments.
Long-Term Debt: Fourth Amended and Restated Credit Agreement ("Senior Secured Credit Facility")—The carrying amounts of the borrowings under the Senior Secured Credit Facility approximate fair value, based upon current interest rates and represent a Level 2 fair value measurement.
We did not measure any assets at fair value on a non-recurring basis for 2017 or 2016.
9. SHAREHOLDERS’ EQUITY
On April 25, 2017, the Board of Directors of the Company approved a new common stock repurchase program of up to $250.0 million. The new program replaced the prior $150.0 million program that was authorized in February 2016 and had unused authorization of $114.6 million. The new authorized amount included and was not in addition to any 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. Share repurchases result in the shares being retired, and the cost of the shares acquired are treated as a reduction from common stock and retained earnings. The repurchase program has no time limit and may be suspended or discontinued at any time.
On June 9, 2017, we entered into an agreement with an affiliate of The Duchossois Group, Inc. ("TDG"), a related party, to repurchase 1,000,000 shares of the Company's common stock for $158.78 per share in a privately negotiated transaction. The aggregate purchase price was $158.8 million.
For the nine months ended September 30, 2017, including the repurchase of 1,000,000 shares from TDG, we have repurchased 1,077,029 shares of our common stock under the April 2017 stock repurchase program at a total cost of $171.7 million. We had approximately $78.3 million of repurchase authority remaining under this program at September 30, 2017.
During the nine months ended September 30, 2017, we also repurchased 53,721 shares of our common stock in conjunction with the February 2016 stock repurchase program at a total cost of $7.8 million.

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


10. STOCK-BASED COMPENSATION PLANS
The 2016 Incentive Plan and the 2007 Incentive Plan (collectively "the 2016 and 2007 Plans") permit the award of restricted shares or restricted stock units to directors and key employees, including our officers who are from time to time responsible for the management, growth and protection of our business. Restricted shares granted under the 2016 and 2007 Plans generally vest either in full upon three years from the date of grant, on a pro-rata basis over a three year term or upon retirement at or after age 60. The fair value of restricted shares that vest solely based on continued service under the 2016 and 2007 Plans is determined by the product of the number of shares granted and the grant date market price of our common stock.
On September 22, 2015, the Board of Directors approved the adoption of the Executive Long-Term Incentive Compensation Plan (the "ELTI Plan"), pursuant to which certain named executive officers ("NEOs") and other key executives ("Grantees") may earn variable equity payouts based upon us achieving certain key performance metrics over a specified period. The ELTI Plan was adopted pursuant to 2016 and 2007 Plans, which were previously approved by our shareholders.
2017 Awards
On February 17, 2017, certain NEOs and Grantees received the following:
25,119 restricted stock units to NEOs vesting equally over three service periods ending December 31, 2017, December 31, 2018 and December 31, 2019;
28,467 performance share units ("PSU") to NEOs with vesting contingent on financial performance measures at the end of a 34-month performance period ending December 31, 2019; and
61,530 restricted stock shares to Grantees vesting equally over three service periods ending February 17, 2018, February 17, 2019 and February 17, 2020.
The performance criteria for the 2017 PSU awards are a cumulative Adjusted EBITDA target that was set at the beginning of the plan performance period for the entire three year period, and a cash flow metric that is the aggregate of the cash flow targets for the three individual years that is set annually at the beginning of each year. The cash flow metric is defined as cash flow from operating activities plus distributions of capital from equity investments less capital maintenance expenditures. The Compensation Committee can make adjustments as it may deem appropriate to these metrics. Measurement against these criteria will be determined against a payout curve which provides up to 200% of performance share units based on the original award.
The performance criteria also includes a relative total shareholder return ("TSR") component. Our TSR will be ranked versus the companies in the Russell 2000 index and will be calculated based on our relative placement within the Russell 2000 index. The PSU awards may be adjusted based on the Company’s TSR, by increasing the PSU awards by 25% if the Company’s TSR is in the top quartile, decreasing the PSU awards by 25% if the Company’s TSR is in the bottom quartile, and providing no change to the PSU awards if the Company’s TSR is in the middle two quartiles.
The total compensation cost we will recognize under the PSUs will be determined using the Monte Carlo valuation methodology and will be based upon an equal performance weighting for the two financial measures and then adjusted based on the Company’s TSR performance within the Russell 2000 index. The maximum number of PSUs that can be earned for a performance period is 250% of the original award.
We recognized stock-based compensation expense of $5.8 million for the three months ended September 30, 2017 and $17.5 million for the nine months ended September 30, 2017. We recognized stock-based compensation expense of $4.8 million for the three months ended September 30, 2016 and $14.3 million for the nine months ended September 30, 2016.
11. CONTINGENCIES
We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated.  When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


that such excess would not be material to our consolidated financial condition, results of operations, or cash flows.  Legal fees are expensed as incurred.
If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.
12. NET INCOME PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the net income per common share computations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
2017
 
2016
 
2017
 
2016
Numerator for basic income per common share:
 
 
 
 
 
 
 
Net income
$
16.7

 
$
8.7

 
$
102.3

 
$
81.3

Net income allocated to participating securities

 
(0.1
)
 
(0.1
)
 
(1.4
)
Numerator for basic income per common share
$
16.7

 
$
8.6

 
$
102.2

 
$
79.9

 
 
 
 
 
 
 
 
Numerator for diluted income per common share
$
16.7

 
$
8.7

 
$
102.3

 
$
81.3

 
 
 
 
 
 
 
 
Denominator for basic and diluted net income per common share:
 
 
 
 
 
 
 
Basic-weighted average shares
15.3

 
16.4

 
15.9

 
16.5

Plus dilutive effect of stock awards
0.2

 
0.2

 
0.2

 
0.2

Plus dilutive effect of participating securities

 
0.3

 
0.1

 
0.3

Diluted-adjusted weighted average shares
15.5

 
16.9

 
16.2

 
17.0

 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
Basic
$
1.09

 
$
0.52

 
$
6.43

 
$
4.85

Diluted
$
1.08

 
$
0.52

 
$
6.32

 
$
4.79

13. SEGMENT INFORMATION
We manage our operations through six operating segments:
Racing, which includes Churchill Downs Racetrack ("Churchill Downs"), Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds") and Calder;
Casinos, which includes Oxford Casino ("Oxford"), Riverwalk Casino ("Riverwalk"), Harlow's Casino ("Harlow’s"), Calder Casino, Fair Grounds Slots, Video Services, LLC ("VSI"), 50% of EBITDA from our joint venture, MVG, 50% equity investment in Ocean Downs and 25% of EBITDA from our equity investment, SCH, which includes investments in Saratoga Casino Hotel, Saratoga Casino Black Hawk and Ocean Downs;
TwinSpires, which includes TwinSpires.com, Fair Grounds Account Wagering, Velocity, BetAmerica, Bloodstock Research Information Services, Bluff Media and Churchill Downs Interactive Gaming;
Big Fish Games, which is a global producer and distributor of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices;
Other Investments, which includes United Tote and other minor investments; and
Corporate, which includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocated to our other operating segments.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Eliminations include the elimination of intersegment transactions. We utilize non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA includes the following adjustments:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
Acquisition expense, net which includes:
Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and
Transaction expense, including legal, accounting, and other deal-related expense;
Stock-based compensation expense;
Gain on Calder land sale;
Calder exit costs; and
Other charges and recoveries.
During the fourth quarter of 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue. Effective January 1, 2017, certain revenue previously included in our Corporate segment was deemed by management to be more closely aligned with our TwinSpires segment. The prior year amounts were reclassified to conform to this presentation.
We utilize the Adjusted EBITDA metric because we believe the inclusion or exclusion of certain non-recurring items is necessary to provide a more accurate measure of our core operating results and enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with U.S. GAAP. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying Consolidated Statements of Comprehensive Income.
The tables below present net revenue from external customers and intercompany revenue from each of our operating segments, Adjusted EBITDA by segment and reconciles Comprehensive Income to Adjusted EBITDA:

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Net revenue from external customers:
 
 
 
 
 
 
 
Racing:
 
 
 
 
 
 
 
Churchill Downs
$
8.1

 
$
8.7

 
$
147.1

 
$
140.1

Arlington
25.0

 
24.0

 
51.5

 
49.8

Fair Grounds
5.0

 
5.1

 
27.5

 
28.9

Calder
0.7

 
0.7

 
1.9

 
2.0

Total Racing
38.8

 
38.5

 
228.0

 
220.8

Casinos:
 
 
 
 
 
 
 
Oxford Casino
25.2

 
24.4

 
69.2

 
65.4

Riverwalk Casino
12.2

 
10.6

 
35.7

 
35.7

Harlow’s Casino
12.3

 
11.7

 
38.3

 
36.6

Calder Casino
19.4

 
19.0

 
62.6

 
59.8

Fair Grounds Slots
8.7

 
8.5

 
27.7

 
27.9

VSI
9.3

 
8.6

 
28.8

 
27.9

Saratoga
0.4

 
0.2

 
1.0

 
0.6

Total Casinos
87.5

 
83.0

 
263.3

 
253.9

TwinSpires
65.9

 
55.1

 
198.4

 
173.1

Big Fish Games:
 
 
 
 
 
 
 
Social casino
53.4

 
44.3

 
149.1

 
138.3

Casual and mid-core free-to-play
46.1

 
56.1

 
135.3

 
162.5

Premium
18.4

 
21.9

 
58.1

 
68.8

Total Big Fish Games
117.9

 
122.3

 
342.5

 
369.6

Other Investments
4.7

 
4.5

 
14.0

 
12.9

Net revenue from external customers
$
314.8

 
$
303.4

 
$
1,046.2

 
$
1,030.3


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Intercompany net revenue:
 
 
 
 
 
 
 
Racing:
 
 
 
 
 
 
 
Churchill Downs
$
0.9

 
$
0.9

 
$
9.6

 
$
8.2

Arlington
2.2

 
1.9

 
5.1

 
4.5

Fair Grounds

 

 
1.0

 
1.0

Total Racing
3.1

 
2.8

 
15.7

 
13.7

TwinSpires
0.2

 
0.4

 
0.8

 
1.0

Other Investments
1.0

 
0.7

 
3.7

 
3.0

Eliminations
(4.3
)
 
(3.9
)
 
(20.2
)
 
(17.7
)
Intercompany net revenue
$

 
$

 
$

 
$


16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Adjusted EBITDA by segment is comprised of the following:
 
Three Months Ended September 30, 2017
(in millions)
Racing
 
Casinos
 
TwinSpires
 
Big Fish
Games
 
Other Investments
 
Corporate
Net revenue
$
41.9

 
$
87.5

 
$
66.1

 
$
117.9

 
$
5.7

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Taxes & purses
(11.2
)
 
(28.9
)
 
(4.5
)
 

 

 

Platform & development fees

 

 

 
(42.1
)
 

 

Marketing & advertising
(1.0
)
 
(3.1
)
 
(1.1
)
 
(31.8
)
 

 

Salaries & benefits
(10.3
)
 
(13.5
)
 
(2.3
)
 
(6.8
)
 
(2.9
)
 

Content expense
(3.8
)
 

 
(30.9
)
 

 

 

SG&A expense
(3.9
)
 
(5.5
)
 
(3.2
)
 
(5.3
)
 
(0.8
)
 
(2.2
)
Research & development

 

 

 
(9.7
)
 

 

Other operating expense
(10.1
)
 
(9.8
)
 
(5.3
)
 
(4.0
)
 
(1.1
)
 
0.1

Other income (expense)
0.1

 
12.8

 

 
(1.2
)
 
0.2

 

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
1.7

 
$
39.5

 
$
18.8

 
$
17.0

 
$
1.1

 
$
(2.1
)

 
Three Months Ended September 30, 2016
(in millions)
Racing
 
Casinos
 
TwinSpires
 
Big Fish
Games
 
Other Investments
 
Corporate
Net revenue
$
41.3

 
$
83.0

 
$
55.5

 
$
122.3

 
$
5.2

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Taxes & purses
(11.2
)
 
(28.1
)
 
(4.0
)
 

 

 

Platform & development fees

 

 

 
(45.2
)
 

 

Marketing & advertising
(1.1
)
 
(3.0
)
 
(1.0
)
 
(26.3
)
 

 

Salaries & benefits
(10.3
)
 
(13.4
)
 
(2.3
)
 
(6.2
)
 
(2.7
)
 

Content expense
(3.9
)
 

 
(26.0
)
 

 

 

SG&A expense
(4.0
)
 
(5.4
)
 
(3.0
)
 
(4.4
)
 
(0.9
)
 
(2.2
)
Research & development

 

 

 
(8.8
)
 

 

Other operating expense
(10.5
)
 
(10.0
)
 
(4.5
)
 
(3.9
)
 
(0.9
)
 
(0.2
)
Other income (expense)
0.1

 
7.3

 

 
(0.3
)
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
0.4


$
30.4

 
$
14.7

 
$
27.2

 
$
0.8


$
(2.4
)


17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Nine Months Ended September 30, 2017
(in millions)
Racing
 
Casinos
 
TwinSpires
 
Big Fish
Games
 
Other Investments
 
Corporate
Net revenue
$
243.7

 
$
263.3

 
$
199.2

 
$
342.5

 
$
17.7

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Taxes & purses
(54.3
)
 
(87.7
)
 
(11.6
)
 

 

 

Platform & development fees

 

 

 
(124.0
)
 

 

Marketing & advertising
(3.9
)
 
(9.1
)
 
(6.7
)
 
(84.3
)
 

 

Salaries & benefits
(32.4
)
 
(40.0
)
 
(7.1
)
 
(20.7
)
 
(9.1
)
 

Content expense
(11.7
)
 

 
(96.5
)
 

 

 

SG&A expense
(11.9
)
 
(16.3
)
 
(8.9
)
 
(15.1
)
 
(2.3
)
 
(6.2
)
Research & development

 

 

 
(29.9
)
 

 

Other operating expense
(39.4
)
 
(31.0
)
 
(17.1
)
 
(11.3
)
 
(3.6
)
 
(0.4
)
Other income (expense)
0.6

 
33.1

 

 
(1.6
)
 
0.3

 

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
90.7

 
$
112.3

 
$
51.3

 
$
55.6

 
$
3.0

 
$
(6.6
)

 
Nine Months Ended September 30, 2016
(in millions)
Racing
 
Casinos
 
TwinSpires
 
Big Fish
Games
 
Other Investments
 
Corporate
Net revenue
$
234.5

 
$
253.9

 
$
174.1

 
$
369.6

 
$
15.9

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Taxes & purses
(52.7
)
 
(84.6
)
 
(8.8
)
 

 

 

Platform & development fees

 

 

 
(135.2
)
 

 

Marketing & advertising
(3.8
)
 
(9.5
)
 
(5.2
)
 
(106.2
)
 

 

Salaries & benefits
(31.4
)
 
(38.2
)
 
(6.9
)
 
(18.4
)
 
(8.2
)
 

Content expense
(12.0
)
 

 
(83.4
)
 

 

 

SG&A expense
(11.9
)
 
(15.8
)
 
(8.6
)
 
(13.6
)
 
(2.5
)
 
(6.2
)
Research & development

 

 

 
(29.3
)
 

 

Other operating expense
(38.8
)
 
(29.4
)
 
(15.6
)
 
(11.8
)
 
(2.6
)
 
(0.5
)
Other income (expense)
0.4

 
21.6

 

 
(1.2
)
 
0.3

 

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
84.3

 
$
98.0

 
$
45.6

 
$
53.9

 
$
2.9

 
$
(6.7
)

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Reconciliation of Comprehensive Income to Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
17.3

 
$
8.7

 
$
102.5

 
$
81.5

Foreign currency translation, net of tax
(0.5
)
 

 
(0.1
)
 
(0.2
)
Change in pension benefits, net of tax
(0.1
)
 

 
(0.1
)
 

Net income
16.7

 
8.7

 
102.3

 
81.3

Additions:
 
 
 
 
 
 
 
Depreciation and amortization
24.0

 
27.5

 
73.3

 
81.4

Interest expense
12.6

 
11.1

 
36.0

 
32.8

Income tax provision
11.6

 
11.7

 
63.6

 
49.6

EBITDA
64.9

 
59.0

 
275.2

 
245.1

 
 
 
 
 
 
 
 
Adjustments to EBITDA:
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Stock-based compensation expense
5.8

 
4.9

 
17.5

 
14.3

Other charges
0.4

 
3.1

 
0.5

 
3.4

Other income, expense:
 
 
 
 
 
 
 
Interest, depreciation and amortization expense related to equity investments
4.0

 
2.5

 
10.6

 
7.5

Other charges and recoveries, net

 

 

 
0.4

Acquisition expense, net
0.7

 
1.1

 
1.7

 
4.9

Calder exit costs
0.2

 
0.5

 
0.8

 
2.4

Total adjustments to EBITDA
11.1

 
12.1

 
31.1

 
32.9

Adjusted EBITDA
$
76.0

 
$
71.1

 
$
306.3

 
$
278.0

 
 
 
 
 
 
 
 
Adjusted EBITDA by segment:
 
 
 
 
 
 
 
Racing
$
1.7

 
$
0.4

 
$
90.7

 
$
84.3

Casinos
39.5

 
30.4

 
112.3

 
98.0

TwinSpires
18.8

 
14.7

 
51.3

 
45.6

Big Fish Games
17.0

 
27.2

 
55.6

 
53.9

Other Investments
1.1

 
0.8

 
3.0

 
2.9

Corporate
(2.1
)
 
(2.4
)
 
(6.6
)
 
(6.7
)
Adjusted EBITDA
$
76.0

 
$
71.1

 
$
306.3

 
$
278.0

The table below presents information about equity in income (losses) of unconsolidated investments included in our reported segments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Casinos
$
8.7

 
$
4.8

 
$
22.5

 
$
13.6

Other Investments
0.2

 
0.1

 
0.2

 
(0.1
)
 
$
8.9

 
$
4.9

 
$
22.7

 
$
13.5


19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The table below presents total asset information for each of our operating segments:
(in millions)
September 30, 2017
 
December 31, 2016
Total assets:
 
 
 
Racing
$
463.7

 
$
454.6

Casinos
675.1

 
628.7

TwinSpires
213.0

 
209.9

Big Fish Games
902.8

 
893.8

Other Investments
11.9

 
11.1

Corporate
60.9

 
56.3

 
$
2,327.4

 
$
2,254.4

The table below presents total capital expenditures for each of our operating segments:
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
Capital expenditures:
 
 
 
Racing
$
47.8

 
$
23.4

Casinos
26.0

 
9.7

TwinSpires
7.3

 
5.4

Big Fish Games
5.6

 
3.6

Other Investments
1.3

 
0.8

Corporate
1.1

 
1.2

 
$
89.1

 
$
44.1

14. SUBSEQUENT EVENT
On October 24, 2017, the Company's Board of Directors declared an annual cash dividend of $1.52 per share, to be paid on January 5, 2018, to all shareholders of record on December 1, 2017.

20


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information set forth in this discussion and analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q 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 the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "seek," "should," "will," and similar words, although some forward-looking statements are expressed differently.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from expectations include the following: the effect of economic conditions on our consumers' confidence and discretionary spending or our access to credit; additional or increased taxes and fees; public perceptions or lack of confidence in the integrity of our business; loss of key or highly skilled personnel; restrictions in our debt facilities limiting our flexibility to operate our business; general risks related to real estate ownership, including fluctuations in market values and environmental regulations; catastrophic events and system failures disrupting our operations, including the impact of natural and other disasters on our operations and our ability to obtain insurance recoveries in respect of such losses; inability to identify and complete acquisition, expansion or divestiture projects on time, on budget or as planned; difficulty in integrating recent or future acquisitions into our operations; legalization of online real money gaming in the United States, and our ability to capitalize on and predict such legalization; inability to respond to rapid technological changes in a timely manner; inadvertent infringement of the intellectual property of others; inability to protect our own intellectual property rights; security breaches and other security risks related to our technology, personal information, source code and other proprietary information, including failure to comply with regulations and other legal obligations relating to receiving, processing, storing and using personal information; payment-related risks, such as chargebacks for fraudulent credit card use; compliance with the Foreign Corrupt Practices Act or applicable money-laundering regulations; work stoppages and labor issues; difficulty in attracting a sufficient number of horses and trainers for full field horseraces; inability to negotiate agreements with industry constituents, including horsemen and other racetracks; personal injury litigation related to injuries occurring at our racetracks; the inability of our totalisator company, United Tote, to maintain its processes accurately, keep its technology current or maintain its significant customers; weather conditions affecting our ability to conduct live racing; increased competition in the horseracing business; changes in the regulatory environment of our racing operations; declining popularity in horseracing; seasonal fluctuations in our horseracing business due to geographic concentration of our operations; increased competition in our casino business; changes in regulatory environment of our casino business; development and expansion of casinos is costly and susceptible to delays, cost overruns and other uncertainties; concentration and evolution of slot machine manufacturing and other technology conditions that could impose additional costs; impact of further legislation prohibiting tobacco smoking; geographic concentration of our casino business; changes in regulatory environment for our advanced deposit wagering business; increase in competition in the advanced deposit wagering business; inability to retain current customers or attract new customers to our advanced deposit wagering business; uncertainty and changes in the legal landscape relating to our advanced deposit wagering business; failure to comply with laws requiring us to block access to certain individuals could result in penalties or impairment in our ability to offer advanced deposit wagering; operating in an evolving and highly competitive market related to Big Fish Games; inability to maintain relationships with third party mobile platforms related to Big Fish Games; failure to develop and publish mobile games that achieve market acceptance; inability to secure new or ongoing content from third party development partners on favorable terms; programming errors or flaws or other technical difficulties, diminishing our customers’ experience; "cheating" programs, scam offers, black-markets and other actions by third parties that seek to exploit our games and players may affect our reputation and harm our operating results; slower than expected growth in use of smartphone and tablet devices to facilitate game platforms; and financial volatility quarter-to-quarter relating to Big Fish Games.
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, 2016, 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.

21


Our Business
Executive Overview
We are an industry-leading racing, gaming and online entertainment company anchored by our iconic flagship event - The Kentucky Derby. We are a leader in brick-and-mortar casino gaming with approximately 9,910 gaming positions in eight states, and we are the largest, legal online account wagering platform for horseracing in the U.S. We are also one of the world's largest producers and distributors of mobile games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
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 condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. 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, U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.
During the fourth quarter of 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue. Effective January 1, 2017, certain revenue previously included in our Corporate segment was deemed by management to be more closely aligned with our TwinSpires segment. The prior year amounts were reclassified to conform to this presentation.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
Acquisition expense, net which includes:
Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and
Transaction expense, including legal, accounting and other deal-related expense;
Stock-based compensation expense;
Gain on Calder land sale;
Calder exit costs; and
Other charges and recoveries.
For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying Condensed Consolidated Statements of Comprehensive Income. Refer to the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information.
Our Operations
We manage our operations through six operating segments: Racing, Casinos, TwinSpires, Big Fish Games, Other Investments and Corporate.
Racing Segment
Our Racing segment includes our four racetracks: Churchill Downs Racetrack ("Churchill Downs"), Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds") and Calder Race Course ("Calder"). We conduct live horseracing at Churchill Downs, Arlington and Fair Grounds. On July 1, 2014, we entered into a racing services agreement with The Stronach Group ("TSG") to allow Gulfstream Park to manage and operate Calder through December 31, 2020. We conducted 57 live thoroughbred race days in the third quarter of 2017 and 60 live thoroughbred race days in the third quarter of 2016. For the nine months ended September 30, 2017, we conducted 176 live thoroughbred racing days, which compares to 175 live thoroughbred racing days during the nine months ended September 30, 2016.
Casinos Segment
We are also a provider of brick-and-mortar real-money casino gaming with approximately 9,910 gaming positions located in eight states. We own five casinos: Oxford Casino ("Oxford"), Riverwalk Casino ("Riverwalk"), Harlow's Casino ("Harlow’s"), Calder

22


Casino, and Fair Grounds Slots, in addition to two hotels (Riverwalk and Harlow’s). We expect the Oxford hotel to open in mid-November 2017. We also own Video Services, LLC ("VSI") associated with our Fair Grounds property. In addition, we have a 50% equity investment in Miami Valley Gaming ("MVG"), a 25% equity investment in Saratoga Casino Holdings LLC ("SCH") and an effective 62.5% equity investment in Ocean Downs. Our casino revenue is primarily generated from slot machines, video poker and table games while ancillary revenue includes hotel and food and beverage sales.
TwinSpires Segment
Our TwinSpires segment includes TwinSpires.com, Fair Grounds Account Wagering ("FAW"), Velocity, Churchill Downs Interactive Gaming, Bluff Media and Bloodstock Research Information Services. On April 24, 2017, we completed the acquisition of certain assets of BAM Software and Services, LLC ("BetAmerica"), which is included in our TwinSpires segment.
Big Fish Games Segment
Big Fish Games, Inc. ("Big Fish Games") is a global producer and distributor of social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac and mobile devices.
Other Investments Segment
Our Other Investments Segment includes United Tote and our other minor investments.
In June 2017, we announced Churchill Downs is investing approximately $60.0 million to construct an 85,000 square-foot, state-of-the-art historical racing machine facility in Louisville, Kentucky.
In September 2017, we announced a partnership with Keeneland Association, Inc. to propose the construction of two new racing facilities to be located in Corbin, Kentucky and Oak Grove, Kentucky. The proposed facilities will feature live horse racing and historical racing machines.
Corporate Segment
Our Corporate segment includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocated to our other operating segments.
Government Regulations and Potential 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 racing operations, our casino operations, TwinSpires and Big Fish Games 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 segments are also subject to legislative actions at both the federal and state level. The following update on 2017 regulatory and legislative activities should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, including Part I - Item 1, "Business," for a discussion of regulatory and legislative issues.
Federal Regulations
In September 2017, the U.S. Treasury Department and the Internal Revenue Service ("IRS") announced modernized regulations regarding withholding and reporting of pari-mutuel proceeds. Specifically, under the new regulations, when determining an amount to be reported or withheld for taxes, the IRS will consider a bettor’s entire investment in a single pari-mutuel pool instead of only the amount wagered on a winning result. The regulations will go into full effect no later than November 14, 2017. Advance deposit wagering operators, tote companies and racetracks will have 45 days to implement the new regulations after the effective date, with early implementation permitted. We believe the new regulations will have a positive impact on our business.
Specific State Casino Regulations and Potential Legislative Changes
Maryland
In April 2017, Maryland's Governor signed a law allowing casinos in Allegany and Worcester counties to qualify for a 10% gaming tax reduction on slot machine revenue effective July 1, 2017. In order to qualify for the gaming tax reduction, casinos must purchase or acquire the right to lease all of their video lottery terminals ("VLT") prior to January 1, 2019. As of August 1, 2017, we purchased or acquired the right to lease all of our VLTs and have realized an effective 10% gaming tax reduction from August 1, 2017 forward under this new law.
Under pre-April 2017 Maryland law, Ocean Downs would be required to spend $1.5 million on racing-related capital maintenance and expenditures in order to qualify for a matching grant from the state. In April 2017, legislation was signed into law to lower the minimum threshold to qualify for matching state funds to $0.3 million. We believe the legislation will have a positive impact on our business.
Also in April 2017, legislation was signed into law to allow a VLT licensee to reduce the following day's proceeds for the amount of money returned to players that exceeds the amount bet through VLT's or table games on a given day, thereby reducing the taxes owed by the VLT licensee. We believe the legislation will have a positive impact on our business.

23


New York
In June 2017, the New York legislature passed a bill that will allow Saratoga Casino Hotel to be eligible to use up to 4% of net winnings for capital improvement projects at the facility. The money must be used solely for capital projects that will improve the facility and attract customers. The capital projects must be approved by the lottery and the gaming commission. The bill was signed by the Governor and we believe it will have a positive material impact on our business.
Specific State TwinSpires Regulations and Potential Legislative Changes
Pennsylvania
On October 30, 2017, the Governor signed legislation (gaming bill HB 271) that will expand gaming in the state. Under the terms of the legislation, previous statutory language which provided each Pennsylvania racetrack a local monopoly over all telephone or Internet wagers on horse racing from Pennsylvania residents located within a 35 mile radius of such racetrack was removed. The legislation also lowered the initial license fee for ADW operators from $500,000 to $50,000 and lowered the annual ongoing license fee from $100,000 to $10,000.
The legislation also authorized interactive gaming. Under the terms of the legislation, Category 1, 2 and 3 casino licensees qualify for an interactive gaming license. Three categories of interactive gaming licenses are available: poker, slot and table games. Each casino licensee has the opportunity to receive any or all of the three categories of licenses for an initial period of five years. If a casino licensee applies for an interactive gaming license within the first ninety days, the casino must apply for all three categories of licenses for a total fee of $10 million. If a casino applies during the ninety to one hundred and twenty day time period, the casino may apply for one or more categories of licenses for a fee of $4 million each. If at the end of the one hundred and twenty day period, there are remaining interactive gaming licenses, a qualified gaming entity licensed in any jurisdiction may apply for one or more of the available licenses. A tax rate of 52% of gross interactive gaming revenue (“GIGR”) on slots and 14% of GIGR on poker and table games is established. There is an additional 2% tax of daily GIGR for local revenue share payments.
We believe this legislation may have a positive impact on business operations.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net revenue
$
314.8

 
$
303.4

 
$
11.4

 
$
1,046.2

 
$
1,030.3

 
$
15.9

Operating income
33.0

 
26.8

 
6.2

 
180.0

 
150.5

 
29.5

Operating income margin
10
%
 
9
%
 
 
 
17
%
 
15
%
 
 
Net income
$
16.7

 
$
8.7

 
$
8.0

 
$
102.3

 
$
81.3

 
$
21.0

Adjusted EBITDA
76.0

 
71.1

 
4.9

 
306.3

 
278.0

 
28.3

Three Months Ended September 30, 2017, Compared to Three Months Ended September 30, 2016
Our net revenue increased $11.4 million driven by a $10.8 million increase from TwinSpires due to a 23.9% increase in active players and 20.6% increase in handle, a $4.5 million increase from Casinos primarily from successful marketing and promotional activities, and a $0.5 million combined increase from Racing and Other Investments. Partially offsetting the increases was a $4.4 million decrease from Big Fish Games primarily due to a decline in casual and mid-core free-to-play games.
Our operating income increased $6.2 million driven by a $5.2 million increase from Casinos primarily driven by the increase in net revenue from successful marketing and promotional activities, a $4.8 million increase from TwinSpires due to the increase in active players and increase in handle, a $1.0 million increase in Racing driven by the successful Arlington meet and a $0.3 million increase from other sources. Partially offsetting these increases was a $5.1 million decrease from Big Fish Games primarily driven by a decline in net revenue and increase in user acquisition expense.
Our net income increased $8.0 million driven by a $6.2 million increase in operating income, a $4.0 million increase in income from our equity investments, and a $0.1 million increase from other sources. Partially offsetting these increases were a $1.5 million increase in interest expense associated with higher outstanding debt balances and a $0.8 million increase in other expense related to unfavorable foreign exchange rates at Big Fish Games.
Our Adjusted EBITDA increased $4.9 million driven by a $9.1 million increase from Casinos primarily due to our unconsolidated investments and organic growth at certain properties, a $4.1 million increase at TwinSpires driven by the increase in active players and increase in handle, a $1.3 million increase in Racing driven by favorable insurance reserve

24


adjustments at Fairgrounds and successful Arlington meet, and a $0.6 million increase from other sources. Partially offsetting these increases was a $10.2 million decrease from Big Fish Games resulting from an increase in user acquisition expense and an increase in operating expenses.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016
Our net revenue increased $15.9 million driven by a $25.3 million increase from TwinSpires due to a 34.5% increase in active players and 16.4% increase in handle, a $9.4 million increase from Casinos due to successful marketing and promotional activities, a $7.2 million increase in Racing primarily due to a strong Kentucky Derby and Oaks week performance, and a $1.1 million increase from Other Investments. Partially offsetting these increases was a $27.1 million decrease from Big Fish Games primarily due to the decline in casual and mid-core free-to-play games.
Our operating income increased $29.5 million driven by a $10.9 million increase from Big Fish Games primarily from a decrease in user acquisition expense, a $7.5 million increase in TwinSpires driven by the increase in active players and increase in handle, a $6.7 million increase from Casinos due to organic growth at certain properties, a $3.2 million decrease in acquisition expense driven by non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders, a $2.9 million increase in Racing due to a strong Kentucky Derby and Oaks week performance, and a $1.6 million decrease in Calder exit costs. Partially offsetting these expenses were a $2.3 million increase in selling, general and administrative expense primarily driven by stock-based compensation, a $0.6 million increase in research and development expense and a $0.4 million increase from other sources.
Our net income increased $21.0 million driven by a $29.5 million increase in operating income and a $9.2 million increase in income from our equity investments. Partially offsetting these increases were a $14.0 million increase in our income tax provision primarily from higher income from our segments and unconsolidated investments, a $3.2 million increase in interest expense associated with higher outstanding debt balances and $0.5 million of other expense related to unfavorable foreign exchange rates at Big Fish Games.
Our Adjusted EBITDA increased $28.3 million driven by a $14.3 million increase in Casinos due to our unconsolidated investments and organic growth at certain properties, a $6.4 million increase from Racing driven by a strong Kentucky Derby and Oaks week performance, a $5.7 million increase from TwinSpires due to an increase in active players and increase in handle, a $1.7 million increase from Big Fish Games primarily due to a decrease in user acquisition expense, and $0.2 million from other sources.

25


Financial Results by Segment
Net Revenue by Segment
The following table presents net revenue for our operating segments, including intercompany revenue:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Racing:
 
 
 
 


 
 
 
 
 
 
Churchill Downs
$
9.0

 
$
9.6

 
$
(0.6
)
 
$
156.7

 
$
148.3

 
$
8.4

Arlington
27.2

 
25.9

 
1.3

 
56.6

 
54.3

 
2.3

Fair Grounds
5.0

 
5.1

 
(0.1
)
 
28.5

 
29.9

 
(1.4
)
Calder
0.7