SEC Filing | Churchill Downs, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019



☐	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

Churchill Downs Incorporated

(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
(Address of Principal Executive Offices)			(Zip Code)

(502)-636-4400

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	CHDN	The Nasdaq Stock Market LLC

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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 ☒

The number of shares outstanding of registrant’s common stock at July 17, 2019 was 40,036,377 shares.

CHURCHILL DOWNS INCORPORATED

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2019



	Part I-FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	3
	Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	4
	Condensed Consolidated Statements of Shareholders' Equity for the three and six months ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

	Part II-OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
	Signatures	53



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	2


PART I.	FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per common share data)	2019			2018			2019			2018
Net revenue:
Churchill Downs	$	182.2		$	154.9		$	203.2		$	156.9
Online Wagering	95.6			93.7			158.7			156.9
Gaming	177.6			108.1			346.4			219.6
All Other	22.0			22.7			34.5			35.3
Total net revenue	477.4			379.4			742.8			568.7
Operating expense:
Churchill Downs	73.6			58.0			97.0			67.9
Online Wagering	62.0			59.5			107.1			103.5
Gaming	133.2			78.1			258.2			157.7
All Other	21.5			22.0			37.0			38.3
Selling, general and administrative expense	30.1			23.1			55.0			41.5
Transaction expense, net	0.6			2.1			4.1			3.5
Total operating expense	321.0			242.8			558.4			412.4
Operating income	156.4			136.6			184.4			156.3
Other income (expense):
Interest expense, net	(19.4		)	(9.7		)	(33.1		)	(19.3		)
Equity in income of unconsolidated affiliates	9.5			8.8			13.6			15.3
Miscellaneous, net	0.4			0.3			0.4			0.4
Total other expense	(9.5		)	(0.6		)	(19.1		)	(3.6		)
Income from continuing operations before provision for income taxes	146.9			136.0			165.3			152.7
Income tax provision	(38.6		)	(32.8		)	(45.1		)	(35.4		)
Income from continuing operations, net of tax	108.3			103.2			120.2			117.3
(Loss) income from discontinued operations, net of tax	(1.2		)	(0.1		)	(1.5		)	167.8
Net income	$	107.1		$	103.1		$	118.7		$	285.1

Net income (loss) per common share data - basic:
Continuing operations	$	2.69		$	2.54		$	2.99		$	2.80
Discontinued operations	$	(0.03	)	$	—		$	(0.04	)	$	3.99
Net income per common share data - basic	$	2.66		$	2.54		$	2.95		$	6.79

Net income (loss) per common share data - diluted:
Continuing operations	$	2.66		$	2.52		$	2.96		$	2.78
Discontinued operations	$	(0.03	)	$	—		$	(0.04	)	$	3.97
Net income per common share data - diluted	$	2.63		$	2.52		$	2.92		$	6.75

Weighted average shares outstanding:
Basic	40.1			40.7			40.3			42.0
Diluted	40.7			40.9			40.7			42.2

Other comprehensive income (loss):
Foreign currency translation, net of tax	$	—		$	—		$	—		$	0.6
Change in pension benefits, net of tax	—			(0.2		)	—			(0.4		)
Other comprehensive income (loss)	—			(0.2		)	—			0.2
Comprehensive income	$	107.1		$	102.9		$	118.7		$	285.3

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



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	3

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in millions)	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	202.7		$	133.3
Restricted cash	42.8			40.0
Accounts receivable, net	72.8			28.8
Income taxes receivable	—			17.0
Other current assets	30.2			22.4
Total current assets	348.5			241.5
Property and equipment, net	880.0			757.5
Investment in and advances to unconsolidated affiliates	621.8			108.1
Goodwill	363.8			338.0
Other intangible assets, net	354.7			264.0
Other assets	19.7			16.1
Total assets	$	2,588.5		$	1,725.2

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	107.2		$	47.0
Purses payable	33.0			15.8
Account wagering deposit liabilities	29.6			29.6
Accrued expense	104.9			89.8
Income taxes payable	15.0			—
Current deferred revenue	15.1			47.9
Current maturities of long-term debt	4.0			4.0
Dividends payable	—			22.5
Total current liabilities	308.8			256.6
Long-term debt, net of current maturities and loan origination fees	385.6			387.3
Notes payable, net of debt issuance costs	1,084.9			493.0
Non-current deferred revenue	17.2			21.1
Deferred income taxes	199.9			78.2
Other liabilities	38.8			15.7
Total liabilities	2,035.2			1,251.9
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 0.3 shares authorized; no shares issued or outstanding	—			—
Common stock, no par value; 150.0 shares authorized; 40.0 shares issued and outstanding at June 30, 2019 and 40.4 shares at December 31, 2018	2.9			—
Retained earnings	551.3			474.2
Accumulated other comprehensive loss	(0.9		)	(0.9		)
Total shareholders' equity	553.3			473.3
Total liabilities and shareholders' equity	$	2,588.5		$	1,725.2

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



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	4

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)



	Common Stock					Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
(in millions)	Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance, December 31, 2018	40.4		$	—		$	474.2		$	(0.9	)	$	473.3
Net income						11.6						11.6
Issuance of common stock	0.1		—									—
Repurchase of common stock	(0.3	)	(4.7		)	(20.3		)				(25.0		)
Taxes paid related to net share settlement of stock awards	(0.1	)	—			(7.6		)				(7.6		)
Issuance of restricted stock awards, net of forfeitures	0.1		—									—
Stock-based compensation			4.7									4.7
Adoption of ASC 842						(0.3		)				(0.3		)
Other						0.2						0.2
Balance, March 31, 2019	40.2		—			457.8			(0.9		)	456.9
Net income						107.1						107.1
Repurchase of common stock	(0.2	)	(4.4		)	(13.6		)				(18.0		)
Stock-based compensation			7.4									7.4
Other			(0.1		)							(0.1		)
Balance, June 30, 2019	40.0		$	2.9		$	551.3		$	(0.9	)	$	553.3



	Common Stock					Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
(in millions)	Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance, December 31, 2017	46.2		$	7.3		$	634.3		$	(1.3	)	$	640.3
Net income						182.0						182.0
Issuance of common stock	0.1		—									—
Repurchase of common stock	(5.7	)	(13.5		)	(488.0		)				(501.5		)
Taxes paid related to net share settlement of stock awards	(0.1	)	—			(12.9		)				(12.9		)
Issuance of restricted stock awards, net of forfeitures	0.1		—									—
Stock-based compensation			6.2									6.2
Adoption of ASC 606						29.7						29.7
Other									0.4			0.4
Balance, March 31, 2018	40.6		—			345.1			(0.9		)	344.2
Net income						103.1						103.1
Issuance of common stock	0.1		—									—
Repurchase of common stock	—		(0.3		)							(0.3		)
Stock-based compensation			6.4									6.4
Other			(0.1		)	(0.1		)				(0.2		)
Balance, June 30, 2018	40.7		$	6.0		$	448.1		$	(0.9	)	$	453.2

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



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	5

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(in millions)	2019			2018
Cash flows from operating activities:
Net income	$	118.7		$	285.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42.3			29.1
Distributions from unconsolidated affiliates	11.5			9.9
Equity in income of unconsolidated affiliates	(13.6		)	(15.3		)
Stock-based compensation	12.1			12.6
Deferred income taxes	12.1			6.9
Gain on sale of Big Fish Games	—			(219.5		)
Other	1.1			(2.3		)
Changes in operating assets and liabilities, net of business acquisitions and dispositions:
Income taxes	31.9			55.3
Deferred revenue	(36.9		)	(43.7		)
Other assets and liabilities	35.1			44.2
Net cash provided by operating activities	214.3			162.3
Cash flows from investing activities:
Capital maintenance expenditures	(26.2		)	(13.7		)
Capital project expenditures	(32.6		)	(58.7		)
Acquisition of businesses, net of cash acquired	(172.1		)	—
Investments in and advances to unconsolidated affiliates	(410.1		)	—
Distributions of capital from unconsolidated affiliates	8.1			—
Acquisition of gaming licenses	(22.1		)	—
Proceeds from sale of Big Fish Games	—			970.7
Other	1.1			(5.9		)
Net cash (used in) provided by investing activities	(653.9		)	892.4
Cash flows from financing activities:
Proceeds from borrowings under long-term debt obligations	1,235.3			117.2
Repayments of borrowings under long-term debt obligations	(637.3		)	(361.3		)
Payment of dividends	(22.2		)	(23.5		)
Repurchase of common stock	(45.5		)	(501.8		)
Taxes paid related to net share settlement of stock awards	(7.6		)	(12.9		)
Debt issuance costs	(8.6		)	—
Big Fish Games earnout payment	—			(31.8		)
Big Fish Games deferred payment	—			(26.4		)
Other	(2.3		)	(4.4		)
Net cash provided by (used in) financing activities	511.8			(844.9		)
Net increase in cash, cash equivalents and restricted cash	72.2			209.8
Effect of exchange rate changes on cash flows	—			(0.6		)
Cash, cash equivalents and restricted cash, beginning of period	173.3			85.5
Cash, cash equivalents and restricted cash, end of period	$	245.5		$	294.7

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



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	6

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)



	Six Months Ended June 30,
(in millions)	2019		2018
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	23.6	$	8.5
Income taxes	1.3		23.7
Schedule of non-cash investing and financing activities:
Property and equipment additions included in accounts payable and accrued expenses	6.8		21.9
Deferred tax liability assumed from equity investment	109.6		—

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



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	7



Churchill Downs Incorporated
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 ("GAAP") or those normally made in our Annual Report on Form 10-K. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by 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, 2018.

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.

Segments

During the first quarter of 2019, we realigned our operating segments to reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources. Our internal management reporting changed primarily due to the continued growth in our Churchill Downs Racetrack and Derby City Gaming business and our casino and associated racing businesses, which resulted in our chief operating decision maker's decision to realign our operating segments primarily based on the regulatory licenses governing each business. Since each of these individual businesses operates under single or interdependent licenses, each of these businesses represents an operating segment. As our TwinSpires business and online sports betting and iGaming businesses are managed together, these businesses represent an operating segment. For financial reporting purposes, we aggregate our operating segments that are similar into three reportable segments as follows:


•	Churchill Downs

The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming.

Churchill Downs Racetrack is the home of The Kentucky Derby and conducts live racing during the year. Derby City Gaming is a historical racing machine facility that operates under the Churchill Downs pari-mutuel racing license at its ancillary training facility in Louisville, Kentucky.

Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming; simulcast fees earned from other wagering sites; admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services.


•	Online Wagering

The Online Wagering segment includes the revenue and expenses for the TwinSpires business ("TwinSpires") and the online Sports Betting and iGaming business.

TwinSpires operates our online horseracing wagering business on TwinSpires.com, BetAmerica.com and other Company platforms; facilitates high dollar wagering by international customers ("Velocity"); and provides the platform for horseracing statistical data generated by our information business that provides data and processing services to the equine industry ("Brisnet").

Our Sports Betting and iGaming business includes the online BetAmerica sports betting and casino gaming operations.


•	Gaming

The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or Jai Alai facilities which support the casino license as applicable. The Gaming segment has approximately 11,000 slot machines and video lottery terminals ("VLTs") located in eight states.

The Gaming segment revenue and expenses includes the following properties:


◦	Calder Casino and Racing ("Calder")



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	8



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)


◦	Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI")


◦	Harlow’s Casino Resort and Spa ("Harlow's")


◦	Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") management agreement


◦	Ocean Downs Casino and Racetrack ("Ocean Downs")


◦	Oxford Casino and Hotel ("Oxford")


◦	Presque Isle Downs and Casino ("Presque Isle")


◦	Riverwalk Casino Hotel ("Riverwalk")

The Gaming segment also includes net income for our ownership portion of the Company’s equity investments in the following:


◦	61.3% equity investment in Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois ("Rivers Des Plaines")


◦	50% equity investment in Miami Valley Gaming and Racing ("MVG")

The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, retail sports betting, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and / or other miscellaneous operations.

We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results:


•	Arlington International Racecourse ("Arlington")


•	United Tote

We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results were reclassified to conform to this presentation.

Effective January 1, 2019, the Company does not allocate corporate and other related expenses to the reportable segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.

Acquisitions of Presque Isle and Lady Luck Nemacolin

On January 11, 2019, we completed the acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc. ("ERI") for cash consideration of $178.9 million (the "Presque Isle Transaction") and $1.6 million of working capital and other purchase price adjustments.

On March 8, 2019, the Company assumed management and acquired certain assets related to the management of Lady Luck Nemacolin in Farmington, Pennsylvania, from ERI for cash consideration of $100,000 (the "Lady Luck Nemacolin Transaction").

Acquisition of Certain Ownership Interests of Midwest Gaming Holdings, LLC

On October 31, 2018, the Company announced that it had entered into a definitive purchase agreement pursuant to which the Company acquired certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines in Des Plaines, Illinois, for cash (the "Sale Transaction").

The Sale Transaction was comprised of (i) the Company’s purchase of 100% of the ownership stake in Midwest Gaming held by affiliates and co-investors of Clairvest Group Inc. ("Clairvest") for approximately $291.0 million and (ii) the Company’s offer to purchase, on the same terms, additional units of Midwest Gaming held by High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC, and Casino Investors, LLC ("Casino Investors") (collectively, the "Sellers"). On March 5, 2019, the Company completed the Sale Transaction.

Following the closing of the Sale Transaction, the parties entered into a recapitalization transaction pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from new credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors (the "Recapitalization" and together with the Sale Transaction, the "Transactions").

Based on the results of the purchase of the Clairvest ownership stake and the purchase, on the same terms, of additional units held by High Plaines and Casino Investors, the Company acquired, at the closing of the Sale Transaction, approximately 42% of Midwest Gaming for aggregate cash consideration of approximately $406.6 million. As a result of the Recapitalization on March 6, 2019, the Company's ownership of Midwest Gaming increased to 61.3%.



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	9



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The total aggregate cash consideration paid for the Sale Transaction was $410.1 million, which included $3.5 million for certain transaction costs and working capital adjustments. We recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership.

Refer to Note 12, Investments in and Advances to Unconsolidated Affiliates, for further information on the Transactions.

Sale of Big Fish Games, Inc.

On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell its mobile gaming subsidiary, Big Fish Games, Inc. ("Big Fish Games"), a Washington corporation, to Aristocrat Technologies, Inc. (the "Purchaser"), a Nevada corporation, an indirect, wholly owned subsidiary of Aristocrat Leisure Limited, an Australian corporation (the "Big Fish Transaction"). On January 9, 2018, pursuant to the Stock Purchase Agreement, the Company completed the Big Fish Transaction. The Purchaser paid an aggregate consideration of $990.0 million in cash in connection with the Big Fish Transaction, subject to customary adjustments for working capital and indebtedness and certain other adjustments as set forth in the Stock Purchase Agreement. The Company received cash proceeds of $970.7 million, which was net of $5.2 million of working capital adjustments and $14.1 million of transaction costs.

Big Fish Games and the related Big Fish Transaction meet the criteria for discontinued operation presentation. Accordingly, the condensed consolidated statements of comprehensive income and the notes to financial statements reflect Big Fish Games as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these condensed consolidated financial statements reflect continuing operations only. The condensed consolidated statements of cash flows include both continuing and discontinued operations. Refer to Note 5, Discontinued Operations, for further information on the discontinued operations relating to the Big Fish Transaction.

Stock Split

On October 31, 2018, the Company announced a three-for-one split (the "Stock Split") of the Company's common stock for shareholders of record as of January 11, 2019. The additional shares resulting from the Stock Split were distributed on January 25, 2019. Our common stock began trading at the split-adjusted price on January 28, 2019. All share and per-share amounts in the Company’s condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the effects of the Stock Split.

Seasonality

Churchill Downs

Due to the seasonal nature of our live racing business at Churchill Downs Racetrack, 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, the majority of our live racing revenue occurs during the second quarter.

Online Wagering

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.

Gaming

Revenue from the properties in our Gaming segment has a seasonal component and is typically higher during the first and second quarters.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncement - Adopted on January 1, 2019

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases, and subsequently has issued additional guidance (collectively, "ASC 842"), which requires companies to generally recognize operating and financing lease liabilities and corresponding right-of-use assets ("ROUAs") on the balance sheet. We adopted ASC 842 on January 1, 2019 using the modified transition method. As part of the transition to ASC 842, we elected the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We recognized



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	10



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

the cumulative effect of applying ASC 842 as an opening balance sheet adjustment at January 1, 2019. The comparative information has not been retrospectively adjusted and continues to be reported under the accounting standards in effect for those periods.

The adoption of ASC 842 had no impact on our accompanying condensed consolidated statements of comprehensive income or statements of cash flows. Due to the adoption of ASC 842, we recognized operating lease ROUAs and lease liabilities for our operating leases with lease terms greater than one year. We do not have any material finance leases or any material operating leases where we are the lessor. We expect the adoption of ASC 842 will not materially impact our results of operations, financial condition, or cash flows on an ongoing basis.

The cumulative effects of the changes made to our accompanying condensed consolidated balance sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:



(in millions)	As Reported at December 31, 2018		Adoption of ASC 842			Balance at January 1, 2019
ASSETS
Other current assets	$	22.4	$	(0.3	)	$	22.1
Property and equipment, net	757.5		25.3			782.8

LIABILITIES
Accrued expense	89.8		3.8			93.6
Other liabilities	15.7		21.5			37.2

SHAREHOLDERS' EQUITY
Retained earnings	474.2		(0.3		)	473.9

Recent Accounting Pronouncements - effective in 2020 or thereafter

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other: Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The guidance is effective in 2020 with early adoption permitted and may be applied prospectively or retrospectively. 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, and is to be applied through a modified retrospective approach during the year of adoption. 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, and is to be applied prospectively. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.

3. SIGNIFICANT ACCOUNTING POLICIES

Except for the accounting policy for leases, which was updated as a result of our adoption of ASC 842 on January 1, 2019, as described in Note 2, Recent Accounting Pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	11



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in property and equipment, net; accrued expense; and other liabilities on our condensed consolidated balance sheets. We generally do not separate lease and non-lease components for our lease contracts. We do not apply the ROUA and leases liability recognition requirements to short-term leases.

Operating lease ROUAs and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The operating lease ROUAs also include any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred. Our lease terms include all non-cancelable periods and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

4. ACQUISITIONS

Presque Isle

On January 11, 2019, the Company completed the Presque Isle Transaction for a cash purchase price of $178.9 million and $1.6 million of working capital and other purchase price adjustments. The fair values for the assets acquired and liabilities assumed in the Presque Isle Transaction shown below are based upon preliminary valuations. Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The primary areas of the preliminary valuations that are not yet finalized relate to income taxes, intangible assets, working capital adjustments, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed, net of cash acquired of $8.4 million, at the date of the acquisition.



(in millions)	Total
Current assets	$	2.1
Property and equipment	78.5
Goodwill	25.8
Intangible assets	71.2
Current liabilities	(4.9		)
Non-current liabilities	(0.6		)
	$	172.1

The preliminary fair value of the intangible assets consists of the following:



(in millions)	Fair Value Recognized		Weighted-Average Useful Life
Gaming rights	$	56.0	N/A
Trademark	15.2		N/A
Total intangible assets	$	71.2

Current assets and current liabilities were valued at the existing carrying values as these items are short term in nature and represent management's estimated fair value of the respective items at January 11, 2019.

The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures. The fair value of the land was determined using the market approach and the fair values of the remaining property and equipment were primarily determined using the cost replacement method which is based on replacement or reproduction costs of the assets.

The fair value of the Presque Isle gaming rights was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream. This method assumes that the gaming rights intangible asset provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	12



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses and start-up costs of Presque Isle were the primary inputs in the valuation. The gaming rights intangible asset was assigned an indefinite useful life based on the Company's expected use of the asset and determination that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the gaming rights. The renewal of the gaming rights in Pennsylvania is subject to various legal requirements. However, the Company's historical experience has not indicated, nor does the Company expect, any limitations regarding its ability to continue to renew its gaming rights in Pennsylvania.

The trademark intangible asset was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset. The trademark was assigned an indefinite useful life based on the Company’s intention to keep the Presque Isle name for an indefinite period of time.

Goodwill of $25.8 million was recognized due to the expected contribution of Presque Isle to the Company's overall business strategy. The goodwill was assigned to the Gaming segment and is deductible for tax purposes.

For the period from the Presque Isle Transaction on January 11, 2019 through June 30, 2019, net revenue was $67.0 million and net income was not material for the period.

The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of Presque Isle occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Presque Isle Transaction was not materially different than our historical net income.



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Net revenue	$	477.4	$	416.3	$	746.0	$	638.8

Lady Luck Nemacolin

On March 8, 2019, we completed the Lady Luck Nemacolin Transaction, by which we assumed management and acquired certain assets related to the management of Lady Luck Nemacolin from ERI for cash consideration of $100,000. The Lady Luck Nemacolin Transaction did not meet the definition of a business and therefore was accounted for as an asset acquisition. The net assets acquired in conjunction with the Lady Luck Nemacolin Transaction were not material.

Ocean Downs

On July 16, 2018, the Company announced its entry into a tax-efficient partial liquidation agreement (the "Liquidation Agreement") for the remaining 50% ownership of the Casino at Ocean Downs and Ocean Downs Racetrack located in Berlin, Maryland ("Ocean Downs") owned by Saratoga Casino Holdings LLC ("SCH") in exchange for the Company's 25% equity interest in SCH, which is the parent company of Saratoga Casino Hotel in Saratoga Springs, New York ("Saratoga New York") and Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga Colorado") (collectively, the "Ocean Downs/Saratoga Transaction"). As part of the Ocean Downs/Saratoga Transaction, Saratoga Harness Racing, Inc. ("SHRI") has agreed to grant the Company and its affiliates exclusive rights to operate online sports betting and iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.

On August 31, 2018, the Company completed the Ocean Downs/Saratoga Transaction, which resulted in the Company owning 100% of the equity interests of Ocean Downs. We therefore consolidated Ocean Downs as of the transaction date. Upon the closing of the Ocean Downs/Saratoga Transaction, the Company no longer has an equity interest or management involvement in Saratoga New York or Saratoga Colorado. Prior to the Ocean Downs/Saratoga Transaction, the Company held an effective 62.5% ownership interest in Ocean Downs, and a 25% ownership interest in Saratoga New York and Saratoga Colorado, all of which were accounted for under the equity method. The consideration transferred to SCH to acquire the remaining interest in Ocean Downs was the Company's equity investments in Saratoga New York and Saratoga Colorado, which had an aggregate fair value of $47.8 million at the acquisition date. Under the acquisition method, the fair values of the consideration transferred and the Company's equity method investment in Ocean Downs, which had a fair value of $80.5 million at the acquisition date, were allocated to the assets acquired and liabilities assumed in the Ocean Downs/Saratoga Transaction. The Company's carrying values in these equity method investments were significantly less than the fair values, resulting in a pre-tax gain of $54.9 million, which is included in the accompanying consolidated statements of comprehensive income. The fair value of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado was determined under the market and income valuation



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	13



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of the remaining 50% interest in Ocean Downs occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Ocean Downs/Saratoga Transaction was not materially different than our historical net income.



	Three Months Ended June 30,		Six Months Ended June 30,
(in millions)	2018		2018
Net revenue	$	400.9	$	607.1

5. DISCONTINUED OPERATIONS

On January 9, 2018, the Company completed the Big Fish Transaction, which had a purchase price of $990.0 million. The Company received cash proceeds of $970.7 million, which was net of $5.2 million of working capital adjustments and $14.1 million of transaction costs. The Company derecognized the following upon the Big Fish Transaction:



(in millions)
Cash and cash equivalents	$	0.3
Accounts receivable	34.7
Game software development, net	6.7
Other current assets	17.0
Property and equipment, net	17.8
Game software development, net	13.8
Goodwill	530.7
Other intangible assets, net	238.4
Other assets	24.0
Accounts payable	(8.5		)
Accrued expense	(22.6		)
Deferred revenue	(44.2		)
Deferred income taxes	(52.0		)
Other liabilities	(4.9		)
Carrying value of Big Fish Games	$	751.2

The Company recognized a gain of $219.5 million upon the sale recorded in income from discontinued operations on the condensed consolidated statement of comprehensive income for the three months ended March 31, 2018. The gain consisted of cash proceeds of $970.7 million offset by the carrying value of Big Fish Games of $751.2 million. The income tax provision on the gain was $51.2 million, resulting in an after tax gain of $168.3 million.



FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
	14



Churchill Downs Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table presents the financial results of Big Fish Games included in "(loss) income from discontinued operations, net of tax" in the accompanying condensed consolidated statements of comprehensive income:



	Three Months Ended June 30,				Six Months Ended June 30,
(in millions)	2019		2018		2019		2018
Net revenue	$	—	$	—	$	—	$	13.2

Operating expenses	—		—		—		8.4
Selling, general and administrative expense	1.6		0.6		2.0		4.9
Research and development	—		—		—		0.9
Total operating expense	1.6		0.6		2.0		14.2
Operating loss