SEC Filing | Churchill Downs, Inc.

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chdn-20200930

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 September 30, 2020


☐			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 October 14, 2020 was 39,455,225 shares.

CHURCHILL DOWNS INCORPORATED

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2020


	Part I-FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019	3
	Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019	4
	Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended Se ptember 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended Se ptember 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51

	Part II-OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
	Signatures	58


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, except per common share data)	2020		2019		2020		2019
Net revenue:
Churchill Downs	$	60.8	$	31.4	$	107.6	$	234.6
Online Wagering	125.9		70.2		314.4		228.9
Gaming	134.8		178.3		319.7		524.7
All Other	16.3		26.4		34.1		60.9
Total net revenue	337.8		306.3		775.8		1,049.1
Operating expense:
Churchill Downs	48.3		30.8		106.0		127.8
Online Wagering	83.5		52.2		208.2		159.3
Gaming	96.7		137.3		267.1		395.5
All Other	20.5		22.9		53.2		59.9
Selling, general and administrative expense	38.8		34.4		85.3		89.4
Impairment of intangible assets	—		—		17.5		—
Transaction expense, net	0.5		0.9		1.0		5.0
Total operating expense	288.3		278.5		738.3		836.9
Operating income	49.5		27.8		37.5		212.2
Other income (expense):
Interest expense, net	(19.7)		(18.9)		(59.3)		(52.0)
Equity in income of unconsolidated affiliates	27.6		14.1		13.2		27.7
Miscellaneous, net	(0.4)		0.2		(0.1)		0.6
Total other income (expense)	7.5		(4.6)		(46.2)		(23.7)
Income (loss) from continuing operations before provision for income taxes	57.0		23.2		(8.7)		188.5
Income tax (provision) benefit	(13.9)		(8.0)		5.6		(53.1)
Income (loss) from continuing operations, net of tax	43.1		15.2		(3.1)		135.4
Loss from discontinued operations, net of tax	—		(0.4)		(96.1)		(1.9)
Net income (loss)	43.1		14.8		(99.2)		133.5
Net loss attributable to noncontrolling interest	(0.1)		—		(0.2)		—
Net income (loss) and comprehensive income (loss) attributable to CDI	$	43.2	$	14.8	$	(99.0)	$	133.5

Net income (loss) per common share data - basic:
Continuing operations	$	1.09	$	0.38	$	(0.07)	$	3.37
Discontinued operations	$	—	$	(0.01)	$	(2.43)	$	(0.05)
Net income (loss) per common share data - basic	$	1.09	$	0.37	$	(2.50)	$	3.32

Net income (loss) per common share data - diluted:
Continuing operations	$	1.08	$	0.37	$	(0.07)	$	3.33
Discontinued operations	$	—	$	(0.01)	$	(2.43)	$	(0.05)
Net income (loss) per common share data - diluted	$	1.08	$	0.36	$	(2.50)	$	3.28

Weighted average shares outstanding:
Basic	39.5		40.0		39.6		40.2
Diluted	40.1		40.7		39.6		40.7

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			3

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(in millions)	September 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	622.0	$	96.2
Restricted cash	57.6		46.3
Accounts receivable, net	53.0		37.3
Income taxes receivable	40.7		14.5
Other current assets	33.3		26.9
Total current assets	806.6		221.2
Property and equipment, net	1,081.8		937.3
Investment in and advances to unconsolidated affiliates	634.0		634.5
Goodwill	366.8		367.1
Other intangible assets, net	351.8		369.8
Other assets	22.0		21.1

Total assets	$	3,263.0	$	2,551.0

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	108.2	$	57.8
Accrued expenses and other current liabilities	192.4		173.4
Current deferred revenue	42.4		42.5
Current maturities of long-term debt	4.0		4.0
Dividends payable	—		23.5
Current liabilities of discontinued operations	124.0		—
Total current liabilities	471.0		301.2
Long-term debt, net of current maturities and loan origination fees	1,076.3		384.0
Notes payable, net of debt issuance costs	1,087.3		1,085.9
Non-current deferred revenue	14.2		16.7
Deferred income taxes	205.4		212.8
Other liabilities	36.6		39.4
Total liabilities	2,890.8		2,040.0
Commitments and contingencies
Shareholders' equity:
Preferred stock	—		—
Common stock	15.5		—
Retained earnings	357.6		509.2
Accumulated other comprehensive loss	(0.9)		(0.9)
Total Churchill Downs Incorporated shareholders' equity	372.2		508.3
Noncontrolling interest	—		2.7
Total shareholders' equity	372.2		511.0
Total liabilities and shareholders' equity	$	3,263.0	$	2,551.0

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			4

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)



	Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss		Noncontrolling Interest		Total Shareholders' Equity
(in millions, except per common share data)	Shares	Amount
Balance, December 31, 2019	39.7	$	—	$	509.2	$	(0.9)	$	2.7	$	511.0
Net loss				(23.4)				(0.1)		(23.5)

Repurchase of common stock	(0.3)	(4.3)		(23.6)						(27.9)
Cash settlement of stock awards				(12.7)						(12.7)
Taxes paid related to net share settlement of stock awards				(15.1)						(15.1)
Stock-based compensation		4.3								4.3
Adoption of ASC 326				(0.5)						(0.5)
Balance, March 31, 2020	39.4	—		433.9		(0.9)		2.6		435.6
Net loss				(118.8)						(118.8)
Stock-based compensation		6.1								6.1
Other				(0.2)						(0.2)
Balance, June 30, 2020	39.4	6.1		314.9		(0.9)		2.6		322.7
Net income				43.2				(0.1)		43.1
Purchase of noncontrolling interest				(0.5)				(2.5)		(3.0)
Issuance of common stock	0.1	2.5								2.5
Stock-based compensation		6.9								6.9


Balance, September 30, 2020	39.5	$	15.5	$	357.6	$	(0.9)	$	—	$	372.2

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

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			5

(Unaudited)



	Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss		Noncontrolling Interest		Total Shareholders' Equity
(in millions, except per common share data)	Shares	Amount
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
Net income				14.8						14.8
Issuance of common stock	0.1	1.9								1.9
Repurchase of common stock	(0.2)	(10.4)		(14.6)						(25.0)
Taxes paid related to net share settlement of stock awards				(0.1)						(0.1)
Stock-based compensation		5.5								5.5
Other		0.1		(0.1)						—
Balance, September 30, 2019	39.9	$	—	$	551.3	$	(0.9)	$	—	$	550.4

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			6

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
(in millions)	2020		2019
Cash flows from operating activities:
Net (loss) income	$	(99.2)	$	133.5
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	66.5		64.3
Distributions from unconsolidated affiliates	12.8		24.7
Equity in income of unconsolidated affiliates	(13.2)		(27.7)
Stock-based compensation	17.3		17.6
Deferred income taxes	(7.4)		22.0
Impairment of intangible assets	17.5		—
Amortization of operating lease assets	3.7		3.3
Other	3.5		2.0
Changes in operating assets and liabilities, net of business acquisitions and dispositions:
Income taxes	(26.2)		15.5
Deferred revenue	(1.9)		(36.0)
Other assets and liabilities	163.9		41.0
Net cash provided by operating activities	137.3		260.2
Cash flows from investing activities:
Capital maintenance expenditures	(18.2)		(37.7)
Capital project expenditures	(191.9)		(53.3)
Acquisition of businesses, net of cash acquired	—		(172.1)
Investments in and advances to unconsolidated affiliates	—		(410.1)
Distributions of capital from unconsolidated affiliates	—		5.8
Acquisition of gaming licenses	—		(22.1)
Other	(2.7)		(1.1)
Net cash used in investing activities	(212.8)		(690.6)
Cash flows from financing activities:
Proceeds from borrowings under long-term debt obligations	726.0		1,236.0
Repayments of borrowings under long-term debt obligations	(34.4)		(639.0)
Payment of dividends	(23.4)		(22.2)
Repurchase of common stock	(28.4)		(66.8)
Cash settlement of stock awards	(12.7)		—
Taxes paid related to net share settlement of stock awards	(15.1)		(7.7)
Debt issuance costs	(1.7)		(8.9)
Other	2.3		(0.5)
Net cash provided by financing activities	612.6		490.9
Net increase in cash, cash equivalents and restricted cash	537.1		60.5
Cash, cash equivalents and restricted cash, beginning of period	142.5		173.3
Cash, cash equivalents and restricted cash, end of period	$	679.6	$	233.8

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			7

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


	Nine Months Ended September 30,
(in millions)	2020		2019
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	57.3	$	40.3
Income taxes	1.4		16.1
Schedule of non-cash investing and financing activities:
Deferred tax liability assumed from equity investment	$	—	$	103.2
Property and equipment additions included in accounts payable and accrued expenses	10.5		10.2
Repurchase of common stock included in accrued expenses	—		3.7

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			8


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, 2019 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, 2019.

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.

We conduct our business through three reportable segments: Churchill Downs, Online Wagering, and Gaming. We aggregate our other businesses as well as certain corporate operations, and other immaterial joint ventures, in All Other. We report net revenue and operating expense associated with these reportable segments in the accompanying condensed consolidated statements of comprehensive income.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, have resulted and continue to result in significant negative economic impacts in the United States and in relation to our business. The long-term impact of COVID-19 on the United States and world economies and continuing impact on our business remains uncertain, the duration and scope of which cannot currently be predicted.

In response to the measures taken to limit the impact of COVID-19 described above, and for the protection of our employees, customers, and communities, we temporarily suspended operations at our properties in March 2020. In May 2020, we began to reopen our properties with patron restrictions and gaming limitations. As of September 30, 2020, all of our properties had reopened and remain open with applicable restrictions. We also implemented other initiatives to facilitate social distancing and enhanced cleaning, such as increased frequency of cleaning and sanitizing of all high-touch surfaces, mandatory temperature checks of all guests and team members upon entry and required training for all team members on safety protocols. Certain amenities at our properties have continued to be suspended, including all of our food buffets and valet services, and certain restaurants and food outlets. Below is a summary of the temporary closures and the current status of each property:

Churchill Downs

•Churchill Downs Racetrack conducted 27 spectator-free live racing days in the second quarter of 2020 and 14 spectator-free live racing days in the third quarter of 2020, including the 146th Kentucky Oaks and Derby on September 4-5, 2020. Churchill Downs Racetrack suspended simulcast operations on March 15, 2020, and these operations remained closed.

•Derby City Gaming temporarily suspended operations on March 15, 2020 and reopened on June 8, 2020. Derby City Gaming is currently restricted to 75% of patron capacity, and is operating at 66% of gaming capacity.

Gaming

Wholly-Owned Properties

•Calder Casino and Racing ("Calder") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020. Operations were temporarily suspended again on July 2, 2020 following a Miami-Dade Emergency Order issued by the county's mayor to close all entertainment venues in Miami-Dade County. Calder reopened on August 31, 2020 with restrictions on operating hours and is operating at 56% of gaming capacity.

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


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			9


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

◦Fair Grounds Slots temporarily suspended operations on March 16, 2020 and reopened on June 13, 2020. Fair Grounds Slots is currently restricted to 25% of patron capacity and is operating at 75% of gaming capacity;

◦Fair Grounds Race Course conducted spectator-free live racing from March 13, 2020 through March 21, 2020 and did not have any live race days during the second or third quarters of 2020; and

◦VSI temporarily suspended operations on March 16, 2020 and reopened on May 18, 2020. VSI is currently restricted to 50% of patron capacity and is operating at 75% of gaming capacity.

•Harlow's Casino Resort and Spa ("Harlow's") temporarily suspended operations on March 16, 2020 and reopened on May 21, 2020. Harlow’s is currently restricted to 50% of patron capacity and is operating at 66% of slot gaming capacity and 60% of table game capacity.

•Ocean Downs Casino and Racetrack ("Ocean Downs") temporarily suspended operations on March 15, 2020 and reopened on June 19, 2020. Ocean Downs is currently restricted to 50% of patron capacity and is operating at 70% of video lottery terminals ("VLTs") capacity and 60% of table game capacity.

•Oxford Casino and Hotel ("Oxford") temporarily suspended operations on March 16, 2020 and reopened on July 9, 2020. Oxford is currently restricted to 200 persons on the gaming floor.

•Presque Isle Downs and Casino ("Presque Isle") temporarily suspended operations on March 16, 2020 and reopened on June 26, 2020. Presque Isle has a temporary ban on alcohol and smoking on the gaming floor, is currently restricted to 50% of patron capacity and is operating at 60% of slot gaming capacity and 60% of table game capacity.

•Riverwalk Casino Hotel ("Riverwalk") temporarily suspended operations on March 16, 2020 and reopened on May 21, 2020. Riverwalk is currently restricted to 50% of patron capacity and is operating at 66% of slot gaming capacity and 60% of table game capacity.

Managed Properties

•Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020. Lady Luck Nemacolin has a temporary ban on alcohol and smoking on the gaming floor, is currently restricted to 50% of patron capacity and is operating at 50% of slot gaming capacity and 60% of table game capacity.

Equity Investments

•Rivers Casino Des Plaines ("Rivers Des Plaines") temporarily suspended operations on March 15, 2020 and reopened on July 1, 2020. Rivers Des Plaines has certain operating hour restrictions and temporary bans on food and beverage within the facility, is currently restricted to 25% of patron capacity and is operating at 75% of slot gaming capacity and 45% of table game capacity.

•Miami Valley Gaming and Racing ("MVG") temporarily suspended operations on March 14, 2020 and reopened on June 19, 2020. MVG has certain hourly restrictions on serving alcohol, is currently restricted to 63% of patron capacity and is operating at 67% of VLT capacity.

All Other

•Arlington International Racecourse ("Arlington") temporarily suspended operations of its off-track betting facilities ("OTBs") and simulcast operations on March 16, 2020. Four OTBs reopened on June 5, 2020 and the remaining OTBs reopened on various dates in July 2020. Arlington conducted 18 spectator-free live racing days and 12 live racing days with patron restrictions of 300 persons during the third quarter of 2020.

•Turfway Park conducted nine live racing days from March 12, 2020 through March 21, 2020 and five of these live racing days were run spectator-free. Live racing was canceled for the remaining three scheduled racing days in March 2020. Turfway Park did not have any race days scheduled in the second or third quarters of 2020.

On March 25, 2020, as a result of the temporary closures and suspended operations described above, the Company announced the temporary furlough of employees at its wholly-owned and managed gaming properties and certain racing operations. As the Company has reopened these properties, certain employees have returned to work while others remain on temporary furlough due to the capacity restrictions at these properties. The Company provided health, dental, vision and life insurance benefits to furloughed employees through July 31, 2020.

The Company also implemented a temporary salary reduction for all remaining non-furloughed salaried employees based on a percentage that varies dependent upon the amount of each employee’s salary. The most senior level of executive management


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			10


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

received the largest salary decrease, based on both percentage and dollar amount. Salaries for non-furloughed employees resumed at the annual base salary beginning with the start of the employee's first full pay period subsequent to July 31, 2020.

Financial Status and Outlook

The Company reduced its planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and has prioritized its capital investments based on the highest near-term return opportunities in order to maintain financial flexibility.

On March 16, 2020, we borrowed $675.4 million on our revolving credit facility (the "Revolver") pursuant to the Credit Agreement (defined below) to provide the Company with additional financial flexibility. The Company had $622.0 million of cash and cash equivalents as of September 30, 2020.

On April 28, 2020, the Company entered into a Second Amendment to its Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers its quarterly financial statements and compliance certificate for the fiscal quarter ending June 30, 2021, subject to certain exceptions (the “Financial Covenant Relief Period”), (ii) amends the definition of “Consolidated EBITDA” in the Credit Agreement with respect to the calculation of Consolidated EBITDA for the first two fiscal quarters after the termination of the Financial Covenant Relief Period, (iii) extends certain deadlines and makes certain other amendments to the Company’s financial reporting obligations, (iv) places certain restrictions on restricted payments during the Financial Covenant Relief Period, and (v) amends the definitions of “Material Adverse Effect” and “License Revocation” in the Credit Agreement to take into consideration COVID-19.

During the Financial Covenant Relief Period, the Company will not be required to comply with the consolidated total secured net leverage ratio financial covenant and the interest coverage ratio financial covenant. The Company has agreed to a minimum liquidity financial covenant that requires the Company and its restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period.

We continue to assess the situation at our properties and operations on a daily basis; however, we are unable to determine when the current restrictions in place for our opened properties will be removed. Our third quarter of 2020 financial results were materially impacted by the rescheduling of the 146th Kentucky Oaks and Derby from the second quarter of 2020 to the third quarter of 2020 without spectators, by the temporary suspension of operations at certain properties, and continued property restrictions.

Based on our current projected operating cash flow needs, interest and debt repayments, and revised maintenance and project capital expenditures, we believe we have adequate cash to fund our business operations, meet all of our financial commitments, and invest in our prioritized key growth capital projects for well beyond the next twelve months.

Oak Grove Racing, Gaming & Hotel

On September 18, 2020, the Company opened its simulcast and historical racing machine ("HRM") operations at Oak Grove Racing, Gaming & Hotel ("Oak Grove"), located in Oak Grove, Kentucky. Oak Grove is currently restricted to 75% of patron capacity and is operating at 63% of gaming capacity. The Oak Grove Hotel opened on October 15, 2020.

Effective September 11, 2020, the Company purchased the remaining equity interests of WKY Development, LLC, a joint venture that owns Oak Grove, from Keeneland Association, Inc. for $3.0 million. As of September 30, 2020, the Company no longer reports a noncontrolling interest associated with Oak Grove in the accompanying consolidated financial statements.

Newport Racing and Gaming

The Company invested $38.4 million to build out Newport Racing & Gaming ("Newport"), located in Newport, Kentucky, to create a premier entertainment experience as an extension of Turfway Park. Newport opened on October 2, 2020 and has a pari-mutuel simulcast area, a 17,000 square foot gaming floor with 500 HRMs, and a feature bar. Newport is currently restricted to 75% of patron capacity.

Online Wagering

On September 24, 2020, the Company opened a retail BetAmerica sportsbook at Bronco Billy's Casino in Cripple Creek, Colorado, and on September 25, 2020, the Company opened a retail BetAmerica sportsbook at Island Resort & Casino in Harris, Michigan. BetAmerica plans to launch its mobile sportsbook and iGaming application in each of Pennsylvania, Colorado and Michigan, and its mobile sportsbook application in Indiana, subject to regulatory approvals.

In August 2020, the Company announced the entry into multi-year agreements with GAN Limited and Kambi Group PLC to provide player account management, casino platform, sports trading and risk management services to BetAmerica.


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			11


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

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 March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Des Plaines in Des Plaines, Illinois to acquire approximately 42% of Midwest Gaming from affiliates and co-investors of Clairvest Group Inc. ("Clairvest") and members of High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC and Casino Investors, LLC ("Casino Investors") for cash consideration of approximately $406.6 million and $3.5 million of certain transaction costs and working capital adjustments (the "Sale Transaction"). Following the closing of the Sale Transaction, the parties completed a recapitalization transaction on March 6, 2019 (the "Recapitalization"), pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors. As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3%. High Plaines retained ownership of 36.0% of Midwest Gaming and Casino Investors retained ownership of 2.7% of Midwest Gaming.

We also recognized a $103.2 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 stake in Midwest Gaming.

Refer to Note 14, Investments in and Advances to Unconsolidated Affiliates, for further information on the Midwest Gaming transactions.

Turfway Park Acquisition

The Company completed the acquisition of Turfway Park from Jack Entertainment LLC ("JACK") and Hard Rock International (“Hard Rock”) on October 9, 2019 for total consideration of $46.0 million in cash ("Turfway Park Acquisition"). Turfway Park is located on 197 acres in Florence, Kentucky. On July 28, 2020, the Company's Board of Directors approved the final design plans for the HRM and grandstand facility at Turfway Park. The final plans reflect $200.0 million of project capital, which includes the Turfway Park Acquisition costs and other previously approved capital. The 155,000 square foot facility will include a grandstand, sports bar, food offerings, and up to 1,200 historical racing machines.

Refer to Note 4, Acquisitions, for further information on the Turfway Park Acquisition.

Seasonality

Due to the seasonal nature of live racing, revenue and operating results for any interim quarter for the Churchill Downs segment and the TwinSpires business within the Online Wagering segment 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 with the running of the Kentucky Derby and Kentucky Oaks. Due to the COVID-19 pandemic, the Company rescheduled the 146th Kentucky Oaks and Kentucky Derby from May 1, 2020 and May 2, 2020 to September 4, 2020 and September 5, 2020, respectively.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncement - Adopted on January 1, 2020

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses, ("ASC 326") 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. We adopted ASC 326 on January 1, 2020 using the modified retrospective approach. We recognized the cumulative effect of applying ASC 326 as an opening balance sheet adjustment at


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			12


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

January 1, 2020. 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 326 did not have a material impact on our business.

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. We adopted this guidance on January 1, 2020. The new guidance did not result in a cumulative adjustment upon adoption and there was no impairment recognized under the new guidance for the three or nine months ended September 30, 2020.

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. We adopted this guidance on January 1, 2020. This guidance is consistent with our current accounting policies, and therefore our adoption of this guidance did not have a material impact on our business.

3. SIGNIFICANT ACCOUNTING POLICIES

Except for the accounting policy for the allowance for doubtful accounts receivable described below, which was updated as a result of our adoption of ASC 326 on January 1, 2020, 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, 2019.

Allowance for Doubtful Accounts Receivable

Upon our adoption of ASC 326 on January 1, 2020, we maintained an allowance for doubtful accounts for current expected credit losses on our financial assets measured at amortized cost which are primarily included in accounts receivable, net in the accompanying condensed consolidated balance sheets. The Company evaluates current expected credit losses on a collective (pool) basis when similar risk characteristics exist. Write-offs are recognized when the Company concludes that all or a portion of a financial asset is no longer collectible. Any subsequent recovery is recognized when it occurs.

4. ACQUISITIONS

Turfway Park

On October 9, 2019, the Company completed the Turfway Park Acquisition for total consideration of $46.0 million. Of the total consideration paid, $36.0 million was allocated to JACK and accounted for as a business combination. The remaining $10.0 million was paid to Hard Rock for the assignment of the purchase and sale agreement rights and was accounted for separately from the business combination as an intangible asset and amortized through expense in the fourth quarter of 2019.

The cash purchase price paid to JACK was $36.0 million, less $0.9 million of working capital and purchase price adjustments. The preliminary fair values of the assets acquired and liabilities assumed, net of cash acquired of $0.9 million, at the date of acquisition were as follows: property and equipment (primarily land) of $18.8 million, indefinite-lived gaming rights of $9.8 million, indefinite-lived trademark of $5.5 million, goodwill of $2.7 million, and current liabilities of $2.6 million.

5. DISCONTINUED OPERATIONS

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. ("Aristocrat"), 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. Aristocrat paid 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 Big Fish Games segment and the related Big Fish Transaction meet the criteria for discontinued operation presentation. 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.


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			13


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

Kater and Thimmegowda Settlement

On May 22, 2020, we entered into an agreement in principle to settle Cheryl Kater v. Churchill Downs Incorporated ("Kater litigation") and Manasa Thimmegowda v. Big Fish Games, Inc. (the “Thimmegowda litigation”). The agreement in principle remains contingent on final court approval by the U.S. District Court for the Western District of Washington (the “District Court”). Under the terms of the settlement, which will take effect only after final court approval of the proposed class settlement: (i) a total of $155.0 million will be paid into a settlement fund. CDI will pay $124.0 million pre-tax of the settlement from its available cash; Aristocrat will pay $31.0 million pre-tax of the settlement; (ii) all members of the nationwide settlement class who do not exclude themselves will release all claims relating to the subject matter of the lawsuits; and (iii) Aristocrat has agreed to specifically release CDI of any and all indemnification obligations under the Stock Purchase Agreement arising from or related to the Kater and Thimmegowda litigations, including any claims of diminution of value of Big Fish Games and any claims by any person who opts out of the proposed class settlement. The $124.0 million pre-tax settlement related to the Company is included in loss from discontinued operations, net of tax in the accompanying condensed consolidated statements of comprehensive (loss) income for the nine months ended September 30, 2020, and on a pre-tax basis in current liabilities of discontinued operations in the accompanying condensed consolidated balance sheets at September 30, 2020.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
Net revenue	$	—	$	—	$	—	$	—

Selling, general and administrative expense	—		0.8		1.5		2.8
Legal settlement	—		—		124.0		—








Loss from discontinued operations before provision for income taxes	—		(0.8)		(125.5)		(2.8)
Income tax benefit	—		0.4		29.4		0.9
Loss from discontinued operations, net of tax	$	—	$	(0.4)	$	(96.1)	$	(1.9)

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill, by segment, is comprised of the following:


(in millions)	Churchill Downs		Online Wagering		Gaming		All Other		Total
Balances as of December 31, 2019	$	49.7	$	148.2	$	165.2	$	4.0	$	367.1
Adjustments	—		—		—		(0.3)		(0.3)
Balances as of September 30, 2020	$	49.7	$	148.2	$	165.2	$	3.7	$	366.8

We performed our annual goodwill impairment analysis as of April 1, 2020. We assessed goodwill for impairment by performing qualitative or quantitative analyses for each reporting unit. Based on the results of these analyses, no goodwill impairments were identified in connection with our annual impairment testing. During the second quarter we recorded an immaterial measurement period adjustment for the Turfway Park acquisition that impacted the All Other goodwill balance.


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			14


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

Other intangible assets are comprised of the following:


	September 30, 2020						December 31, 2019
(in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Definite-lived intangible assets	$	31.2	$	(15.4)	$	15.8	$	31.3	$	(15.0)	$	16.3
Indefinite-lived intangible assets					336.0						353.5
Total					$	351.8					$	369.8

Refer to Note 7, Asset Impairment, for information regarding intangible asset impairments recognized during the first quarter of 2020.

We performed our annual indefinite-lived intangible assets impairment analysis as of April 1, 2020. We assessed our indefinite-lived intangible assets for impairment by performing qualitative or quantitative analyses for each asset. Based on the results of these analyses, no indefinite-lived intangible asset impairments were identified in connection with our annual impairment testing.

7. ASSET IMPAIRMENT

During the quarter ended March 31, 2020, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of its intangible assets, goodwill, or property and equipment, were impaired ("Trigger Event"), or if there were any other than temporary impairments of our equity investments. Factors considered in this evaluation included, among other things, the amount of the fair value over carrying value from the annual impairment testing performed as of April 1, 2019, changes in carrying values, changes in discount rates, and the impact of temporary property closures due to the COVID-19 pandemic on cash flows. Based on the Company's evaluation, the Company concluded that a Trigger Event occurred related to the Presque Isle gaming rights, trademark, and the reporting unit's goodwill due to the impact and uncertainty of the COVID-19 pandemic and the recent closing of the Presque Isle Transaction in 2019.

The initial fair value of Presque Isle gaming rights in the first quarter of 2019 was determined using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. This method assumes that the Presque Isle gaming rights provide the opportunity to develop a casino and online wagering platform in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and / or the creation of all tangible and intangible assets. The estimated future revenue, operating expenses, start-up costs, and discount rate were the primary inputs in the valuation.

Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated the projected cash flow stream. As a result, the Company recognized an impairment of $15.0 million in first quarter of 2020 for its Presque Isle gaming rights ($12.5 million related to the Gaming segment and $2.5 million related to the Online Wagering segment).

The Presque Isle trademark was initially valued in first quarter of 2019 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 estimated future revenue, royalty rate, and discount rate were the primary inputs in the valuation of the trademark.

Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated projected cash flow stream. As a result, the Company recognized an impairment of $2.5 million in first quarter of 2020 for its Presque Isle trademark.

The fair value of the Presque Isle reporting unit's goodwill was determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

In accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other, the Company performed its impairment testing of the Presque Isle gaming rights and trademark prior to testing Presque Isle goodwill. Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated project cash flow stream. As a result, the Company did not recognize an impairment for Presque Isle goodwill in the first quarter of 2020 because the fair value exceeded the carrying value.


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			15


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

8. INCOME TAXES

The Company’s effective income tax rate for the three months ended September 30, 2020 was higher than the U.S. federal statutory rate of 21.0% primarily resulting from tax expense during a period of pre-tax income from nondeductible officer’s compensation and state income taxes, partially offset by tax benefits during a period of pre-tax income from a current year estimated federal taxable loss which will be carried back to a pre-2018 tax year, and a decrease in our unrecognized tax benefits due to the expiration of the federal income tax statute of limitations.

The Company’s effective income tax rate for the nine months ended September 30, 2020 was higher than the U.S. federal statutory rate of 21.0% primarily resulting from tax benefits during a period of pre-tax loss from a current year estimated federal taxable loss which will be carried back to a pre-2018 tax year, year-to-date tax deductions from vesting of stock awards in excess of book deductions, state income taxes, and a decrease in our unrecognized tax benefits due to the expiration of the federal income tax statute of limitations, partially offset by tax expense during a period of pre-tax loss from nondeductible officer’s compensation.

The Company’s effective income tax rate for the three and nine months ended September 30, 2019 was higher than the U.S. federal statutory rate of 21.0% primarily due to state income taxes, certain expenses that are not deductible for the purposes of income taxes, and $2.7 million of future income tax expenses recognized from the re-measurement of our net deferred tax liabilities based on an increase in income attributable to states with higher tax rates compared to the prior year quarter. This expense was partially offset by a decrease in our unrecognized tax benefits due to the expiration of the federal income tax statute of limitations and year-to-date tax deductions from vesting of stock awards in excess of book deductions.

9. SHAREHOLDERS’ EQUITY

On October 30, 2018, the Board of Directors of the Company approved a new common stock repurchase program of up to $300.0 million. The new program replaced the prior $250.0 million program that was authorized in April 2017 and had unused authorization of $78.3 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. The repurchase program has no time limit and may be suspended or discontinued at any time.

For the nine months ended September 30, 2020, we repurchased 235,590 shares of our common stock under the October 2018 stock repurchase program at an aggregate purchase price of $27.9 million, based on trade date. We had approximately $147.1 million of repurchase authority remaining under this program at September 30, 2020, based on trade date. There were no repurchases of common stock under our repurchase program for the three months ended September 30, 2020.

10. STOCK-BASED COMPENSATION PLANS

We have stock-based employee compensation plans with awards outstanding under the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan (the "2016 Plan") and the Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan. Our total stock-based compensation expense, which includes expenses related to restricted stock awards ("RSAs"), restricted stock unit awards ("RSUs"), performance share unit awards ("PSUs"), and stock options associated with our employee stock purchase plan was $6.9 million for the three months ended September 30, 2020 and $5.5 million for the three months ended September 30, 2019. Stock-based compensation expense was $17.3 million for the nine months ended September 30, 2020 and $17.6 million for the nine months ended September 30, 2019.

During the nine months ended September 30, 2020, the Company awarded RSUs to employees, RSUs and PSUs to certain named executive officers ("NEOs"), and RSUs to directors. The vesting criteria for the PSU awards granted in 2020 were based on a three-year service period with two performance conditions and a market condition related to relative total shareholder return ("TSR") consistent with prior year grants. The total compensation cost we will recognize under the PSUs will be determined using the Monte Carlo valuation methodology, which factors in the value of the TSR market condition when determining the grant date fair value of the PSU. Compensation cost for each PSU is recognized during the performance and service period based on the probable achievement of the two performance criteria. The PSUs are converted into shares of our common stock at the time the PSU award value is finalized.

On February 12, 2020, the Compensation Committee of the Board of Directors offered, and the NEOs accepted, to settle the 2017 PSU Awards in cash.


FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
			16


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

A summary of the RSUs and PSUs granted during 2020 is presented below (units in thousands):

Grant Year

Award Type

Number of Units Awarded

Vesting Terms