ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in Part II, Item 8. Financial Statements and Supplementary Data. The following discussion provides an analysis of our results of operations and reasons for material changes therein for 2020 as compared to 2019. Discussion regarding our financial condition and results of operations for 2019 as compared to 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020.
Our Business
The Company is an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event, the Kentucky Derby. We own and operate three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines ("HRMs") in Kentucky. We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing, sports and iGaming in the U.S. and we have seven retail sportsbooks. We are also a leader in brick-and-mortar casino gaming in eight states with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
For financial reporting purposes, we aggregate our operating segments into three reportable segments as follows: Churchill Downs, Online Wagering and Gaming. Our operating segments reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources. For additional information, refer to Note 21 to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Impact of the COVID-19 Global Pandemic
For a discussion of the impact of the COVID-19 global pandemic on our Company, refer to "Impact of the COVID-19 Global Pandemic", in Part I. Item 1. Business section. Below is a summary of the temporary closures and the current status and restrictions of each property:
Churchill Downs
•Churchill Downs Racetrack conducted 65 live racing days during 2020, including 41 spectator-free days in the second and third quarters 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 reopened on October 1, 2020.
•Derby City Gaming temporarily suspended operations on March 15, 2020 and reopened on June 8, 2020. Derby City Gaming is currently restricted to 33% of patron 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 and reopened on August 31, 2020. Calder currently has a temporary ban on food and beverage on the gaming floor and has certain operating hour restrictions.
•Fair Grounds Slots, Fair Grounds Race Course and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI"):
◦Fair Grounds Slots temporarily suspended operations on March 16, 2020 and reopened on June 13, 2020, and is currently restricted to 50% of patron capacity;
◦Fair Grounds Race Course conducted 73 live racing days during 2020, including 28 spectator-free days from March 13, 2020 through December 31, 2020; and
◦VSI temporarily suspended operations on March 16, 2020 and reopened on May 18, 2020, and is currently restricted to 50% of patron 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.
•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.
•Oxford Casino and Hotel ("Oxford") temporarily suspended operations on March 16, 2020 and reopened on July 9, 2020. Oxford has certain operating hour restrictions and 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. Operations were temporarily suspended again on December 12, 2020 and reopened on January 4, 2021. Presque Isle currently has a temporary ban on alcohol and smoking on the gaming floor and is currently restricted to 50% of patron 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.
Managed Properties
•Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") temporarily suspended operations on March 16, 2020 and reopened on June 12, 2020. Operations were temporarily suspended again on December 12, 2020 and reopened on January 4, 2021. Lady Luck Nemacolin currently has a temporary ban on alcohol and smoking on the gaming floor and is currently restricted to 50% of patron capacity.
Equity Investments
•Rivers Casino Des Plaines ("Rivers Des Plaines") temporarily suspended operations on March 15, 2020 and reopened on July 1, 2020. Operations were temporarily suspended on November 20, 2020 and remained suspended as of December 31, 2020. Rivers Des Plaines reopened on January 19, 2021. Rivers Des Plaines currently has certain operating hour restrictions and temporary bans on food and beverage within the facility and is restricted to 50% of patron capacity.
•Miami Valley Gaming and Racing ("MVG") temporarily suspended operations on March 14, 2020 and reopened on June 19, 2020. MVG is currently restricted to 63% of patron capacity.
All Other
•Arlington International Racecourse ("Arlington") temporarily suspended operations of the Company's 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 2020.
•Turfway Park conducted nine live racing days in March 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 also ran 13 live racing dates in December 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 the Company's 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 and during the subsequent property closure periods.
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 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 after July 31, 2020.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee. The Company qualified for the tax credit and received additional tax credits for qualified wages, and the Company recorded a $2.7 million benefit related to the CARES Employee Retention Credit in operating expense in the accompanying consolidated statement of comprehensive (loss) income for the year ended December 31, 2020. The CARES Act also provides for deferred payment of the employer portion of social security taxes through December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. Approximately $5.3 million of deferred payments are recorded as liabilities within accrued expense and other current liabilities and other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2020.
Financial Status and Outlook
The Company reduced planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and prioritized capital investments based on the highest near-term return opportunities in order to maintain financial flexibility.
Refer to "Credit Facilities and Indebtedness" section within this section for additional detail of the Company's borrowings and repayments under our Credit Facility during 2020.
On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers the Company's 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 restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period. While the Second Amendment is in effect, the Company agreed to limit Restricted Payments to $26.0 million.
On February 1, 2021, the Company entered into the Third Amendment to the Credit Agreement to increase the restricted payments capacity during the Financial Covenant Relief Period, as defined in the Second Amendment, from $26.0 million to $226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc. The Company repurchased the shares using available cash and borrowings under the Company's Revolver.
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 properties will be removed.
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.
Kater and Thimmegowda Settlement
Refer to Part I, Item 3, Legal Proceedings, of this Report for discussion of the settlement agreement with respect to the Kater Litigation and Thimmegowda Litigation the Company entered into during 2020.
Key Indicators to Evaluate Business Results and Financial Condition
Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend.
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of EBITDA from our equity investments.
Adjusted EBITDA excludes:
•Transaction expense, net which includes:
–Acquisition and disposition related charges, including fair value adjustments related to earnouts and deferred payments,
–Calder racing exit costs, and
–Other transaction expense, including legal, accounting and other deal-related expense.
•Stock-based compensation expense,
•Midwest Gaming's impact on our investments in unconsolidated affiliates from:
–The impact of changes in fair value of interest rate swaps, and
–Recapitalization and transaction costs.
•Asset impairments,
•Gain on Ocean Downs/Saratoga Transaction,
•Loss on extinguishment of debt,
•Legal reserves,
•Pre-opening expense, and
•Other charges, recoveries and expenses
For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the consolidated statements of comprehensive (loss) income. See the Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA included in this section for additional information.
Business Highlights
In 2020, our executive management, leaders, and team members of our Company faced leadership challenges that were unprecedented as a result of the COVID-19 global pandemic.
The Company reacted quickly to significant threats to the Company's long-term financial health by taking the following actions:
•Property closures and re-openings:
–Implemented immediate employee, customer, and regulatory communications, safety and health protocols, return to work protocols, work-from-home practices and other facility actions to protect our team members, our customers, our communities, and our Company’s assets when governmental authorities ordered the closure and subsequent reopening of nearly all of our properties.
–Furloughed nearly all of our employees at the closed properties during the closure periods and implemented graduated salary reductions based on the level of pay for executive management and all salaried professionals who were not furloughed.
–Executed immediate operational cost reduction actions to offset the loss of revenue.
–Immediately prioritized maintenance and project capital and stopped all non-priority capital projects.
•Negotiated a waiver of our financial covenants for our Credit Agreement while retaining the ability to grow organically, make acquisitions, and pay dividends.
•Made the difficult decision – but one that our investors have applauded as the right decision - to run the Kentucky Oaks and Derby without spectators to protect the long-term value of this iconic asset.
•Consistently communicated with equity and debt investors and rating agencies on an ongoing basis regarding the status of the Company’s operations, financial health, and long-term strategy to provide reassurance on the long-term financial health and strategic direction of the Company.
Churchill Downs Segment:
•Churchill Downs Racetrack:
–The Governor of the Commonwealth of Kentucky had banned horse racing and other activities for the first Saturday in May. We negotiated a new date and time frame with NBC on the first weekend in September 2020 and modified our safety protocols to conduct the 146th running of the Kentucky Derby.
–The Kentucky Oaks and Derby were held on September 4th and 5th without spectators in a challenging environment and delivered positive Adjusted EBITDA despite the loss of ticket revenue, fewer sponsorships, and lower wagering during Derby Week.
–Our team members implemented extensive COVID-19 testing and processes and procedures to hold a shortened Spring Meet with no spectators and the September Meet and Fall Meet with restrictions on patron capacity.
–The state-of-the-art equine medical center and quarantine barns on the backside area of our track were completed in April 2020 which reinforces our ongoing commitment to equine and jockey safety and supports our long-term international growth strategy. We also implemented other equine safety initiatives led by our on-staff veterinarian including entry restrictions, medication restrictions, and other actions to improve the safety of the equine athletes and jockeys and supported federal legislation that was resulted in the Horseracing Integrity and Safety Act being signed into law on December 28, 2020.
•Derby City Gaming:
–Derby City Gaming delivered record Adjusted EBITDA in 2020 despite a temporary closure from March 15, 2020 to June 8, 2020 as a result of the COVID-19 global pandemic.
–We added a second patio to the facility that allows for smoking and provided an additional 8,000 square-feet of gaming space and 225 HRMs.
–Our team members developed partnerships with Scientific Games, IGT, and Konami to add their leading game titles on the HRMs at our Derby City Gaming, Oak Grove, Newport, and future HRM facilities.
Online Wagering Segment:
•TwinSpires Horse Racing:
–Handle grew from $1.46 billion to $1.98 billion, up $521.0 million, or 35.8%, over 2019. Industry handle decreased 1.0%.
–Net revenue grew from $291.0 million to $405.0 million, up $114.0 million, or 39.2%, over 2019.
–The business delivered record Adjusted EBITDA of $126.8 million, up $48.4 million, or 61.7%, over 2019.
•TwinSpires Sports and Casino:
–We signed multi-year agreements with GAN Limited and Kambi Group PLC to provide player account management, casino platform, sports trading, and risk management services. We also announced the transition from the BetAmerica brand to the TwinSpires brand.
–We opened a retail sportsbook at Bronco Billy's Casino in Cripple Creek, Colorado and at Island Resort & Casino in Harris, Michigan. We have also launched our sportsbook and casino app in Michigan.
Gaming
•The Gaming Segment delivered $176.7 million of Adjusted EBITDA, a decrease of $104.2 million, 37.1% from 2019 despite multiple property closures and ongoing patron capacity restrictions as a result of the COVID-19 global pandemic.
•The team delivered wholly-owned casino margins of 36.6% in the second half of 2020, up 690 basis points from 2019 excluding properties that were closed during part of the second half of 2020.
•Our leaders and team members developed and implemented changes to our amenities, modified our gaming floors, enhanced our cleaning and safety protocols, provided safety equipment and protective gear to our team members, and conducted extensive training to enable our properties to safely reopen with patron capacity restrictions.
All Other
•Oak Grove - We opened a simulcast and HRM facility in Oak Grove, Kentucky with approximately 1,325 HRMs, a 128-room hotel, an event center, and food and beverage venues. The 1,200-person grandstand, 3,000-person capacity outdoor amphitheater and stage, a state-of-the-art equestrian center, and a recreational vehicle park will open in early 2021.
•Newport Racing and Gaming - We opened a pari-mutuel simulcast area, a 17,000 square foot gaming floor with approximately 500 HRMs, and a feature bar in Newport, Kentucky, as an extension of Turfway Park.
•We entered into an agreement in principle to settle the Kater Litigation and Thimmegowda Litigation where the Company will pay $124.0 million pre-tax of the settlement and Aristocrat will pay $31.0 million pre-tax. Aristocrat released the Company of any and all indemnification obligations related to Big Fish Games.
•On March 16, 2020, we entered into the First Amendment to our Credit Agreement which extended the maturity of the Company’s Revolver, lowers the pricing schedule for all levels of the pricing grid, and reduces the commitment fee.
•We entered into a Second Amendment to our Credit Agreement to provide financial covenant relief through the financial reporting date for second quarter 2021 and limited restricted payments to $26.0 million for this period.
•We formed a Diversity Council and conducted Diversity and Inclusion training for leaders and full-time team members in our Company.
•The Company’s total shareholder return was 43% for 2020 compared to 20% for the Russell 2000 and 18% for the S&P 500. The Company’s five-year total shareholder return for 2020 was 325% compared to 86% for the Russell 2000 and 103% for the S&P 500. The preceding shareholder return calculations assume dividends are reinvested.
We are committed to delivering strong financial results and long-term sustainable growth. We have strong cash flow and a solid balance sheet that supports organic growth as well as potential strategic acquisitions that we believe will create long-term value for our shareholders.
Our Operations
We manage our operations through three reportable segments: Churchill Downs, Online Wagering, and Gaming.
Refer to Part I, Item 1. Business, of this Annual Report on Form 10-K for more information on our segments and a description of our competition and government regulations and potential legislative changes that affect our business.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net (loss) income, Adjusted EBITDA, and certain other financial information:
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|
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Years Ended December 31,
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Change
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(in millions)
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2020
|
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2019
|
|
Net revenue
|
$
|
1,054.0
|
|
|
$
|
1,329.7
|
|
|
$
|
(275.7)
|
|
Operating income
|
60.2
|
|
|
215.7
|
|
|
(155.5)
|
|
Operating income margin
|
5.7
|
%
|
|
16.2
|
%
|
|
|
Net income from continuing operations
|
13.3
|
|
|
139.6
|
|
|
(126.3)
|
|
Net (loss) income attributable to Churchill Downs Incorporated
|
(81.9)
|
|
|
137.5
|
|
|
(219.4)
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|
Adjusted EBITDA
|
286.5
|
|
|
451.4
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|
|
(164.9)
|
|
Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
•Net revenue decreased $275.7 million driven by a $251.0 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties; a $131.4 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators; and a $11.1 million decrease from All Other primarily due to the temporary suspension of operations at Arlington partially offset by the opening of Oak Grove in September 2020. Partially offsetting these decreases was a $117.8 million increase from Online Wagering due to an increase in handle from higher net revenue per active player and an increase in active players for our TwinSpires Horse Racing business.
•Operating income decreased $155.5 million due to a $109.5 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators; a $83.3 million decrease from Gaming due to the temporary suspension of operations of all of our Gaming properties; a $17.5 million non-cash impairment of the Presque Isle gaming rights and trademark intangible assets; and a $7.0 million decrease from All Other primarily due to the temporary suspension of operations at Arlington partially offset by the opening of Oak Grove in September 2020. Partially offsetting these decreases were a $50.3 million increase from Online Wagering due to an increase in handle and net revenue per active player at TwinSpires; a $7.2 million decrease in selling, general and administrative expense primarily from a reduction in salaries and associated benefits; and a $4.3 million decrease in transaction expense, net.
•Net income from continuing operations decreased $126.3 million. The following items impacted comparability of the Company's net income from continuing operations for the year ended December 31, 2020 compared to the prior year: $14.4 million of after-tax expenses incurred in 2019 that did not recur in 2020, including the impact of the accelerated amortization of the purchase and sale agreement rights related to the Turfway Park Acquisition, Midwest Gaming's recapitalization and transaction costs, and legal reserves; a $13.3 million tax benefit related to our net operating loss in the current year that the Company intends to offset prior year taxes as a result of the CARES Act; and a $6.4 million non-cash tax decrease related to the re-measurement of our net deferred tax liabilities based on impact of revenue related to states with higher tax rates. Partially offsetting these decreases was a $12.0 million non-cash after-tax impact related to our impairment of the Presque Isle intangible assets; a $1.7 million after-tax increase in expenses related to higher transaction, pre-opening and other expenses; and a $0.2 million increase from other sources. Excluding these items, net income from continuing operations decreased $146.5 million primarily due to a $141.0 million after-tax decrease driven by the results of our operations and equity income from our unconsolidated affiliates and a $5.5 million after-tax increase in interest expense associated with higher outstanding debt balances.
•Our net income attributable to Churchill Downs Incorporated decreased $219.4 million due to a $126.3 million decrease in net income from continuing operations discussed above, a $93.0 million decrease in net loss from discontinued operations, and a $0.1 million decrease in net loss attributable to noncontrolling interest. During the
second quarter of 2020, we settled the Kater and Thimmegowda litigations for $124.0 million pre-tax ($95.0 million after-tax) which increased our net loss from discontinued operations compared to the prior year period.
•Our Adjusted EBITDA decreased $164.9 million driven by a $104.2 million decrease from Gaming due to the temporary suspension of all Gaming property operations; a $99.4 million decrease from Churchill Downs primarily due to running the 146th Kentucky Oaks and Derby without spectators; and a $4.3 million decrease from All Other primarily due to the temporary suspension of operations at Arlington. Partially offsetting these decreases was a $43.0 million increase from Online Wagering due to an increase in handle from higher net revenue per active player and an increase in active players for our TwinSpires Horse Racing business.
Financial Results by Segment
Net Revenue by Segment
The following table presents net revenue for our segments, including intercompany revenue:
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Years Ended December 31,
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Change
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(in millions)
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2020
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2019
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Churchill Downs:
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|
|
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Churchill Downs Racetrack
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$
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81.0
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|
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$
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202.8
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|
|
$
|
(121.8)
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Derby City Gaming
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79.5
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|
|
86.6
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|
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(7.1)
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Total Churchill Downs
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160.5
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|
|
289.4
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|
|
(128.9)
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Online Wagering:
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|
|
|
|
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TwinSpires Horse Racing
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405.0
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|
|
291.0
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|
|
114.0
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TwinSpires Sports and Casino
|
4.9
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|
|
0.6
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|
|
4.3
|
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Total Online Wagering
|
409.9
|
|
|
291.6
|
|
|
118.3
|
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Gaming:
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|
|
|
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Presque Isle
|
75.4
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|
|
139.0
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|
|
(63.6)
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Fair Grounds Slots and VSI
|
99.8
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|
|
124.8
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(25.0)
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Oxford
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44.9
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|
|
101.7
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|
(56.8)
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Calder
|
51.9
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|
|
99.9
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|
(48.0)
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Ocean Downs
|
60.3
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|
|
85.9
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|
|
(25.6)
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Riverwalk
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49.1
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|
|
58.9
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|
|
(9.8)
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Harlow's
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41.8
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|
|
55.3
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|
|
(13.5)
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Lady Luck Nemacolin
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20.7
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|
|
29.3
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|
|
(8.6)
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Total Gaming
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443.9
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|
|
694.8
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|
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(250.9)
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All Other
|
74.7
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|
|
84.2
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|
|
(9.5)
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Eliminations
|
(35.0)
|
|
|
(30.3)
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|
|
(4.7)
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Net Revenue
|
$
|
1,054.0
|
|
|
$
|
1,329.7
|
|
|
$
|
(275.7)
|
|
Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
•Churchill Downs revenue decreased $128.9 million primarily due to a $121.8 million decrease from Churchill Downs Racetrack from the loss of ticket revenue, fewer sponsorships, and lower wagering during Derby Week as a result of running of 146th Kentucky Oaks and Derby without spectators in a challenging environment, and a $7.1 million decrease at Derby City Gaming due to the temporary suspension of operations.
•Online Wagering revenue increased $118.3 million from the prior year primarily due to a $114.0 million increase at TwinSpires Horse Racing. Although horse racing content for wagering decreased, TwinSpires Horse Racing handle grew $521.0 million, or 35.8%, compared to prior year, as our customers wagered more on the content that was available. Our TwinSpires Sports and Casino net revenues increased $4.3 million compared to prior year primarily due to the launch of the casino platform in Pennsylvania and Indiana in late December 2019.
•Gaming revenue decreased $250.9 million primarily due to the temporary suspension of operations at all of our Gaming properties that reduced the net revenue generated at these properties.
•All Other revenue decreased $9.5 million primarily due to a $30.8 million decrease as a result of the temporary suspension of operations and loss of racing days at Arlington and a $4.2 million decrease as a result of the temporary
suspension of operations at the majority of United Tote customer locations. Partially offsetting these decreases were a $16.6 million increase at Oak Grove due to the opening of the HRM facility in September 2020 and the hotel in October 2020, a $5.8 million increase primarily from the increase in Turfway Park handle, and a $3.1 million increase at Newport due to the opening in October 2020.
Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
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Years Ended December 31,
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|
Change
|
|
|
(in millions)
|
2020
|
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2019
|
|
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|
|
|
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|
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Taxes and purses
|
$
|
268.3
|
|
$
|
369.7
|
|
$
|
(101.4)
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|
|
|
Content expense
|
180.7
|
|
139.6
|
|
41.1
|
|
|
|
Salaries and benefits
|
140.5
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|
171.2
|
|
(30.7)
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|
|
|
Selling, general and administrative expense
|
114.8
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|
122.0
|
|
(7.2)
|
|
|
|
Depreciation and amortization
|
92.9
|
|
96.4
|
|
(3.5)
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|
|
|
Marketing and advertising expense
|
31.4
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|
41.8
|
|
(10.4)
|
|
|
|
Impairment expense
|
17.5
|
|
—
|
|
17.5
|
|
|
|
Transaction expense, net
|
1.0
|
|
5.3
|
|
(4.3)
|
|
|
|
Other operating expense
|
146.7
|
|
168.0
|
|
(21.3)
|
|
|
|
Total expense
|
$
|
993.8
|
|
$
|
1,114.0
|
|
$
|
(120.2)
|
|
|
|
Percent of revenue
|
94
|
%
|
|
84
|
%
|
|
|
|
|
Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Significant items affecting comparability of consolidated operating expense include:
•Taxes and purses decreased $101.4 million driven by the temporary suspension of all operations at our Gaming properties and the related decrease in net revenue and a decrease in purses related to the reduction of horse races from the temporary closures of our facilities, partially offset by an increase in taxes and purses driven by the opening of Oak Grove in September 2020 and Newport in October 2020.
•Content expense increased $41.1 million primarily due to an increase in certain host fees and source market fees for TwinSpires as a result of the increase in handle.
•Salaries and benefits expense decreased $30.7 million driven primarily by temporary furloughing certain employees and temporarily reducing salaries for all remaining non-furloughed salaried employees through the end of July 2020, partially offset by increased expenses due to the opening of Oak Grove in September 2020 and Newport in October 2020.
•Selling, general and administrative expense decreased $7.2 million primarily from a temporary reduction in salaries and associated benefits and a decrease in accrued bonuses compared to prior year.
•Depreciation and amortization expense decreased $3.5 million primarily driven by the amortization of the assignment of the purchase and sale agreement rights associated with the Turfway Park Acquisition that occurred in 2019 and did not recur in 2020, partially offset by capital projects placed into service for Churchill Downs Racetrack and Derby City Gaming, and Turfway Park.
•Marketing and advertising expense decreased $10.4 million primarily due to the temporary suspension of operations at our brick-and-mortar properties, partially offset by an increase in marketing and advertising spend for TwinSpires Horse Racing and our TwinSpires Sports and Casino business in the Online Wagering segment.
•Impairment of intangible assets increased $17.5 million driven by a $15.0 million non-cash impairment charge related to Presque Isle's gaming rights and a $2.5 million non-cash impairment charge related to Presque Isle's trademark.
•Transaction expense, net was nominal for the year ended December 31, 2020. For the year ended December 31, 2019, transaction expense, net was related to the acquisitions of Presque Isle and Lady Luck Nemacolin.
•Other operating expense includes maintenance, utilities, food and beverage costs, property taxes and insurance and other operating expenses. Other operating expense decreased $21.3 million primarily driven by the temporary suspension of operations at our brick-and-mortar properties, partially offset by the operating expenses related to
Turfway Park and from the opening of Oak Grove in September 2020 and Newport Racing and Gaming in October 2020.
Adjusted EBITDA
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
(in millions)
|
2020
|
|
2019
|
|
Churchill Downs
|
$
|
38.3
|
|
|
$
|
137.7
|
|
|
$
|
(99.4)
|
|
Online Wagering
|
109.3
|
|
|
66.3
|
|
|
43.0
|
|
Gaming
|
176.7
|
|
|
280.9
|
|
|
(104.2)
|
|
Total segment Adjusted EBITDA
|
324.3
|
|
|
484.9
|
|
|
(160.6)
|
|
All Other
|
(37.8)
|
|
|
(33.5)
|
|
|
(4.3)
|
|
Total Adjusted EBITDA
|
$
|
286.5
|
|
|
$
|
451.4
|
|
|
$
|
(164.9)
|
|
Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
•Churchill Downs Adjusted EBITDA decreased $99.4 million due to a $101.0 million decrease at Churchill Downs Racetrack primarily due to the decrease in net revenue as a result of running the 146th Kentucky Oaks and Derby without spectators, partially offset by a $1.6 million increase from Derby City Gaming due to increased operating efficiencies which more than offset the impact of the temporary closure of the property and ongoing capacity restrictions.
•Online Wagering Adjusted EBITDA increased $43.0 million primarily due to a $48.4 million increase driven by an increase in TwinSpires Horse Racing handle, partially offset by a $5.4 million decrease from a higher level of marketing spend and increased costs associated with the continued build-out of the TwinSpires Sports and Casino business.
•Gaming Adjusted EBITDA decreased $104.2 million driven by an $82.9 million decrease at our wholly-owned Gaming properties and a $21.3 million decrease from our equity investments, both of which were due to decreases in net revenue as a result of the temporary suspension of operations during 2020.
•All Other Adjusted EBITDA decreased $4.3 million primarily due to a $7.3 million decrease from lower revenue from Arlington and United Tote, a $1.6 million decrease from higher expenses at Turfway Park as a result of a full year of operations in 2020, and a $0.5 million decrease from other sources. Partially offsetting these decreases was a $5.1 million increase from the opening of Oak Grove in September 2020.
Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in millions)
|
2020
|
|
2019
|
|
Net (loss) income attributable to Churchill Downs Incorporated
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
(219.4)
|
|
Net loss attributable to noncontrolling interest
|
0.2
|
|
|
0.3
|
|
|
(0.1)
|
|
Net (loss) income before noncontrolling interest
|
(82.1)
|
|
|
137.2
|
|
|
(219.3)
|
|
Loss from discontinued operations, net of tax
|
95.4
|
|
|
2.4
|
|
|
93.0
|
|
Income from continuing operations, net of tax
|
13.3
|
|
|
139.6
|
|
|
(126.3)
|
|
Additions:
|
|
|
|
|
|
Depreciation and amortization
|
92.9
|
|
|
96.4
|
|
|
(3.5)
|
|
Interest expense
|
80.0
|
|
|
70.9
|
|
|
9.1
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
(5.3)
|
|
|
56.8
|
|
|
(62.1)
|
|
EBITDA
|
$
|
180.9
|
|
|
$
|
363.7
|
|
|
$
|
(182.8)
|
|
|
|
|
|
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
Stock-based compensation expense
|
$
|
23.7
|
|
|
$
|
23.8
|
|
|
$
|
(0.1)
|
|
Legal reserves
|
—
|
|
|
3.6
|
|
|
(3.6)
|
|
Other, net
|
0.8
|
|
|
0.4
|
|
|
0.4
|
|
Pre-opening expense
|
11.2
|
|
|
5.1
|
|
|
6.1
|
|
Other income, expense:
|
|
|
|
|
|
Interest, depreciation and amortization expense related to equity investments
|
38.5
|
|
|
32.6
|
|
|
5.9
|
|
Changes in fair value of Midwest Gaming's interest rate swaps
|
12.9
|
|
|
12.4
|
|
|
0.5
|
|
Midwest Gaming's recapitalization and transactions costs
|
—
|
|
|
4.7
|
|
|
(4.7)
|
|
Other charges and recoveries, net
|
—
|
|
|
(0.2)
|
|
|
0.2
|
|
|
|
|
|
|
|
Transaction expense, net
|
1.0
|
|
|
5.3
|
|
|
(4.3)
|
|
Impairment of tangible and other intangible assets
|
17.5
|
|
|
—
|
|
|
17.5
|
|
Total adjustments to EBITDA
|
105.6
|
|
|
87.7
|
|
|
17.9
|
|
Adjusted EBITDA
|
$
|
286.5
|
|
|
$
|
451.4
|
|
|
$
|
(164.9)
|
|
Consolidated Balance Sheet
The following table is a summary of our overall financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Change
|
(in millions)
|
2020
|
|
2019
|
|
Total assets
|
$
|
2,686.4
|
|
|
$
|
2,551.0
|
|
|
$
|
135.4
|
|
Total liabilities
|
2,319.3
|
|
|
2,040.0
|
|
|
279.3
|
|
Total shareholders’ equity
|
367.1
|
|
|
511.0
|
|
(143.9)
|
|
•Total assets increased $135.4 million driven by a $144.8 million increase in property and equipment, net, due to the construction of Oak Grove and Newport; a $34.9 million increase in income taxes receivable as a result of our current year income tax benefit; and a $3.7 million increase in all other assets. Partially offsetting these increases was a $28.8 million decrease in cash and cash equivalents primarily driven by our project capital expenditures related to Oak Grove and Newport; and a $19.2 million decrease in other intangibles primarily due the impairment of Presque Isle gaming rights and trademark.
•Total liabilities increased $279.3 million driven by a $146.5 million increase in long-term debt, non-current, primarily driven by borrowings from our senior secured revolving credit facility; a $124.0 million increase in current liabilities of discontinued operations due to the settlement of Kater and Thimmegowda litigations; and a $12.9 million increase
in accounts payable primarily driven by timing. Partially offsetting these increases was a $4.1 million decrease in all other liabilities.
•Total shareholders’ equity decreased $143.9 million driven by a $81.9 million current year net loss attributable to Churchill Downs Incorporated, $27.9 million in repurchases of common stock, $31.4 million in settlement of stock awards, $25.1 million from our annual dividend declared in December 2020, and a $1.3 million decrease in other equity components. Partially offsetting these decreases was a $23.7 million increase resulting from stock-based compensation.
Liquidity and Capital Resources
The following table is a summary of our liquidity and cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
(in millions)
|
2020
|
|
2019
|
|
Cash Flows from:
|
|
|
|
|
|
Operating activities
|
$
|
141.9
|
|
|
$
|
289.6
|
|
|
$
|
(147.7)
|
|
Investing activities
|
(239.4)
|
|
|
(781.2)
|
|
|
541.8
|
|
Financing activities
|
76.0
|
|
|
460.8
|
|
|
(384.8)
|
|
Included in cash flows from investing activities are capital maintenance expenditures and capital project expenditures. Capital maintenance expenditures relate to the replacement of existing fixed assets with a useful life greater than one year that are obsolete, exhausted, or no longer cost effective to repair. Capital project expenditures represent fixed asset additions related to land or building improvements to new or existing assets or purchases of new (non-replacement) equipment or software related to specific projects deemed necessary expenditures.
Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
•Cash provided by operating activities decreased $147.7 million driven by a $138.0 million decrease in operating income related to continuing operations, net of the $17.5 million non-cash impairment of Presque Isle's intangible assets; a $17.9 million increase in cash interest paid; and a $13.7 million decrease from all other operating activities. Partially offsetting these decreases was a $21.9 million decrease in cash taxes paid. We anticipate that cash flows from operations over the next twelve months will be adequate to fund our business operations and capital expenditures.
•Cash used in investing activities decreased $541.8 million driven by a $648.8 million decrease in cash used for our investment and acquisitions in 2019 related to the equity investment in Midwest Gaming, the Presque Isle Transaction, the Turfway Park Acquisition, and other investments in intangible assets, and a $25.3 million decrease in capital maintenance expenditures. Partially offsetting these decreases were a $128.3 million increase for capital project expenditures and a $4.0 million increase in funds used in other investing activities.
•Cash provided by financing activities decreased $384.8 million driven by a $450.3 million decrease in net borrowings under our long-term debt obligations primarily related to the issuance of our 2027 Senior Notes in 2019, partially offset by borrowings from our senior secured revolving credit facility during 2020, and a $19.8 million increase in cash paid to settle stock awards and pay taxes related to the settlement of stock awards. Partially offsetting these decreases was a $66.6 million decrease in share repurchases in 2020 and an $18.7 million decrease from other financing activities.
Credit Facilities and Indebtedness
The following table presents our debt outstanding, bond premium and debt issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Change
|
(in millions)
|
2020
|
|
2019
|
|
Term Loan B due 2024
|
$
|
388.0
|
|
|
$
|
392.0
|
|
|
$
|
(4.0)
|
|
Revolver
|
149.7
|
|
|
—
|
|
|
149.7
|
|
2027 Senior Notes
|
600.0
|
|
|
600.0
|
|
|
—
|
|
2028 Senior Notes
|
500.0
|
|
|
500.0
|
|
|
—
|
|
Total Debt
|
1,637.7
|
|
|
1,492.0
|
|
|
145.7
|
|
Current maturities of long-term debt
|
4.0
|
|
|
4.0
|
|
|
—
|
|
Total debt, net of current maturities
|
1,633.7
|
|
|
1,488.0
|
|
|
145.7
|
|
Issuance cost and fees
|
(15.4)
|
|
|
(18.1)
|
|
|
2.7
|
|
Net debt
|
$
|
1,618.3
|
|
|
$
|
1,469.9
|
|
|
$
|
148.4
|
|
Credit Agreement
On December 27, 2017, we entered into a senior secured credit agreement (as amended, the "Credit Agreement") among the Company, the subsidiary guarantors party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders and other financial institutions party thereto. The Credit Agreement provides for a $700.0 million senior secured revolving credit facility due 2022 (the "Revolver") and a $400.0 million senior secured term loan B due 2024 (the "Term Loan B"). Included in the maximum borrowing of $700.0 million under the Revolver is a letter of credit sub facility not to exceed $50.0 million and a swing line commitment up to a maximum principal amount of $50.0 million. The Credit Amendment is secured by substantially all wholly-owned assets of the Company. The Company capitalized $1.6 million of debt issuance costs associated with the Revolver which is being amortized as interest expense over 5 years. The Company also capitalized $5.1 million of deferred financing costs associated with the Term Loan B portion of the Credit Agreement which is being amortized as interest expense over 7 years.
The interest rates applicable to the Company’s borrowings under the Credit Agreement are LIBOR-based plus a spread, as determined by the Company’s consolidated total net leverage ratio. The Term Loan B requires quarterly payments of 0.25% of the original $400.0 million balance, or $1.0 million per quarter. The Term Loan B may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement. The Company is required to pay a commitment fee on the unused portion of the Revolver determined by a pricing grid based on the consolidated total net leverage ratio of the Company. For the period ended December 31, 2020, the Company's commitment fee rate was 0.30%.
The Company had an outstanding balance of $149.7 million and had $545.8 million available on the Revolver on December 31, 2020. The Company had $67.4 million of cash and cash equivalents on December 31, 2020. On March 16, 2020, we borrowed $675.4 million on the Revolver to provide the Company with additional financial flexibility. On December 31, 2020, we repaid $545.0 million of the borrowings on the Revolver.
On March 16, 2020, the Company entered into the First Amendment (the “First Amendment”) to the Credit Agreement. The First Amendment extended the maturity of the Company’s Revolver from December 27, 2022 to at least September 27, 2024, which is 91 days prior to the latest maturity date of the term loan facility on December 27, 2024. The First Amendment also lowered the upper limit of the applied spreads with respect to revolving loans from 2.25% to 1.75% and for commitment fees with respect thereto from 0.35% to 0.30% and provides a reduced pricing schedule for outstanding borrowings and commitment fees with respect to the Revolver across all other leverage pricing levels. The First Amendment did not alter the Company’s borrowing capacity. The Company capitalized $2.0 million of debt issuance costs associated with the First Amendment which are being amortized as interest expense over the remaining duration of the Revolver.
On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement, which (i) provides for a financial covenant relief period through the date on which the Company delivers the Company's 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 restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period. While the Second Amendment is in effect, the Company agreed to limit restricted payments to $26.0 million.
On February 1, 2021, the Company entered into the Third Amendment to the Credit Agreement to increase the restricted payments capacity during the Financial Covenant Relief Period, as defined in the Second Amendment, from $26.0 million to $226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc. The Company repurchased the shares using available cash and borrowings under the Company's Revolver.
Although the Company was not required to meet the Company's financial covenants under the Credit Agreement on December 31, 2020 (as a result of the Second Amendment), the Company was compliant with all applicable covenants on December 31, 2020.
2027 Senior Notes
On March 25, 2019, we completed an offering of $600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature on April 1, 2027 (the "2027 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2027 Senior Notes were issued at par, with interest payable on April 1st and October 1st of each year, commencing on October 1, 2019. The Company used the net proceeds from the offering to repay our outstanding balance on the Revolver portion of our Credit Agreement. In connection with the offering, we capitalized $8.9 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes.
The 2027 Senior Notes were issued pursuant to an indenture, dated March 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2027 Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2027 Senior Notes at any time prior to April 1, 2022, at a price equal to 100% of the principal amount of the 2027 Senior Notes redeemed plus an applicable make-whole premium. On or after such date, the Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture. In addition, at any time prior to April 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 Senior Notes at a redemption price equal to 105.50% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2027 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.
In connection with the issuance of the 2027 Senior Notes, the Company and the 2027 Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019.
2028 Senior Notes
On December 27, 2017, we completed an offering of $500.0 million in aggregate principal amount of 4.75% Senior Unsecured Notes that mature on January 15, 2028 (the "2028 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2028 Senior Notes were issued at par, with interest payable on January 15th and July 15th of each year, commencing on July 15, 2018. The Company used the net proceeds from the 2028 Senior Notes and the Credit Agreement to repay the remaining outstanding amount of our $600.0 million 5.375% Senior Unsecured Notes that were scheduled to mature on December 15, 2021. In connection with the offering, we capitalized $7.7 million of debt issuance costs which are being amortized as interest expense over the term of the 2028 Senior Notes.
The 2028 Senior Notes were issued pursuant to an indenture, dated December 27, 2017 (the "2028 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2028 Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2028 Senior Notes at any time prior to January 15, 2023, at a price equal to 100% of the principal amount of the 2028 Senior Notes redeemed plus an applicable make-whole premium. On or after such date the Company may redeem some or all of the 2028 Senior Notes at redemption prices set forth in the 2028 Indenture. In addition, at any time prior to January 15, 2021, the Company may redeem up to 40% of the aggregate principal amount of the 2028 Senior Notes at a redemption price equal to 104.75% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2028 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted
payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.
In connection with the issuance of the 2028 Senior Notes, the Company and the 2028 Guarantors entered into a Registration Rights Agreement to register any 2028 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from December 27, 2017.
Contractual Obligations
Our commitments to make future payments as of December 31, 2020, are estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2021
|
|
2022-2023
|
|
2024-2025
|
|
Thereafter
|
|
Total
|
Dividends
|
$
|
24.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24.9
|
|
Term Loan B
|
4.0
|
|
|
8.0
|
|
|
376.0
|
|
|
—
|
|
|
388.0
|
|
Interest on Term Loan B (1)
|
8.3
|
|
|
16.6
|
|
|
8.1
|
|
|
—
|
|
|
33.0
|
|
Revolver
|
—
|
|
|
—
|
|
|
149.7
|
|
|
—
|
|
|
149.7
|
|
Interest on Revolver (2)
|
2.8
|
|
|
5.7
|
|
|
2.8
|
|
|
—
|
|
|
11.3
|
|
2027 Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
600.0
|
|
|
600.0
|
|
2028 Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
500.0
|
|
|
500.0
|
|
Interest on 2027 Senior Notes
|
33.0
|
|
|
66.0
|
|
|
66.0
|
|
|
49.5
|
|
|
214.5
|
|
Interest on 2028 Senior Notes
|
23.8
|
|
|
47.5
|
|
|
47.5
|
|
|
59.4
|
|
|
178.2
|
|
Operating Leases
|
5.5
|
|
|
8.1
|
|
|
7.4
|
|
|
5.5
|
|
|
26.5
|
|
Minimum Guarantees (3)
|
9.0
|
|
|
19.0
|
|
|
19.0
|
|
|
13.2
|
|
|
60.2
|
|
Total
|
$
|
111.3
|
|
|
$
|
170.9
|
|
|
$
|
676.5
|
|
|
$
|
1,227.6
|
|
|
$
|
2,186.3
|
|
(1) Interest includes the estimated contractual payments under our Credit Facility assuming no change in the weighted average borrowing rate of 2.15%, which was the rate in place as of December 31, 2020.
(2) Assumes no change in the weighted average borrowing rate of 1.90%, which was the rate in place as of December 31, 2020.
(3) Includes the maximum estimated exposure where we are contractually obligated to make future minimum payments.
As of December 31, 2020, we had approximately $3.9 million of unrecognized tax benefits.
Critical Accounting Policies and Estimates
Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2 to the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.
Our critical accounting estimates relate to goodwill and certain indefinite-lived intangible assets.
Goodwill and certain indefinite-lived intangible assets
Acquisition of certain identifiable indefinite-lived intangible assets
In conjunction with the acquisition of a business, the Company records identifiable indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. Our indefinite-lived intangible assets primarily consist of gaming rights and trademarks. Gaming rights and trademarks are considered indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities and use the trademarks indefinitely, and our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions.
We use various valuation methods to determine initial fair value of our indefinite-lived intangible assets, including the Greenfield method and relief-from-royalty method of the income approach, all of which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. The use of these valuation methods requires us to make significant
estimates and assumptions about future revenue and operating expenses, expected start-up costs, capital expenditures, royalty rate, and the discount rate. The fair values of gaming rights are generally determined using the Greenfield method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. This method assumes that the gaming rights provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses, start-up costs of the acquired business, and the discount rate are the primary assumptions and estimates used in these valuations. The fair values of trademarks are generally determined using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the trademarks. The estimated future revenue, royalty rate, and the discount rate are the primary assumptions and estimates used in these valuations. The discount rates used to discount expected future cash flows to present value are generally derived from the weighted average cost of capital analysis and adjusted for the size and/or risk of the asset.
Assessments of goodwill and indefinite-lived intangible assets
We perform our annual review for impairment of goodwill and indefinite-lived intangible assets on April 1 of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not the asset is impaired. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues which are triggering events requiring the testing of an asset’s carrying value for recoverability.
Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired. An entity may first assess qualitative factors to determine whether it is necessary to complete the impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies. If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield method for gaming rights and relief-from-royalty method of the income approach for trademarks. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others. These factors require significant judgments and estimates, and application of alternative assumptions could produce materially different results. Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values, and fair values of our reporting units and assets. The impairment tests for goodwill and indefinite-lived intangible assets are subject to uncertainties arising from such events as changes in competitive conditions, the current economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions. If any of these factors were to materially change, such change may require a reevaluation of our goodwill and indefinite-lived intangible assets. Changes in estimates or the application of alternative assumptions could produce significantly different results.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
2020
|
|
2019
|
|
2018
|
Net revenue:
|
|
|
|
|
|
Churchill Downs
|
$
|
142.8
|
|
|
$
|
274.2
|
|
|
$
|
195.8
|
|
Online Wagering
|
408.3
|
|
|
290.5
|
|
|
290.2
|
|
Gaming
|
441.4
|
|
|
692.4
|
|
|
449.5
|
|
All Other
|
61.5
|
|
|
72.6
|
|
|
73.5
|
|
Total net revenue
|
1,054.0
|
|
|
1,329.7
|
|
|
1,009.0
|
|
Operating expense:
|
|
|
|
|
|
Churchill Downs
|
141.9
|
|
|
163.8
|
|
|
116.3
|
|
Online Wagering
|
273.3
|
|
|
205.8
|
|
|
196.1
|
|
Gaming
|
360.4
|
|
|
528.1
|
|
|
331.0
|
|
All Other
|
84.9
|
|
|
89.0
|
|
|
75.9
|
|
Selling, general and administrative expense
|
114.8
|
|
|
122.0
|
|
|
90.6
|
|
Impairment of intangible assets
|
17.5
|
|
|
—
|
|
|
—
|
|
Transaction expense, net
|
1.0
|
|
|
5.3
|
|
|
10.3
|
|
Total operating expense
|
993.8
|
|
|
1,114.0
|
|
|
820.2
|
|
Operating income
|
60.2
|
|
|
215.7
|
|
|
188.8
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense, net
|
(80.0)
|
|
|
(70.9)
|
|
|
(40.1)
|
|
Equity in income of unconsolidated investments
|
27.7
|
|
|
50.6
|
|
|
29.6
|
|
Gain on Ocean Downs/Saratoga transaction
|
—
|
|
|
—
|
|
|
54.9
|
|
Miscellaneous, net
|
0.1
|
|
|
1.0
|
|
|
0.7
|
|
Total other (expense) income
|
(52.2)
|
|
|
(19.3)
|
|
|
45.1
|
|
Income from continuing operations before provision for income taxes
|
8.0
|
|
|
196.4
|
|
|
233.9
|
|
Income tax benefit (provision)
|
5.3
|
|
|
(56.8)
|
|
|
(51.3)
|
|
Income from continuing operations, net of tax
|
13.3
|
|
|
139.6
|
|
|
182.6
|
|
(Loss) income from discontinued operations, net of tax
|
(95.4)
|
|
|
(2.4)
|
|
|
170.2
|
|
Net (loss) income
|
(82.1)
|
|
|
137.2
|
|
|
352.8
|
|
Net loss attributable to noncontrolling interest
|
(0.2)
|
|
|
(0.3)
|
|
|
—
|
|
Net (loss) income attributable to Churchill Downs Incorporated
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
352.8
|
|
|
|
|
|
|
|
Net income (loss) per common share data - basic:
|
|
|
|
|
|
Continuing operations
|
$
|
0.34
|
|
|
$
|
3.49
|
|
|
$
|
4.42
|
|
Discontinued operations
|
$
|
(2.41)
|
|
|
$
|
(0.06)
|
|
|
$
|
4.12
|
|
Net (loss) income per common share - basic
|
$
|
(2.07)
|
|
|
$
|
3.43
|
|
|
$
|
8.54
|
|
|
|
|
|
|
|
Net income (loss) per common share data - diluted:
|
|
|
|
|
|
Continuing operations
|
$
|
0.33
|
|
|
$
|
3.44
|
|
|
$
|
4.39
|
|
Discontinued operations
|
$
|
(2.41)
|
|
|
$
|
(0.06)
|
|
|
$
|
4.09
|
|
Net (loss) income per common share - diluted
|
$
|
(2.08)
|
|
|
$
|
3.38
|
|
|
$
|
8.48
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
39.6
|
|
|
40.1
|
|
|
41.3
|
|
Diluted
|
40.1
|
|
|
40.6
|
|
|
41.6
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
Change in pension benefits, net of tax
|
—
|
|
|
—
|
|
|
(0.2)
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
0.4
|
|
Comprehensive (loss) income attributable to Churchill Downs Incorporated
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
353.2
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
67.4
|
|
|
$
|
96.2
|
|
Restricted cash
|
53.6
|
|
|
46.3
|
|
Accounts receivable, net of allowance for doubtful accounts of $4.9 in 2020 and $4.4 in 2019
|
36.5
|
|
|
37.3
|
|
Income taxes receivable
|
49.4
|
|
|
14.5
|
|
Other current assets
|
28.2
|
|
|
26.9
|
|
Total current assets
|
235.1
|
|
|
221.2
|
|
Property and equipment, net
|
1,082.1
|
|
|
937.3
|
|
Investment in and advances to unconsolidated affiliates
|
630.6
|
|
|
634.5
|
|
Goodwill
|
366.8
|
|
|
367.1
|
|
Other intangible assets, net
|
350.6
|
|
|
369.8
|
|
Other assets
|
21.2
|
|
|
21.1
|
|
Total assets
|
$
|
2,686.4
|
|
|
$
|
2,551.0
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
70.7
|
|
|
$
|
57.8
|
|
Accrued expenses and other current liabilities
|
167.8
|
|
|
173.4
|
|
Current deferred revenue
|
32.8
|
|
|
42.5
|
|
Current maturities of long-term debt
|
4.0
|
|
|
4.0
|
|
Dividends payable
|
24.9
|
|
|
23.5
|
|
Current liabilities of discontinued operations
|
124.0
|
|
|
—
|
|
Total current liabilities
|
424.2
|
|
|
301.2
|
|
Long-term debt (net of current maturities and loan origination fees of $3.2 in 2020 and $4.0 in 2019)
|
530.5
|
|
|
384.0
|
|
Notes payable (net of debt issuance costs of $12.2 in 2020 and $14.1 in 2019)
|
1,087.8
|
|
|
1,085.9
|
|
Non-current deferred revenue
|
17.1
|
|
|
16.7
|
|
Deferred income taxes
|
213.9
|
|
|
212.8
|
|
Other liabilities
|
45.8
|
|
|
39.4
|
|
Total liabilities
|
2,319.3
|
|
|
2,040.0
|
|
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; 39.5 shares issued and outstanding in 2020 and 39.7 shares in 2019
|
18.2
|
|
|
—
|
|
Retained earnings
|
349.8
|
|
|
509.2
|
|
Accumulated other comprehensive loss
|
(0.9)
|
|
|
(0.9)
|
|
Total Churchill Downs Incorporated shareholders' equity
|
367.1
|
|
|
508.3
|
|
Noncontrolling interest
|
—
|
|
|
2.7
|
|
Total shareholders' equity
|
367.1
|
|
511.0
|
Total liabilities and shareholders' equity
|
$
|
2,686.4
|
|
|
$
|
2,551.0
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the years ended December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
46.2
|
|
|
$
|
7.3
|
|
|
$
|
634.3
|
|
|
$
|
(1.3)
|
|
|
$
|
—
|
|
|
$
|
640.3
|
|
Net income
|
|
|
|
|
352.8
|
|
|
|
|
|
|
352.8
|
|
Issuance of common stock
|
0.3
|
|
|
1.5
|
|
|
|
|
|
|
|
|
1.5
|
|
Repurchase of common stock
|
(6.1)
|
|
|
(29.9)
|
|
|
(504.0)
|
|
|
|
|
|
|
(533.9)
|
|
Taxes paid related to net share settlement of stock awards
|
(0.1)
|
|
|
|
|
(15.6)
|
|
|
|
|
|
|
(15.6)
|
|
Issuance of restricted stock awards, net of forfeitures
|
0.1
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
21.1
|
|
|
|
|
|
|
|
|
21.1
|
|
Adoption of ASC 606
|
|
|
|
|
29.7
|
|
|
|
|
|
|
29.7
|
|
Cash dividends ($0.543 per share)
|
|
|
|
|
(23.0)
|
|
|
|
|
|
|
(23.0)
|
|
Foreign currency translation adjustment, net of $(0.1) tax
|
|
|
|
|
|
|
0.6
|
|
|
|
|
0.6
|
|
Change in pension benefits, net of $(0.1) tax
|
|
|
|
|
|
|
(0.2)
|
|
|
|
|
(0.2)
|
|
Balance, December 31, 2018
|
40.4
|
|
|
—
|
|
|
474.2
|
|
|
(0.9)
|
|
|
—
|
|
|
473.3
|
|
Net income
|
|
|
|
|
137.5
|
|
|
|
|
(0.3)
|
|
|
137.2
|
|
Contributions from noncontrolling interest
|
|
|
|
|
|
|
|
|
3.0
|
|
|
3.0
|
|
Issuance of common stock
|
0.2
|
|
|
1.9
|
|
|
|
|
|
|
|
|
1.9
|
|
Repurchase of common stock
|
(0.9)
|
|
|
(25.7)
|
|
|
(67.3)
|
|
|
|
|
|
|
(93.0)
|
|
Taxes paid related to net share settlement of stock awards
|
(0.1)
|
|
|
|
|
(11.5)
|
|
|
|
|
|
|
(11.5)
|
|
Issuance of restricted stock awards, net of forfeitures
|
0.1
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
23.8
|
|
|
|
|
|
|
|
|
23.8
|
|
Adoption of ASC 842
|
|
|
|
|
(0.3)
|
|
|
|
|
|
|
(0.3)
|
|
Cash dividends ($0.581 per share)
|
|
|
|
|
(23.4)
|
|
|
|
|
|
|
(23.4)
|
|
Balance, December 31, 2019
|
39.7
|
|
|
—
|
|
|
509.2
|
|
|
(0.9)
|
|
|
2.7
|
|
|
511.0
|
|
Net loss
|
|
|
|
|
(81.9)
|
|
|
|
|
(0.2)
|
|
|
(82.1)
|
|
Purchase of noncontrolling interest
|
|
|
|
|
(0.5)
|
|
|
|
|
(2.5)
|
|
|
(3.0)
|
|
Issuance of common stock
|
0.1
|
|
|
2.4
|
|
|
|
|
|
|
|
|
2.4
|
|
Repurchase of common stock
|
(0.2)
|
|
|
(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
|
(0.1)
|
|
|
(3.6)
|
|
|
(15.1)
|
|
|
|
|
|
|
(18.7)
|
|
Stock-based compensation
|
|
|
23.7
|
|
|
|
|
|
|
|
|
23.7
|
|
Adoption of ASC 326
|
|
|
|
|
(0.5)
|
|
|
|
|
|
|
(0.5)
|
|
Cash dividends ($0.622 per share)
|
|
|
|
|
(25.1)
|
|
|
|
|
|
|
(25.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
39.5
|
|
|
$
|
18.2
|
|
|
$
|
349.8
|
|
|
$
|
(0.9)
|
|
|
$
|
—
|
|
|
$
|
367.1
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(82.1)
|
|
|
$
|
137.2
|
|
|
$
|
352.8
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
92.9
|
|
|
96.4
|
|
|
63.6
|
|
Equity in income of unconsolidated affiliates
|
(27.7)
|
|
|
(50.6)
|
|
|
(29.6)
|
|
Distributions from unconsolidated affiliates
|
30.7
|
|
|
38.1
|
|
|
19.8
|
|
Stock-based compensation
|
23.7
|
|
|
23.8
|
|
|
21.1
|
|
Deferred income taxes
|
1.1
|
|
|
31.5
|
|
|
36.5
|
|
Impairment of intangible assets
|
17.5
|
|
|
—
|
|
|
—
|
|
Amortization of operating lease assets
|
5.0
|
|
|
4.6
|
|
|
—
|
|
Gain on Ocean Downs/Saratoga transaction
|
—
|
|
|
—
|
|
|
(54.9)
|
|
Gain on sale of Big Fish Games
|
—
|
|
|
—
|
|
|
(219.5)
|
|
Other
|
4.5
|
|
|
2.8
|
|
|
(1.2)
|
|
Changes in operating assets and liabilities, net of businesses acquired and dispositions:
|
|
|
|
|
|
Income taxes
|
(34.3)
|
|
|
2.5
|
|
|
13.8
|
|
Deferred revenue
|
(8.3)
|
|
|
(9.3)
|
|
|
(10.3)
|
|
Current liabilities of discontinued operations
|
124.0
|
|
|
—
|
|
|
—
|
|
Other assets and liabilities
|
(5.1)
|
|
|
12.6
|
|
|
5.7
|
|
Net cash provided by operating activities
|
141.9
|
|
|
289.6
|
|
|
197.8
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital maintenance expenditures
|
(23.0)
|
|
|
(48.3)
|
|
|
(29.6)
|
|
Capital project expenditures
|
(211.2)
|
|
|
(82.9)
|
|
|
(119.8)
|
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(206.6)
|
|
|
13.1
|
|
Investments in and advances to unconsolidated affiliates
|
—
|
|
|
(410.1)
|
|
|
—
|
|
Acquisition of other intangible assets
|
—
|
|
|
(32.1)
|
|
|
—
|
|
Proceeds from sale of Big Fish Games
|
—
|
|
|
—
|
|
|
970.7
|
|
Other
|
(5.2)
|
|
|
(1.2)
|
|
|
(10.3)
|
|
Net cash (used in) provided by investing activities
|
(239.4)
|
|
|
(781.2)
|
|
|
824.1
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from borrowings under long-term debt obligations
|
726.1
|
|
|
1,236.3
|
|
|
135.0
|
|
Repayments of borrowings under long-term debt obligations
|
(580.4)
|
|
|
(640.3)
|
|
|
(381.0)
|
|
Payment of dividends
|
(23.4)
|
|
|
(22.2)
|
|
|
(23.7)
|
|
Repurchase of common stock
|
(28.4)
|
|
|
(95.0)
|
|
|
(531.4)
|
|
Cash settlement of stock awards
|
(12.7)
|
|
|
—
|
|
|
—
|
|
Taxes paid related to net share settlement of stock awards
|
(18.7)
|
|
|
(11.5)
|
|
|
(15.6)
|
|
Repayment of Ocean Downs debt
|
—
|
|
|
—
|
|
|
(54.7)
|
|
Big Fish Games earnout and deferred payments
|
—
|
|
|
—
|
|
|
(58.2)
|
|
Debt issuance costs
|
(2.0)
|
|
|
(8.9)
|
|
|
(0.8)
|
|
Change in bank overdraft
|
13.4
|
|
|
—
|
|
|
(4.4)
|
|
Other
|
2.1
|
|
|
2.4
|
|
|
1.5
|
|
Net cash provided by (used in) financing activities
|
76.0
|
|
|
460.8
|
|
|
(933.3)
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
(21.5)
|
|
|
(30.8)
|
|
|
88.6
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
(0.8)
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
142.5
|
|
|
173.3
|
|
|
85.5
|
|
Cash, cash equivalents and restricted cash, end of year
|
$
|
121.0
|
|
|
$
|
142.5
|
|
|
$
|
173.3
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
79.6
|
|
|
$
|
61.7
|
|
|
$
|
31.1
|
|
Income taxes
|
1.6
|
|
|
23.5
|
|
|
48.6
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
Dividends payable
|
$
|
25.8
|
|
|
$
|
23.5
|
|
|
$
|
22.5
|
|
Deferred tax liability assumed from equity investment
|
—
|
|
|
103.2
|
|
|
—
|
|
Property and equipment additions included in accounts payable and accrued expense and other current liabilities
|
12.9
|
|
|
12.4
|
|
|
6.6
|
|
Repurchase of common stock in payment of income taxes on stock-based compensation included in accrued expense and other current liabilities
|
—
|
|
|
3.9
|
|
|
2.5
|
|
Repurchase of common stock included in accrued expense and other current liabilities
|
—
|
|
|
0.5
|
|
|
2.5
|
|
Acquisition of Ocean Downs, net of cash acquired
|
—
|
|
|
—
|
|
|
115.2
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Churchill Downs Incorporated (the "Company", "we", "us", "our") is an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event, the Kentucky Derby. We own and operate three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines ("HRMs") in Kentucky. We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing, sports and iGaming in the U.S. and we have seven retail sportsbooks. We are also a leader in brick-and-mortar casino gaming in eight states with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
Impact of the COVID-19 Global 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 the potential effects of COVID-19, 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 U.S. and in relation to our business. The long-term impact of COVID-19 on the U.S. 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. One property temporarily suspended operations again in July 2020 and reopened in August 2020, and three properties temporarily suspended operations again in December 2020 and reopened in January 2021.
We implemented a number of 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 food buffets and valet services, and certain restaurants and food outlets. A summary of the temporary closures and the current restrictions at each property is provided in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this Report.
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 the Company's wholly-owned and managed gaming properties and certain racing operations. As the Company 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 and during the subsequent property closure periods.
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 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 after July 31, 2020.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee. The Company qualified for the tax credit and received additional tax credits for qualified wages, and the Company recorded a $2.7 million benefit related to the CARES Employee Retention Credit in operating expense in the accompanying consolidated statement of comprehensive (loss) income for the year ended December 31, 2020. The CARES Act also provides for deferred payment of the employer portion of social security taxes through December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. Approximately $5.3 million of deferred payments are recorded as liabilities within accrued expense and other current liabilities and other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2020.
The Company reduced planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and prioritized capital investments based on the highest near-term return opportunities in order to maintain financial flexibility.
Refer to Note 12, Total Debt, for discussion of from borrowings and repayments on our revolving credit facility (the "Revolver") pursuant to the Credit Agreement, and the amendments entered into during 2020.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
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.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We consolidate all subsidiaries in which we have a controlling financial interest and variable interest entities (“VIEs”) for which we or one of our consolidated subsidiaries is the primary beneficiary. We consolidate a VIE when we have both the power to direct the activities that most significantly impact the results of the VIE and the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE.
Use of Estimates
Our financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which requires management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired. An entity may first assess qualitative factors to determine whether it is necessary to complete the impairment test using a more likely than not criteria. If an entity believes it is more likely than not that the fair value of a reporting unit is greater than the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed. Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies. If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield method for gaming rights and relief-from-royalty method of the income approach for trademarks. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others. These factors require judgments and estimates, and application of alternative assumptions could produce significantly different results. Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values and fair market values of our reporting units and assets. Changes in estimates or the application of alternative assumptions could produce significantly different results.
We perform our annual review for impairment of goodwill and indefinite-lived intangible assets on April 1 of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not the relevant asset is impaired. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other items, may be indications of potential impairment issues, which are triggering events requiring the testing of an asset’s carrying value for recoverability. Goodwill is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. We are required to aggregate the components of an operating segment into one reporting unit if they have similar economic characteristics.
Our gaming rights and trademarks are considered indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities and use the trademarks indefinitely and our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions. The indefinite lived-intangible assets carrying value are tested annually, or more frequently, if indicators of impairment exist, by comparing the fair value of the recorded assets to the associated carrying amount. If the carrying amount of the gaming rights and trademark intangible assets exceed fair value, an impairment loss is recognized.
Property and Equipment
We review the carrying value of our property and equipment to be held and used in our operations whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
flows expected to result from the asset's use and eventual disposition. Adverse industry or economic trends, lower projections of profitability, or a significant adverse change in legal factors or in the business climate, among other items, may be indications of potential impairment issues. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, an impairment is recorded based on the fair value of the asset.
Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows: 10 to 40 years for grandstands and buildings, 2 to 10 years for equipment, 2 to 10 years for furniture and fixtures and 10 to 20 years for tracks and other improvements.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASC 606") using the modified retrospective method. The adoption of ASC 606 had no impact on cash provided by or used in operating, financing, or investing activities on our accompanying consolidated statements of cash flows. Due to the adoption of ASC 606, we made certain modifications to the classification of net revenue and operating expenses in the Online Wagering segment primarily due to the fact that under ASC 606, we are the principal in all import revenue contracts. Under ASC 606, in circumstances where we make advance sales and advance billings to customers, we recognize a receivable and deferred revenue when we have an unconditional right to receive payment. Previously, we recognized a receivable and deferred revenue at the time of the advance sale and billing if it was probable we would collect the receivable and recognize revenue.
We generate revenue from pari-mutuel wagering transactions with customers related to live races, simulcast races, and historical races as well as simulcast host fees earned from other wagering sites. Our racetracks that host live races also generate revenue through sponsorships, admissions (including luxury suites), personal seat licenses ("PSLs"), television rights, concessions, programs and parking. Concessions, programs, and parking revenue is recognized once the good or service is delivered.
Our live racetracks' revenue and income are influenced by our racing calendar. Similarly, Online Wagering horse racing revenue and income is influenced by racing calendars. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby.
For live races we present at our racetracks, we recognize revenue on wagers we accept from customers at our racetrack ("on-track revenue") and revenue we earn from exporting our live racing signals to other race tracks, off-track betting facilities ("OTBs"), and advance deposit wagering providers ("export revenue"). For simulcast races we display at our racetracks, OTBs, and Online Wagering platforms, we recognize revenue we earn from providing a wagering service to our customers on these imported live races ("import revenue"). Online Wagering import revenue is generated through advance deposit wagering which consists of patrons wagering through an advance deposit account. Each wagering contract for on-track revenue, and import revenue contains a single performance obligation and our export revenue contracts contain a series of distinct services that form a single performance obligation. The transaction price for on-track revenue and import revenue is fixed based on the established commission rate we are entitled to retain. The transaction price for export revenue is variable based on the simulcast host fee we charge our customers for exporting our signal. We may provide cash incentives in conjunction with wagering transactions we accept from Online Wagering customers. These cash incentives represent consideration payable to a customer and therefore are treated as a reduction of the transaction price for the wagering transaction. Our export revenue contracts generally have a duration of one year or less. These arrangements are licenses of intellectual property containing a usage-based royalty. As a result, we have elected to use the practical expedient to omit disclosure related to remaining performance obligations for our export revenue contracts. We recognize on-track revenue, export revenue, and import revenue once the live race event is made official by the relevant racing regulatory body.
We recognize revenue we earn from providing a wagering service to our customers on historical races at our HRM facilities. The transaction price for HRM revenue is based on the established commission rate we are entitled to retain for each wager on the HRM. We recognize HRM revenue once the historical race has been completed on the historical racing machine, net of the liability to the pool.
We evaluate our on-track revenue, export revenue, import revenue, and HRM revenue contracts in order to determine whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity is a principal if it controls the specified service before that service is transferred to a customer.
The revenue we recognize for on-track revenue, import revenue, and HRM revenue is the commission we are entitled to retain for providing a wagering service to our customers. For these arrangements, we are the principal as we control the wagering
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
service; therefore, any charges, including any applicable simulcast fees, we incur for delivering the wagering service are presented as operating expenses.
For export revenue, our customer is the third-party wagering site such as a racetrack, OTB, or advance deposit wagering provider. Therefore, the revenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third-party wagering site.
Our admission contracts are either for a single live racing event day or multiple days. Our PSLs, sponsorships, and television rights contracts generally relate to multiple live racing event days. Multiple day admission, PSLs, sponsorships, and television rights contracts contain a distinct series of services that form single performance obligations. Sponsorships contracts generally include performance obligations related to admissions and advertising rights at our racetracks. Television rights contracts contain a performance obligation related to the rights to distribute certain live racing events on media platforms. The transaction prices for our admissions, PSLs, sponsorships, and television rights contracts are fixed. We allocate the transaction price to our sponsorship contract performance obligations based on the estimated relative standalone selling price of each distinct service.
The revenue we recognize for admissions to a live racing event day is recognized once the related event is complete. For admissions, PSLs, sponsorships, and television rights contracts that relate to multiple live racing event days, we recognize revenue over time using an output method of each completed live racing event day as our measure of progress. Each completed live racing event day corresponds with the transfer of the relevant service to a customer and therefore is considered a faithful depiction of our efforts to satisfy the promises in these contracts. This output method results in measuring the value transferred to date to the customer relative to the remaining services promised under the contracts. Certain premium live racing event days such as the Kentucky Derby and Oaks result in a higher value of revenue allocated relative to other live racing event days due to, among other things, the quality of thoroughbreds racing, higher levels of on-track attendance, national broadcast audience, local and national media coverage, and overall entertainment value of the event. While these performance obligations are satisfied over time, the timing of when this revenue is recognized is directly associated with the occurrence of our live racing events, which is when the majority of our revenues recognized at a point in time are also recognized.
Timing of revenue recognition may differ from the timing of invoicing to customers for our long-term contracts for racing event-related services. We generally invoice customers prior to delivery of services for our admissions, PSLs, sponsorships, and television rights contracts. We recognize a receivable and a contract liability at the time we have an unconditional right to receive payment. When cash is received in advance of delivering services under our contracts, we defer revenue and recognize it in accordance with our policies for that type of contract. In situations where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to allow our customers to secure the right to the specific services provided under our contracts, not to receive financing from our customers.
Gaming revenue primarily consists of gaming wager transactions. Other operating revenue, such as food and beverage or hotel revenue, is recognized once delivery of the product or service has occurred.
The transaction price for gaming wager transactions is the difference between gaming wins and losses. Gaming wager revenue is recognized when the wager settles.
The majority of our HRM facilities and casinos offer loyalty programs that enable customers to earn loyalty points based on their play. Gaming and HRM wager transactions involve two performance obligations for those customers earning loyalty points under the Company’s loyalty programs and a single performance obligation for customers who do not participate in the program. Loyalty points are primarily redeemable for free wagering activities and food and beverage. For purposes of allocating the transaction price in a gaming or HRM wagering transaction between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a loyalty point that can be redeemed for wagering activities or food and beverage. For gaming wagering transactions, an amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. For HRM wagering transactions, the amount allocated to the HRM wager performance obligation is the commission rate we are entitled to retain. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a wagering transaction or food and beverage, and such goods or services are delivered to the customer.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Income Taxes
We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns.
Adjustments to deferred taxes are determined based upon the changes in differences between the book basis and tax basis of our assets and liabilities and measured using enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.
When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that will be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Cash and Cash Equivalents
We consider investments with original maturities of three months or less that are readily convertible to cash to be cash equivalents. We have, from time to time, cash in the bank in excess of federally insured limits. Under our cash management system, checks issued but not yet presented to banks that would result in negative bank balances when presented are classified as a current liability in the accompanying consolidated balance sheets.
Restricted Cash and Account Wagering Deposit Liabilities
Restricted cash includes deposits collected from our Online Wagering customers. Other amounts included in restricted cash represent amounts due to horsemen for purses, stakes and awards that are paid in accordance with the terms of our contractual agreements or statutory requirements.
Allowance for Doubtful Accounts Receivable
Upon our adoption of Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses ("ASC 326") on January 1, 2020, we maintain 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 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.
Prior to adopting ASC 326, we maintained an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance is maintained at a level considered appropriate based on historical experience and other factors that affect our expectation of future collectability. Uncollectible accounts receivable are written off against the allowance for doubtful accounts receivable when management determines that the probability of payment is remote and collection efforts have ceased.
Internal Use Software
Internal use software costs for Online Wagering software are capitalized in property and equipment, net in the accompanying consolidated balance sheets, in accordance with accounting guidance governing computer software developed or obtained for internal use. Once the software is placed in operation, we amortize the capitalized software over the software's estimated economic useful life, which is generally three years. We capitalized internal use software of approximately $10.5 million in 2020, $9.8 million in 2019, and $9.7 million in 2018. We incurred amortization expense of approximately $9.4 million in 2020, $8.8 million in 2019, and $7.3 million in 2018, for projects which had been placed in service.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Fair Value of Assets and Liabilities
We adhere to a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities; Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and Level 3: Unobservable inputs for the asset or liability. We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
Investments in and Advances to Unconsolidated Affiliates
We have investments in unconsolidated affiliates accounted for under the equity method. Under the equity method, carrying value is adjusted for our share of the investees' income and losses, amortization of certain basis differences as well as capital contributions to and distributions from these companies. We use the cumulative earnings approach to present distributions received from equity method investees. Distributions in excess of equity method income are recognized as a return of investment and recorded as investing cash inflows in the accompanying consolidated statements of cash flows. We classify income and losses as well as gains and impairments related to our investments in unconsolidated affiliates as a component of other income (expense) in the accompanying consolidated statements of comprehensive (loss) income.
We evaluate our investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may have experienced an "other-than-temporary" decline in value. If such conditions exist, we compare the estimated fair value of the investment to the investment's carrying value to determine if an impairment is indicated and determine whether the impairment is "other-than-temporary" based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss. We estimate fair value using a discounted cash flow analysis based on estimated future results of the investee.
Leases
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, and subsequently issued additional guidance (collectively, "ASC 842") 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 of any expired or existing leases and (3) initial direct costs of any expired or existing leases.
Due to the adoption of ASC 842, we recognize operating lease right-of-use assets ("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.
Upon adopting ASC 842, we determine if an arrangement is a lease at inception. Operating and finance leases are included in property and equipment, net; accrued expense and other current liabilities; and other liabilities on our 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 the commencement date. These leases do not provide an implicit rate, so therefore we use our incremental borrowing rate based on the information available at the 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. The 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.
Debt Issuance Costs and Loan Origination Fees
Debt issuance costs and loan origination fees associated with our term debt, revolver, and notes payable are amortized as interest expense over the term of each respective financial instrument. Debt issuance costs and loan origination fees associated with our term debt and notes payable are presented as a direct deduction from the carrying amount of the related liability. Debt issuance costs and loan origination fees associated with our revolver are presented as an asset.
Casino and Pari-mutuel Taxes
We recognize casino and pari-mutuel tax expense based on the statutory requirements of the federal, state, and local jurisdictions in which we conduct business. All of our casino taxes and the majority of our pari-mutuel taxes are gross receipts taxes levied on the gaming entity. We recognize these taxes as Churchill Downs, Online Wagering, Gaming, and All Other operating expenses in our consolidated statements of comprehensive (loss) income. In certain jurisdictions governing our pari-
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
mutuel contracts with customers, there are specific pari-mutuel taxes that are assessed on winning wagers from our customers, which we collect and remit to the government. These taxes are presented on a net basis.
Purse Expense
We recognize purse expense based on the statutorily or contractually determined amount that is required to be paid out in the form of purses to the qualifying finishers of horse races run at our racetracks in the period in which wagering occurs. We incur a liability for all unpaid purses that will be paid out on a future live race event.
Self-insurance Accruals
We are self-insured up to certain limits for costs associated with general liability, workers’ compensation and employee health coverage, and we purchase insurance for claims that exceed our self-insurance retention or deductible levels. We record self-insurance reserves that include accruals of estimated settlements for known claims ("Case Reserves"), as well as accruals of third-party actuarial estimates for claims incurred but not yet reported ("IBNR"). Case Reserves represent estimated liabilities for unpaid losses, based on a claims administrator's estimates of future payments on individual reported claims, including allocated loss adjustment expense, which generally include claims settlement costs such as legal fees. IBNR includes the provision for unreported claims, changes in case reserves and future payments on reopened claims.
Key variables and assumptions include, but are not limited to, loss development factors and trend factors such as changes in workers' compensation laws, medical care costs and wages. These loss development factors and trend factors are developed using our actual historical losses. It is possible that reasonable alternative selections would produce different reserve estimates.
Advertising and Marketing
We expense the costs of general advertising, marketing and associated promotional expenditures at the time the costs are incurred. We incurred advertising and marketing expense of approximately $31.4 million in 2020, $41.8 million in 2019, and $28.8 million in 2018 in our accompanying consolidated statements of comprehensive (loss) income.
Stock-Based Compensation
All stock-based payments to employees and directors, including grants of performance share units and restricted stock, are recognized as compensation expense over the service period based on the fair value on the date of grant. For awards that have a graded vesting schedule, we recognize expense on a straight-line basis for each separately vesting portion of the award. We recognize forfeitures of awards as incurred.
Computation of Net Income per Common Share
Net income per common share is presented for both basic earnings per common share ("Basic EPS") and diluted earnings per common share ("Diluted EPS"). Basic EPS is based upon the weighted average number of common shares outstanding, excluding unvested stock awards, during the period plus vested common stock equivalents that have not yet been converted to common shares. Diluted EPS is based upon the weighted average number of shares used to calculate Basic EPS and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from applying the treasury stock method to unvested stock awards.
Common Stock Share Repurchases
From time-to-time, we repurchase shares of our common stock under share repurchase programs and privately negotiated transactions authorized by our Board of Directors. Share repurchases constitute authorized but unissued shares under the Kentucky laws under which we are incorporated. Our common stock has no par or stated value. We record the full value of share repurchases, upon the trade date, against common stock on our consolidated balance sheets except when to do so would result in a negative balance in such common stock account. In such instances, we record the cost of any further share repurchases as a reduction to retained earnings. Due to the large number of shares of our common stock repurchased over the past several years, our common stock balance frequently will be zero at the end of any given reporting period. Refer to Note 10, Shareholders' Equity, for additional information on our share repurchases.
Recent Accounting Pronouncements - Adopted on January 1, 2020
In June 2016, the Financial Accounting Standards Board ("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. 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 on January 1, 2020. The comparative
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
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 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.
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 the reporting unit's 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 year ended December 31, 2020.
Recent Accounting Pronouncements - effective in 2021 or thereafter
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate (LIBOR), and other interbank offered rates expected to be discontinued, to alternative reference rates. The guidance was effective upon issuance; if elected, it is to be applied prospectively through December 31, 2022. We are currently evaluating the effect the adoption of this new accounting standard will have on our results of operations, financial condition, or cash flows.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect the adoption of this ASU to have a material impact on the Company's consolidated financial statements.
3. ACQUISITIONS
Presque Isle
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. The following table summarizes the final fair values of the assets acquired and liabilities assumed, net of cash acquired of $8.4 million, at the date of the acquisition.
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|
|
|
|
|
(in millions)
|
Total
|
Current assets
|
$
|
2.1
|
|
Property and equipment
|
78.5
|
|
Goodwill
|
26.1
|
|
Intangible assets
|
71.2
|
|
Current liabilities
|
(5.2)
|
|
Non-current liabilities
|
(0.6)
|
|
|
$
|
172.1
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The fair value of the intangible assets consists of the following:
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|
|
|
|
|
|
|
|
|
|
|
(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 on 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 is 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, future operating expenses, start-up costs, and discount rate 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 the Company's ability to continue to renew our 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 estimated future revenue, royalty rate, and discount rate were the primary inputs in the valuation of the trademark. 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 $26.1 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.
Refer to Note 8, Asset Impairment, for information regarding intangible asset impairments recognized during the first quarter of 2020 related to the Presque Isle gaming rights and trademark.
For the period from the Presque Isle Transaction on January 11, 2019 through December 31, 2019, net revenue was $138.5 million and net income was not material.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of Presque Isle occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Presque Isle Transaction was not materially different than our historical net income.
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|
|
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Year Ended December 31,
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(in millions)
|
2019
|
|
2018
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Net revenue
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$
|
1,332.9
|
|
|
$
|
1,150.8
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|
Lady Luck Nemacolin
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"). 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.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Turfway Park
On October 9, 2019, the Company completed the acquisition of Turfway Park from Jack Entertainment LLC ("JACK") and Hard Rock International (“Hard Rock”) for total consideration of $46.0 million in cash ("Turfway Park Acquisition"). Of the $46.0 million total consideration, $36.0 million, less $0.9 million of working capital and purchase price adjustments, was 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 was 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 $0.6 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 $2.3 million.
Ocean Downs
On July 16, 2018, the Company announced the 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"). On August 31, 2018, the Company closed the Ocean Downs/Saratoga Transaction, which resulted in the Company owning 100% of Ocean Downs and having no further equity interest or management involvement in Saratoga New York or Saratoga Colorado.
As part of the Ocean Downs/Saratoga Transaction, Saratoga Harness Racing, Inc. ("SHRI") has agreed to grant the Company and our 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.
We consolidated Ocean Downs upon closing of the Ocean Downs/Saratoga Transaction on August 31, 2018. 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 their fair values, resulting in a pre-tax gain of $54.9 million, which is included in the accompanying consolidated statements of comprehensive (loss) income. The fair values of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado were 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.
The following table summarizes the final fair values of the assets acquired and liabilities assumed, net of cash acquired of $13.1 million, at the acquisition date.
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|
|
|
|
|
|
|
(in millions)
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Total
|
Current assets
|
$
|
1.9
|
|
Property and equipment
|
57.4
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|
Goodwill
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20.4
|
|
Intangible assets
|
95.4
|
|
Current liabilities
|
(5.2)
|
|
Debt
|
(54.7)
|
|
|
$
|
115.2
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The final fair value of the intangible assets consisted of the following:
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|
|
|
|
|
|
|
|
|
|
(in millions)
|
Fair Value Recognized
|
|
Weighted-Average Useful Life
|
Gaming rights
|
$
|
87.0
|
|
|
N/A
|
Trademark
|
8.3
|
|
|
N/A
|
Other
|
0.1
|
|
|
1.3 years
|
Total intangible assets
|
$
|
95.4
|
|
|
|
Current assets and current liabilities were valued at the existing carrying values due to their short-term nature and represent management's estimated fair value of the respective items on August 31, 2018. The debt of $54.7 million assumed by the Company was valued at the Company's outstanding principal balance, which approximated fair value on August 31, 2018. The Company subsequently paid off the debt in full on September 4, 2018.
The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures. The fair values of the 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 Ocean Downs 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 is a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses and start-up costs of Ocean Downs 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 Maryland is subject to various legal requirements. However, the Company's historical experience has not indicated, nor does the Company expect any limitations regarding the Company's ability to continue to renew the Company's gaming rights in Maryland.
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 Ocean Downs name for an indefinite period of time.
Goodwill of $20.4 million was recognized due to the expected contribution of Ocean Downs to the Company's overall business strategy. The goodwill was assigned to the Gaming segment and is not deductible for tax purposes.
In connection with the Ocean Downs/Saratoga Transaction, the Company recorded a deferred tax liability and income tax expense of $12.6 million. The deferred tax liability represents the excess of the financial reporting amounts of the net assets of Ocean Downs over their respective basis under federal, state, and local tax law expected to be applied to taxable income in the periods such differences are expected to be realized. After the closing of the Ocean Downs/Saratoga Transaction, for the period from September 1, 2018 through December 31, 2018, net revenue for Ocean Downs was $25.9 million, and net income was not material.
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 and excludes the gain recognized from the Ocean Downs/Saratoga Transaction. 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.
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|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2018
|
Net revenue
|
$
|
1,065.4
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
4. DISCONTINUED OPERATIONS
On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell the Company's 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 Big Fish Games segment and related Big Fish Transaction meet the criteria for held for sale and discontinued operation presentation. The consolidated statements of comprehensive (loss) income and the notes to consolidated financial statements reflect the Big Fish Games segment as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. The consolidated statements of cash flows includes both continuing and discontinued operations.
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 recognized a gain of $219.5 million upon the sale recorded in income from discontinued operations in the accompanying consolidated statements of comprehensive (loss) income in 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.
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. The Company will pay $124.0 million pre-tax of the settlement from the Company's available cash and Aristocrat will pay the remaining $31.0 million pre-tax of the 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 consolidated statements of comprehensive (loss) income for the year ended December 31, 2020, and on a pre-tax basis in current liabilities of discontinued operations in the accompanying consolidated balance sheet as of December 31, 2020.
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.
iii.Aristocrat has agreed to specifically release the Company of any and all indemnification obligations under the Stock Purchase Agreement arising from or related to the Kater Litigation and the Thimmegowda Litigation, 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.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The following table presents the financial results of Big Fish Games included in "Income from discontinued operations, net of tax" in the accompanying consolidated statements of comprehensive (loss) income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Net revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
Operating expenses
|
—
|
|
|
—
|
|
|
8.4
|
|
Selling, general and administrative expense
|
0.1
|
|
|
3.5
|
|
|
6.0
|
|
Research and development
|
—
|
|
|
—
|
|
|
0.9
|
|
Legal settlement
|
124.0
|
|
|
—
|
|
|
—
|
|
Total operating expense
|
124.1
|
|
|
3.5
|
|
|
15.3
|
|
Operating loss
|
(124.1)
|
|
|
(3.5)
|
|
|
(2.1)
|
|
Other income
|
|
|
|
|
|
Gain on sale of Big Fish Games
|
—
|
|
|
—
|
|
|
219.5
|
|
Other income
|
—
|
|
|
—
|
|
|
0.1
|
|
Total other income
|
—
|
|
|
—
|
|
|
219.6
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before provision for income taxes
|
(124.1)
|
|
|
(3.5)
|
|
|
217.5
|
|
Income tax benefit (provision)
|
28.7
|
|
|
1.1
|
|
|
(47.3)
|
|
(Loss) income from discontinued operations, net of tax
|
$
|
(95.4)
|
|
|
$
|
(2.4)
|
|
|
$
|
170.2
|
|
Stock-Based Compensation
As part of the Big Fish Transaction, the vesting dates for all outstanding unvested restricted stock awards, restricted stock unit awards, and performance share unit awards (collectively the "Stock Awards") for certain Big Fish Games' employees were accelerated to vest on the closing date. Most of these Stock Awards would not have vested prior to the closing date of the Big Fish Transaction. Therefore, the related stock-based compensation expense previously recognized through the modification date was reduced to zero and a new fair value of the Stock Awards was established on the date of the announcement of the Big Fish Transaction. The expense was amortized during the period from the date of the announcement to the closing of the Big Fish Transaction.
Total stock-based compensation expense related to Big Fish Games, which includes the accelerated vesting of the Stock Awards and stock options associated with the Company's employee stock purchase plan, was $3.4 million in 2018.
Earnout Liabilities
As of December 31, 2017, we had $34.2 million of deferred earnout consideration and $28.4 million of deferred payments due to the founder of Big Fish Games, both of which were paid on January 3, 2018.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
5. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2020
|
|
2019
|
Grandstands and buildings
|
$
|
785.5
|
|
|
$
|
625.2
|
|
Equipment
|
477.9
|
|
|
406.5
|
|
Tracks and other improvements
|
240.7
|
|
|
222.3
|
|
Land
|
164.2
|
|
|
162.4
|
|
Furniture and fixtures
|
89.7
|
|
|
79.2
|
|
Construction in progress
|
23.3
|
|
|
52.3
|
|
|
1,781.3
|
|
|
1,547.9
|
|
Accumulated depreciation
|
(721.5)
|
|
|
(635.4)
|
|
Subtotal
|
1,059.8
|
|
|
912.5
|
|
Operating lease right-of-use assets
|
22.3
|
|
|
24.8
|
|
Total
|
$
|
1,082.1
|
|
|
$
|
937.3
|
|
Depreciation expense was $88.0 million in 2020, $81.4 million in 2019 and $57.6 million in 2018 and is classified in operating expense in the accompanying consolidated statements of comprehensive (loss) income.
6. GOODWILL
Goodwill, by segment, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
|
All Other
|
|
Total
|
Balances as of December 31, 2018
|
$
|
49.7
|
|
|
$
|
148.2
|
|
|
$
|
139.1
|
|
|
$
|
1.0
|
|
|
$
|
338.0
|
|
Additions
|
—
|
|
|
—
|
|
|
26.1
|
|
|
3.0
|
|
|
29.1
|
|
Balances as of December 31, 2019
|
49.7
|
|
|
148.2
|
|
|
165.2
|
|
|
4.0
|
|
|
367.1
|
|
Adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(0.3)
|
|
|
(0.3)
|
|
Balances as of December 31, 2020
|
$
|
49.7
|
|
|
$
|
148.2
|
|
|
$
|
165.2
|
|
|
$
|
3.7
|
|
|
$
|
366.8
|
|
In 2019, we established goodwill of $26.1 million related to the Presque Isle Transaction, and $3.0 million related to the Turfway Park Acquisition.
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 2020, we recorded an immaterial measurement period adjustment for the Turfway Park Acquisition that impacted the All Other goodwill balance.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
7. OTHER INTANGIBLE ASSETS
Other intangible assets, net is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
Favorable contracts
|
$
|
11.0
|
|
|
$
|
(8.8)
|
|
|
$
|
2.2
|
|
|
$
|
11.0
|
|
|
$
|
(8.1)
|
|
|
$
|
2.9
|
|
Other
|
10.4
|
|
|
(3.5)
|
|
|
6.9
|
|
|
10.5
|
|
|
(3.3)
|
|
|
7.2
|
|
Customer relationships
|
4.7
|
|
|
(2.2)
|
|
|
2.5
|
|
|
4.7
|
|
|
(1.6)
|
|
|
3.1
|
|
Gaming licenses
|
5.1
|
|
|
(2.1)
|
|
|
3.0
|
|
|
5.1
|
|
|
(2.0)
|
|
|
3.1
|
|
|
$
|
31.2
|
|
|
$
|
(16.6)
|
|
|
$
|
14.6
|
|
|
$
|
31.3
|
|
|
$
|
(15.0)
|
|
|
$
|
16.3
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
47.7
|
|
|
|
|
|
|
50.2
|
|
Gaming rights
|
|
|
|
|
288.2
|
|
|
|
|
|
|
303.2
|
|
Other
|
|
|
|
|
0.1
|
|
|
|
|
|
|
0.1
|
|
Total
|
|
|
|
|
$
|
350.6
|
|
|
|
|
|
|
$
|
369.8
|
|
In 2019, we established indefinite-lived intangible assets of $56.0 million for gaming rights and $15.2 million for trademarks related to the Presque Isle Transaction. We also acquired indefinite-lived intangible assets of $8.0 million for online gaming rights in Pennsylvania related to our Online Wagering operations, $10.0 million for retail sports betting gaming rights at Presque Isle and online sports betting gaming rights in Pennsylvania, as well as $3.0 million for other gaming rights at Presque Isle. We also established indefinite-lived intangible assets of $5.5 million for trademarks and $9.8 million for gaming rights related to the Turfway Park acquisition.
In 2018, we established indefinite-lived intangible assets of $87.0 million for gaming rights and $8.3 million for trademarks related to the Ocean Downs/Saratoga Transaction. We also established definite-lived intangible assets of $2.3 million relating to the opening of Derby City Gaming and $0.1 million relating to the Ocean Downs/Saratoga Transaction for other intangibles.
Amortization expense for definite-lived intangible assets was $4.9 million in 2020, $15.0 million in 2019, and $6.0 million in 2018, and is classified in operating expense in the accompanying consolidated statements of comprehensive (loss) income. As described further in Note 3, Acquisitions, we accelerated the amortization for the assignment of the Turfway Park Acquisition purchase and sale agreement rights of $10.0 million in the fourth quarter of 2019, which is included in All Other in the accompanying consolidated statements of comprehensive (loss) income. We submitted payments of $2.3 million in 2020 and 2019 for annual license fees for Calder, which are being amortized to expense over the annual license period.
Indefinite-lived intangible assets consist primarily of trademarks and state gaming rights in Maine, Maryland, Mississippi, Louisiana, Pennsylvania and Kentucky.
Refer to Note 8, 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, which included an assessment of qualitative and quantitative factors to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying amount. We concluded that the fair values of our indefinite-lived intangible assets exceeded their carrying value.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Future estimated aggregate amortization expense on existing definite-lived intangible assets for each of the next five fiscal years is as follows (in millions):
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Estimated Amortization Expense
|
2021
|
|
$
|
3.6
|
|
2022
|
|
2.5
|
|
2023
|
|
2.4
|
|
2024
|
|
1.9
|
|
2025
|
|
1.2
|
|
Future estimated amortization expense does not include additional payments of $2.3 million in 2021 and in each year thereafter for the ongoing amortization of future expected annual Calder license fees not yet incurred or paid.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
8. 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 the Company's 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 global pandemic on cash flows. Because Presque Isle was acquired in 2019, we did not expect the estimated fair value and the carry value to be significantly different. 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 global pandemic.
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 $77.6 million carrying value of the Presque Isle gaming rights exceeded the fair value of $62.6 million and the Company recognized an impairment of $15.0 million in first quarter of 2020 for the 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 the first quarter of 2020 for the 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 the 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.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
9. INCOME TAXES
Components of the (benefit) provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Current (benefit) provision:
|
|
|
|
|
|
Federal
|
$
|
(38.7)
|
|
|
$
|
19.2
|
|
|
$
|
10.1
|
|
State and local
|
3.0
|
|
|
6.0
|
|
|
3.8
|
|
Foreign
|
0.1
|
|
|
—
|
|
|
—
|
|
|
(35.6)
|
|
|
25.2
|
|
|
13.9
|
|
Deferred provision:
|
|
|
|
|
|
Federal
|
28.7
|
|
|
16.1
|
|
|
35.0
|
|
State and local
|
1.5
|
|
|
15.5
|
|
|
2.5
|
|
Foreign
|
0.1
|
|
|
—
|
|
|
(0.1)
|
|
|
30.3
|
|
|
31.6
|
|
|
37.4
|
|
Income tax (benefit) provision
|
$
|
(5.3)
|
|
|
$
|
56.8
|
|
|
$
|
51.3
|
|
Income from continuing operations before provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
8.2
|
|
|
$
|
196.4
|
|
|
$
|
234.2
|
|
Foreign
|
(0.2)
|
|
|
—
|
|
|
(0.3)
|
|
Income from continuing operations before provision for income taxes
|
$
|
8.0
|
|
|
$
|
196.4
|
|
|
$
|
233.9
|
|
Our income tax (benefit) expense is different from the amount computed by applying the federal statutory income tax rate to income from continuing operations before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Federal statutory tax on earnings before income taxes
|
$
|
1.7
|
|
|
$
|
41.2
|
|
|
$
|
49.1
|
|
State income taxes, net of federal income tax benefit
|
(0.6)
|
|
|
8.0
|
|
|
5.4
|
|
Net operating loss carry back - CARES Act
|
(13.3)
|
|
|
—
|
|
|
—
|
|
Windfall deduction from equity compensation
|
(5.1)
|
|
|
(5.2)
|
|
|
(4.7)
|
|
Non-deductible officer's compensation
|
7.3
|
|
|
5.5
|
|
|
2.6
|
|
Re-measurement of deferred taxes
|
1.9
|
|
|
8.3
|
|
|
—
|
|
Uncertain tax positions
|
1.7
|
|
|
(1.0)
|
|
|
—
|
|
Valuation allowance - state and foreign net operating losses
|
1.1
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(1.1)
|
|
Income tax (benefit) provision
|
$
|
(5.3)
|
|
|
$
|
56.8
|
|
|
$
|
51.3
|
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a one-time tax on accumulated earnings of foreign subsidiaries as of 2017, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property.
The CARES Act provides, among other things, that any net operating loss arising in a tax year beginning in 2018, 2019 or 2020 may be carried back five years or carried forward indefinitely, offsetting up to 100% of taxable income in tax years beginning
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
before 2021. The Company intends to carry back our 2020 net operating loss to claim a refund of taxes paid in a year before the statutory corporate tax rate was reduced from 35% to 21% by the Tax Act. Due to the higher statutory rate applied to this net operating loss, the Company recognized an income tax benefit of $13.3 million for the year ended December 31, 2020.
The Company recognized $1.9 million during 2020 and $8.3 million during 2019 of income tax expense 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 period.
The Company will generate a capital loss associated with the Kater litigation. We have recorded a $29.0 million deferred tax asset without a valuation allowance for the capital loss in 2020, as we fully expect to be able to offset the capital loss with previously recognized capital gains.
Components of our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Capital loss
|
$
|
29.0
|
|
|
$
|
—
|
|
Net operating losses and credit carryforward
|
9.3
|
|
|
3.4
|
|
Lease liabilities
|
7.7
|
|
|
6.8
|
|
Deferred compensation plans
|
6.7
|
|
|
5.9
|
|
Deferred income
|
5.5
|
|
|
4.8
|
|
Deferred liabilities
|
2.8
|
|
|
2.7
|
|
Allowance for uncollectible receivables
|
1.2
|
|
|
1.0
|
|
Deferred tax assets
|
62.2
|
|
|
24.6
|
|
Valuation allowance
|
(1.4)
|
|
|
(0.2)
|
|
Net deferred tax asset
|
60.8
|
|
|
24.4
|
|
Deferred tax liabilities:
|
|
|
|
Equity investments in excess of tax basis
|
121.6
|
|
|
114.8
|
|
Property and equipment in excess of tax basis
|
77.9
|
|
|
53.4
|
|
Intangible assets in excess of tax basis
|
65.6
|
|
|
60.2
|
|
Right-of-use assets
|
7.4
|
|
|
6.8
|
|
Other
|
2.2
|
|
|
2.0
|
|
Deferred tax liabilities
|
274.7
|
|
|
237.2
|
|
Net deferred tax liability
|
$
|
(213.9)
|
|
|
$
|
(212.8)
|
|
As of December 31, 2020, we had federal net operating losses of $3.2 million which were acquired in conjunction with the 2010 acquisition of Youbet.com. The utilization of these losses, which expire in 2025 and 2026, is limited on an annual basis pursuant to Internal Revenue Code § 382. We believe that we will be able to fully utilize all of these losses. We also have state net operating losses of $7.3 million. We have recorded a valuation allowance of $1.1 million against the state net operating losses due to the fact that it is unlikely that we will generate income in certain states which is necessary to utilize the deferred tax assets.
The Internal Revenue Service has completed audits through 2012. Tax years 2017 and after are open to examination. As of December 31, 2020, we had approximately $3.9 million of total gross unrecognized tax benefits, excluding interest of $0.2 million. If the total gross unrecognized tax benefits were recognized, there would be a $3.4 million effect to the annual effective tax rate. We anticipate a decrease in our unrecognized tax positions of approximately $0.8 million during the next twelve months primarily due to the expiration of statutes of limitation.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Balance as of January 1
|
$
|
1.8
|
|
|
$
|
2.8
|
|
|
$
|
2.9
|
|
Additions for tax positions related to the current year
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Additions for tax positions of prior years
|
2.6
|
|
|
—
|
|
|
0.1
|
|
Reductions for tax positions of prior years
|
(0.6)
|
|
|
(1.1)
|
|
|
(0.3)
|
|
Balance as of December 31
|
$
|
3.9
|
|
|
$
|
1.8
|
|
|
$
|
2.8
|
|
10. SHAREHOLDERS’ EQUITY
Stock Repurchase Program
On November 29, 2017, the Board of Directors of the Company authorized a $500.0 million share repurchase program in a "modified Dutch auction" tender offer (the "Tender Offer") utilizing a portion of the proceeds from the Big Fish Transaction. The Company completed the Tender Offer on February 12, 2018, and repurchased 5,660,376 shares of the Company's common stock at a purchase price of $88.33 per share with an aggregate cost of $500.0 million, excluding fees and expenses related to the Tender Offer.
On October 30, 2018, the Board of Directors of the Company approved a new common stock repurchase program of up to $300.0 million. 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 year ended December 31, 2020, we repurchased 235,590 shares of our common stock under the October 2018 stock repurchase program at a total cost of $27.9 million. We had $147.1 million of repurchase authority remaining under this program at December 31, 2020.
For the year ended December 31, 2019, we repurchased 864,233 shares of our common stock under the October 2018 stock repurchase program at a total cost of $93.0 million. As of December 31, 2019, we accrued $0.5 million for the future cash settlement of executed repurchases of our common stock.
For the year ended December 31, 2018, excluding the shares purchased under the Tender Offer, we repurchased 372,282 shares of our common stock under the October 2018 stock repurchase program at a total cost of $32.0 million.
Privately Negotiated Share Repurchase
Refer to Note 23, Subsequent Events, for information regarding the Company's privately negotiated share repurchase on February 1, 2021.
Stock Split
On October 30, 2018, the Company’s Board of Directors approved a three-for-one stock split (the "Stock Split") and an amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 50,000,000 shares, no par value, to 150,000,000 shares, no par value. This amendment to the Company’s Articles of Incorporation became effective on January 25, 2019 and our common stock began trading at the split-adjusted price on January 28, 2019. All share and per-share amounts in the Company’s consolidated financial statements and related notes have been retroactively adjusted to reflect the effects of the Stock Split.
11. STOCK-BASED COMPENSATION PLANS
Our total compensation expense, which includes expense related to restricted stock awards, restricted stock unit awards, performance share unit awards, and stock options associated with our employee stock purchase plan, was $23.7 million in 2020, $23.8 million in 2019, and $17.7 million in 2018. The income tax benefit related to stock-based employee compensation expense was $1.9 million in 2020, $2.1 million in 2019, and $2.7 million in 2018. Our stock-based employee compensation plans are described below.
2016 Omnibus Stock Incentive Plan
We have a stock-based employee compensation plan with awards outstanding under the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan (the “2016 Plan”) and Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan. The 2016 Incentive Plan is intended to advance our long-term success by encouraging stock ownership among key employees and the Board of Directors. Awards may be in the form of stock options, stock appreciation
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
rights, restricted stock ("RSA"), restricted stock units ("RSU"), performance share units ("PSU"), performance units, or performance cash. The 2016 Incentive Plan has a minimum vesting period of one year for awards granted.
Restricted Stock, Restricted Stock Units, and Performance Share Units
The 2016 Incentive Plan permits the award of RSAs, RSUs, or PSUs to directors and key employees responsible for the management, growth and protection of our business. The fair value of RSAs and RSUs that vest solely based on continued service under the Plan is determined by the product of the number of shares granted and the grant date market price of our common stock.
RSAs and RSUs granted to employees under the 2016 Plan generally vests either in full upon three years from the date of grant or on a pro rata basis over a three-year term. RSAs are legally issued common stock at the time of grant, with certain restrictions placed on them. RSUs granted to employees are converted into shares of our common stock at vesting. The RSUs granted to directors under the 2016 Plan generally vests in full upon one year from the date of grant. RSUs granted to directors are converted into shares of our common stock at the time of the director's retirement.
In 2018, 2019, and 2020, the Company granted three-year performance and total shareholder return ("TSR") PSU awards (the "PSU Awards") to certain named executive officers ("NEOs"). The two performance criteria for the PSU Awards are: (1) a cumulative Adjusted EBITDA target that was set at the beginning of the plan performance period for the three-year period; and (2) a cash flow metric that is the aggregate of the cash flow targets for the three individual years that is set annually at the beginning of each year. The cash flow metric is defined as cash flow from operating activities, excluding the change in restricted cash, plus distributions of capital from equity investments less capital maintenance expenditures. The Compensation Committee of the Board of Directors (the "Compensation Committee") can make adjustments as it may deem appropriate to these metrics. Measurement against these criteria will be determined against a payout curve which provides up to 200% of performance share units based on the original award.
The PSU Awards may be adjusted based on the Company’s TSR performance relative to the TSR performance during the performance period of the Companies remaining in the Russell 2000 index at the end of the performance period as follows:
1.The PSU Awards will increase by 25% if the Company’s TSR is in the top quartile;
2.The PSU Awards will decrease by 25% if the Company’s TSR is in the bottom quartile; and
3.The PSU Awards will not change if the Company’s TSR is in the middle two quartiles.
The maximum number of PSU Awards, including the impact of the TSR performance, that can be earned for a performance period is 250% of the original award.
On February 12, 2020, the Compensation Committee offered, and the NEOs accepted, to settle the 2017 PSU Awards in cash.
In October 2018, the Company granted a special equity award to two NEOs ("7-Year Grant") consisting of PSU Awards that may be adjusted up to 200% based on the Company's relative TSR performance versus the Russell 2000 over a three-year period, and service-based RSU awards, both of which vest which vest in 25% annual increments over four years beginning on the fourth anniversary of the grant date, totaling seven years to be fully vested.
The total compensation cost recognized for PSU Awards is determined using the Monte Carlo valuation methodology, which factors in the value of the TSR when determining the grant date fair value of the award. Compensation cost for the PSU Awards is recognized during the three-year performance and service period based on the probable achievement of the two performance criteria, with the exception of the 7-Year Grant, which compensation cost is recognized during the seven-year service period. All PSUs awards are converted into shares of our common stock at the time the award value is finalized.
A summary of the 2020 RSUs, and PSUs granted to certain NEOs, employees, and the Board of Directors is presented below (shares/units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Year
|
|
Award Type
|
|
Number of Units Awarded(1)
|
|
Vesting Terms
|
2020
|
|
RSU
|
|
82
|
|
Vest equally over three service periods ending in 2021, 2022, and 2023
|
2020
|
|
PSU
|
|
37
|
|
Three-year performance and service period ending in 2022
|
2020
|
|
RSU
|
|
12
|
|
One year service period ending in 2021
|
(1) PSUs presented are based on the target number of units for the original PSU grant.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Activity for our RSAs, RSUs, and PSUs is presented below (shares/units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
RSAs and RSUs
|
|
Total
|
(in thousands, except grant date values)
|
Number of
Shares/Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares/Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares/Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance as of December 31, 2017
|
124
|
|
|
$
|
51.59
|
|
|
316
|
|
|
$
|
45.51
|
|
|
440
|
|
|
$
|
47.23
|
|
Granted
|
256
|
|
|
$
|
68.32
|
|
|
193
|
|
|
$
|
84.78
|
|
|
449
|
|
|
$
|
75.39
|
|
Performance adjustment(1)
|
70
|
|
|
$
|
47.01
|
|
|
—
|
|
|
$
|
—
|
|
|
70
|
|
|
$
|
47.01
|
|
Vested
|
(129)
|
|
|
$
|
47.01
|
|
|
(217)
|
|
|
$
|
46.35
|
|
|
(346)
|
|
|
$
|
46.60
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(17)
|
|
|
$
|
54.49
|
|
|
(17)
|
|
|
$
|
54.49
|
|
Balance as of December 31, 2018
|
321
|
|
|
$
|
65.77
|
|
|
275
|
|
|
$
|
72.03
|
|
|
596
|
|
|
$
|
68.66
|
|
Granted
|
58
|
|
|
$
|
92.90
|
|
|
130
|
|
|
$
|
94.42
|
|
|
188
|
|
|
$
|
93.96
|
|
Performance adjustment(1)
|
87
|
|
|
$
|
55.75
|
|
|
—
|
|
|
$
|
—
|
|
|
87
|
|
|
$
|
55.75
|
|
Vested
|
(152)
|
|
|
$
|
55.75
|
|
|
(135)
|
|
|
$
|
68.15
|
|
|
(287)
|
|
|
$
|
61.57
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(5)
|
|
|
$
|
77.59
|
|
|
(5)
|
|
|
$
|
77.59
|
|
Balance as of December 31, 2019
|
314
|
|
|
$
|
72.84
|
|
|
265
|
|
|
$
|
85.07
|
|
|
579
|
|
|
$
|
78.45
|
|
Granted
|
37
|
|
$
|
182.45
|
|
|
94
|
|
$
|
150.12
|
|
|
131
|
|
$
|
159.3
|
|
Performance adjustment(1)
|
41
|
|
$
|
90.73
|
|
|
—
|
|
|
$
|
—
|
|
|
41
|
|
$
|
90.73
|
|
Vested
|
(90)
|
|
|
$
|
90.73
|
|
|
(121)
|
|
|
$
|
90.01
|
|
|
(211)
|
|
|
$
|
90.32
|
|
Canceled/forfeited
|
—
|
|
|
$
|
—
|
|
|
(3)
|
|
|
$
|
121.39
|
|
|
(3)
|
|
|
$
|
121.39
|
|
Balance as of December 31, 2020
|
302
|
|
$
|
83.40
|
|
|
235
|
|
$
|
107.90
|
|
|
537
|
|
$
|
94.14
|
|
(1)Adjustment to number of target units awarded for PSUs based on achievement of performance and TSR goals.
The fair value of shares and units vested was $36.9 million in 2020 and 2019, and $32.4 million in 2018.
A summary of total unrecognized stock-based compensation expense related to RSAs, RSUs, and PSUs (based on current performance estimates), at December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except years)
|
December 31, 2020
|
|
Weighted Average Remaining Vesting Period (Years)
|
Unrecognized expense:
|
|
|
|
RSA
|
$
|
0.8
|
|
|
1.02
|
RSU
|
9.9
|
|
|
2.29
|
PSU
|
14.2
|
|
|
2.72
|
Total
|
$
|
24.9
|
|
|
2.49
|
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "ESP Plan"), we are authorized to sell, pursuant to short-term stock options, shares of our common stock to our full-time and qualifying part-time employees at a discount from our common stock’s fair market value. The ESP Plan operates on the basis of recurring, consecutive one-year periods. Each period commences on August 1 and ends on the following July 31. Compensation expense related to the ESP Plan was not material for any year included in our accompanying consolidated statements of comprehensive (loss) income.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
12. TOTAL DEBT
The following table presents our total debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
(in millions)
|
Outstanding Principal
|
|
Issuance Costs and Fees
|
|
Long-Term Debt, Net
|
Term Loan B due 2024
|
$
|
388.0
|
|
|
$
|
3.2
|
|
|
$
|
384.8
|
|
Revolver
|
149.7
|
|
|
—
|
|
|
149.7
|
|
2027 Senior Notes
|
600.0
|
|
|
6.8
|
|
|
593.2
|
|
2028 Senior Notes
|
500.0
|
|
|
5.4
|
|
|
494.6
|
|
Total debt
|
1,637.7
|
|
|
15.4
|
|
|
1,622.3
|
|
Current maturities of long-term debt
|
4.0
|
|
|
—
|
|
|
4.0
|
|
Total debt, net of current maturities
|
$
|
1,633.7
|
|
|
$
|
15.4
|
|
|
$
|
1,618.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
(in millions)
|
Outstanding Principal
|
|
Issuance Costs and Fees
|
|
Long-Term Debt, Net
|
Term Loan B due 2024
|
$
|
392.0
|
|
|
$
|
4.0
|
|
|
$
|
388.0
|
|
2027 Senior Notes
|
600.0
|
|
|
8.0
|
|
|
592.0
|
|
2028 Senior Notes
|
500.0
|
|
|
6.1
|
|
|
493.9
|
|
Total debt
|
1,492.0
|
|
|
18.1
|
|
|
1,473.9
|
|
Current maturities of long-term debt
|
4.0
|
|
|
—
|
|
|
4.0
|
|
Total debt, net of current maturities
|
$
|
1,488.0
|
|
|
$
|
18.1
|
|
|
$
|
1,469.9
|
|
Credit Agreement
On December 27, 2017, we entered into a senior secured credit agreement (as amended, the "Credit Agreement") with a syndicate of lenders. The Credit Agreement provides for a $700.0 million senior secured revolving credit facility due 2022 (the "Revolver") and a $400.0 million senior secured term loan B due 2024 (the "Term Loan B"). Included in the maximum borrowing of $700.0 million under the Revolver is a letter of credit sub facility not to exceed $50.0 million and a swing line commitment up to a maximum principal amount of $50.0 million. The Credit Agreement is collateralized by substantially all of the wholly-owned assets of the Company.
The Company capitalized $1.6 million of debt issuance costs associated with the Revolver which is being amortized as interest expense over the shorter of the respective debt period or 5 years. The Company also capitalized $5.1 million of debt issuance costs associated with the Term Loan B portion of the Credit Agreement which is being amortized as interest expense over the shorter of the respective debt period or 7 years.
The interest rates applicable to the Company’s borrowings under the Credit Agreement are LIBOR-based plus a spread, as determined by the Company's consolidated total net leverage ratio. The Term Loan B requires quarterly payments of 0.25% of the original $400.0 million balance, or $1.0 million per quarter. The Term Loan B may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement. The Company is required to pay a commitment fee on the unused portion of the Revolver as determined by a pricing grid based on the consolidated total net secured leverage ratio of the Company. For the period ended December 31, 2020, the Company's commitment fee rate was 0.30%.
The Credit Agreement contains certain customary affirmative and negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, and transactions with affiliates. The Credit Agreement also contains financial covenants providing for the maintenance of a maximum consolidated secured net leverage ratio (4.0 to 1.0 or 4.5 to 1.0 for the year following any permitted acquisition greater than $100.0 million) and the maintenance of a minimum consolidated interest coverage ratio of 2.5 to 1.0.
On March 16, 2020, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”). The First Amendment extended the maturity for the Company’s Revolver from December 27, 2022 to at least September 27, 2024,
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
which is 91 days prior to the latest maturity date of the Company’s term loan facility on December 27, 2024. The First Amendment also lowered the upper limit of the applied spreads with respect to revolving loans from 2.25% to 1.75% and for commitment fees with respect thereto from 0.35% to 0.30% and provides a reduced pricing schedule for outstanding borrowings and commitment fees with respect to the Revolver across all other leverage pricing levels. The First Amendment did not alter the Company’s borrowing capacity. The Company capitalized $2.0 million of debt issuance costs associated with the First Amendment which will be amortized as interest expense over the remaining duration of the Revolver.
The Company had an outstanding balance of $149.7 million and had $545.8 million available on the Revolver as of December 31, 2020. The Company had $67.4 million of cash and cash equivalents as of December 31, 2020.
On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”). The Second Amendment (i) provides for a financial covenant relief period through the date on which the Company delivers the Company’s 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 restricted subsidiaries to maintain liquidity of at least $150.0 million during the Financial Covenant Relief Period. While the Second Amendment is in effect, the Company agreed to limit restricted payments to $26.0 million.
On February 1, 2021, the Company entered into the Third Amendment to the Credit Agreement to increase the restricted payments capacity during the Financial Covenant Relief Period, as defined in the Second Amendment, from $26.0 million to $226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc. The Company repurchased the shares using available cash and borrowings under the Company's Revolver. Refer to Note 23, Subsequent Events, for information regarding this transaction.
The interest rate on the Revolver on December 31, 2020 was LIBOR plus 175 points based on the Revolver pricing grid in the Second Amendment and the Company's net leverage ratio as of December 31, 2020. The Term Loan B bears interest at LIBOR plus 200 basis points.
Although the Company was not required to meet the Company’s financial covenants under the Credit Agreement on December 31, 2020 (as a result of the Second Amendment), the Company was compliant with all applicable covenants on December 31, 2020.
2027 Senior Notes
On March 25, 2019, we completed an offering of $600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature on April 1, 2027 (the "2027 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2027 Senior Notes were issued at par, with interest payable on April 1st and October 1st of each year, commencing on October 1, 2019. The Company used the net proceeds from the offering to repay our outstanding balance on the Credit Agreement. In connection with the offering, we capitalized $8.9 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes.
The 2027 Senior Notes were issued pursuant to an indenture, dated March 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2027 Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2027 Senior Notes at any time prior to April 1, 2022, at a price equal to 100% of the principal amount of the 2027 Senior Notes redeemed plus an applicable make-whole premium. On or after such date, the Company may redeem some or all of the 2027 Senior Notes at redemption prices set forth in the 2027 Indenture. At any time prior to April 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 Senior Notes at a redemption price equal to 105.5% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2027 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
In connection with the issuance of the 2027 Senior Notes, the Company and the 2027 Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019.
2028 Senior Notes
On December 27, 2017, we completed an offering of $500.0 million in aggregate principal amount of 4.75% Senior Unsecured Notes that mature on January 15, 2028 (the "2028 Senior Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A that is exempt from registration under the Securities Act, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The 2028 Senior Notes were issued at par, with interest payable on January 15th and July 15th of each year, commencing on July 15, 2018. The Company used the net proceeds from the offering to repay a portion of our $600.0 million 5.375% Senior Unsecured Notes (the "2021 Senior Notes"). In connection with the offering, we capitalized $7.7 million of debt issuance costs which are being amortized as interest expense over the term of the 2028 Senior Notes.
The 2028 Senior Notes were issued pursuant to an indenture, dated December 27, 2017 (the "2028 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2028 Guarantors"), and U.S. Bank National Association, as trustee. The Company may redeem some or all of the 2028 Senior Notes at any time prior to January 15, 2023, at a price equal to 100% of the principal amount of the 2028 Senior Notes redeemed plus an applicable make-whole premium. On or after such date, the Company may redeem some or all of the 2028 Senior Notes at redemption prices set forth in the 2028 Indenture. At any time prior to January 15, 2021, the Company may redeem up to 40% of the aggregate principal amount of the 2028 Senior Notes at a redemption price equal to 104.75% of the principal amount thereof with the net cash proceeds of one or more equity offerings provided that certain conditions are met. The terms of the 2028 Indenture, among other things, limit the ability of the Company to: (i) incur additional debt and issue preferred stock; (ii) pay dividends or make other restricted payments; (iii) make certain investments; (iv) create liens; (v) allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments; (vi) sell assets; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.
In connection with the issuance of the 2028 Senior Notes, the Company and the 2028 Guarantors entered into a Registration Rights Agreement to register any 2028 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from December 27, 2017.
Future aggregate maturities of total debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2021
|
|
$
|
4.0
|
|
2022
|
|
4.0
|
|
2023
|
|
4.0
|
|
2024
|
|
525.7
|
|
2025
|
|
—
|
|
Thereafter
|
|
1,100.0
|
|
Total
|
|
$
|
1,637.7
|
|
13. REVENUE FROM CONTRACTS WITH CUSTOMERS
Performance Obligations
As of December 31, 2020, our Churchill Downs segment had remaining performance obligations on contracts with a duration greater than one year relating to television rights, sponsorships, personal seat licenses, and admissions, with an aggregate transaction price of $131.8 million. The revenue we expect to recognize on these remaining performance obligations is $32.8 million in 2021, $36.6 million in 2022, $23.2 million in 2023, and the remainder thereafter.
As of December 31, 2020, our remaining performance obligations on contracts with a duration greater than one year in segments other than Churchill Downs were not material.
Contract Assets and Contract Liabilities
Contract assets were not material as of December 31, 2020 and 2019.
Contract liabilities were $53.7 million as of December 31, 2020 and $63.1 million as of December 31, 2019. Contract liabilities are included in current deferred revenue, non-current deferred revenue, and accrued expense and other current liabilities in the
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
accompanying consolidated balance sheets. Contract liabilities primarily relate to our Churchill Downs segment and the decrease was primarily due to revenue recognized for performance obligations related to Churchill Downs Racetrack that were fulfilled in 2020. We recognized $6.7 million of revenue during the year ended December 31, 2020 that was included in the contract liabilities balance at December 31, 2019. We recognized $51.2 million of revenue during the year ended December 31, 2019 that was included in the contract liabilities balance at December 31, 2018. We recognized $53.7 million of revenue during the year ended December 31, 2018 that was included in the contract liabilities balance at January 1, 2018.
Disaggregation of Revenue
In Note 21, Segment Information, the Company has included its disaggregated revenue disclosures as follows:
•For the Churchill Downs segment, revenue is disaggregated between Churchill Downs Racetrack and Derby City Gaming given that Churchill Downs Racetrack's revenues primarily revolve around live racing events while Derby City Gaming's revenues primarily revolve around historical racing events. Within the Churchill Downs segment, revenue is further disaggregated between live and simulcast racing, historical racing, racing event-related services, and other services.
•For the Online Wagering segment, revenue is disaggregated between the TwinSpires Horse Racing business and our TwinSpires Sports and Casino business given that TwinSpires' Horse Racing revenue is primarily related to online pari-mutuel wagering on live race events while the TwinSpires Sports and Casino revenue relates to sports and casino gaming service offerings. Within the Online Wagering segment, revenue is further disaggregated between live and simulcast racing, gaming, and other services.
•For the Gaming segment, revenue is disaggregated by location given the geographic economic factors that affect the revenue of Gaming service offerings. Within the Gaming segment, revenue is further disaggregated between live and simulcast racing, racing event-related services, gaming, and other services.
We believe that these disclosures depict how the amount, nature, timing, and uncertainty of cash flows are affected by economic factors.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
14. OTHER BALANCE SHEET ITEMS
Accounts receivable
Accounts receivable is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2020
|
|
2019
|
Trade receivables
|
$
|
6.5
|
|
|
$
|
12.3
|
|
Simulcast and online wagering receivables
|
26.7
|
|
|
20.9
|
|
Other receivables
|
8.2
|
|
|
8.5
|
|
|
41.4
|
|
|
41.7
|
|
Allowance for doubtful accounts
|
(4.9)
|
|
|
(4.4)
|
|
Total
|
$
|
36.5
|
|
|
$
|
37.3
|
|
We recognized bad debt expense of $2.5 million in 2020, $2.1 million in 2019 and $1.7 million in 2018.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2020
|
|
2019
|
Accrued salaries and related benefits
|
$
|
19.6
|
|
|
$
|
29.2
|
|
Account wagering deposits liability
|
38.1
|
|
|
28.9
|
|
Purses payable
|
18.5
|
|
|
19.9
|
|
Accrued interest
|
19.2
|
|
|
19.7
|
|
Other
|
72.4
|
|
|
75.7
|
|
Total
|
$
|
167.8
|
|
|
$
|
173.4
|
|
15. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in and advances to unconsolidated affiliates as of December 31, 2020 and 2019 primarily consisted of a 50% interest in MVG, a 61.3% interest in Rivers Des Plaines (as described further below), and two other immaterial joint ventures.
Miami Valley Gaming
Delaware North Companies Gaming & Entertainment Inc. ("DNC") owns the remaining 50% interest in MVG. Since both we and DNC have participating rights over MVG, and both must consent to MVG's operating, investing and financing decisions, we account for MVG using the equity method.
Our investment in MVG was $110.1 million as of December 31, 2020 and $110.8 million as of December 31, 2019. The Company received distributions from MVG of $20.0 million in 2020, $23.8 million in 2019 and $18.8 million in 2018.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Rivers Des Plaines
On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines 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.
A new limited liability company agreement was entered into by the members of Midwest Gaming as a result of the change in ownership structure. Under the new limited liability company agreement, both the Company and High Plaines have participating rights over Midwest Gaming, and both must consent to Midwest Gaming's operating, investing and financing decisions. As a result, we account for Midwest Gaming using the equity method.
The Company’s investment in Midwest Gaming is presented at our initial cost of investment plus the Company's accumulated proportional share of income or loss, including depreciation/accretion of the difference in the historical basis of the Company’s contribution, less any distributions it has received. Following the Sale Transaction and Recapitalization, the carrying value of the Company’s investment in Midwest Gaming was $835.0 million higher than the Company’s underlying equity in the net assets of Midwest Gaming. This equity method basis difference was comprised of $853.7 million related to goodwill and indefinite-lived intangible assets, $(13.7) million related to non-depreciable land, $(9.5) million related to buildings that will be accreted into income over a weighted average useful life of 35.3 years, and $4.5 million related to personal property that will be depreciated over a weighted average useful life of 3.7 years. As of December 31, 2020, the net aggregate basis difference between the Company’s investment in Midwest Gaming and the amounts of the underlying equity in net assets was $833.3 million.
Our investment in Rivers Des Plaines was $519.0 million as of December 31, 2020 and $522.1 million as of December 31, 2019. The Company received distributions from Rivers Des Plaines of $10.7 million in 2020 and $14.2 million in 2019.
Ocean Downs
Ocean Downs was accounted for under the equity method prior to August 31, 2018. On August 31, 2018, the Company completed the acquisition of the remaining 50% ownership of Ocean Downs owned by SCH in exchange for liquidating the Company's 25% equity interest in SCH, which is the parent company of Saratoga New York and Saratoga Colorado. As of August 31, 2018, the Company owns 100% of Ocean Downs and has no equity interest or management involvement in Saratoga New York or Saratoga Colorado.
Summarized Financial Results for our Unconsolidated Affiliates
The financial results for our unconsolidated affiliates are summarized below. The summarized income statement information for 2020 and summarized balance sheet information as of December 31, 2020 includes the following equity investments: MVG, Rivers Des Plaines, and one other immaterial joint venture. The summarized income statement information for 2019 and summarized balance sheet information as of December 31, 2019 includes the following equity investments: MVG, Rivers Des Plaines from the transaction date of March 5, 2019, and two other immaterial joint ventures. The summarized income statement information for 2018 includes the following equity investments: MVG, Saratoga New York, Saratoga Colorado, Ocean Downs,
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
and two other immaterial joint ventures. The 2018 summarized income statement information includes the results of Ocean Downs, Saratoga New York, and Saratoga Colorado through August 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2020
|
|
2019
|
Assets
|
|
|
|
Current assets
|
$
|
132.8
|
|
|
$
|
64.0
|
|
Property and equipment, net
|
267.5
|
|
|
256.1
|
|
Other assets, net
|
244.9
|
|
|
240.1
|
|
Total assets
|
$
|
645.2
|
|
|
$
|
560.2
|
|
|
|
|
|
Liabilities and Members' Deficit
|
|
|
|
Current liabilities
|
$
|
133.5
|
|
|
$
|
73.3
|
|
Long-term debt
|
753.5
|
|
|
745.0
|
|
Other liabilities
|
42.3
|
|
|
20.6
|
|
Members' deficit
|
(284.1)
|
|
|
(278.7)
|
|
Total liabilities and members' deficit
|
$
|
645.2
|
|
|
$
|
560.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Net revenue
|
$
|
386.3
|
|
|
$
|
585.5
|
|
|
$
|
367.2
|
|
Operating and SG&A expense
|
252.1
|
|
|
411.4
|
|
|
271.9
|
|
Depreciation and amortization
|
17.0
|
|
|
13.0
|
|
|
22.2
|
|
Operating income
|
117.2
|
|
|
161.1
|
|
|
73.1
|
|
Interest and other expense, net
|
(63.1)
|
|
|
(67.0)
|
|
|
(6.3)
|
|
Net income
|
$
|
54.1
|
|
|
$
|
94.1
|
|
|
$
|
66.8
|
|
16. LEASES
Our operating leases with terms greater than one year are primarily related to buildings and land. Our operating leases with terms less than one year are primarily related to equipment. Most of our building and land leases have terms of 2 to 10 years and include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Certain of our lease agreements include lease payments based on a percentage of net gaming revenue and others include rental payment adjustments periodically for inflation. The estimated discount rate for each of our leases is determined based on adjustments made to our secured debt borrowing rate.
The components of total lease cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
Short-term lease cost (a) (b)
|
$
|
6.5
|
|
|
$
|
14.3
|
|
Operating lease cost (b)
|
6.6
|
|
|
6.7
|
|
Finance lease interest expense
|
0.1
|
|
|
—
|
|
Finance lease amortization expense (b)
|
0.2
|
|
|
—
|
|
Total lease cost
|
$
|
13.4
|
|
|
$
|
21.0
|
|
(a)Includes leases with terms of one month or less
(b)Includes variable lease costs, which were not material
Supplemental cash flow information related to leases are as follows:
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
$
|
6.0
|
|
|
$
|
5.2
|
|
Operating cash flows from finance leases
|
$
|
0.1
|
|
|
$
|
—
|
|
Financing cash flows from finance lease
|
$
|
0.1
|
|
|
$
|
—
|
|
|
|
|
|
ROUAs obtained in exchange for lease obligations
|
|
|
|
Operating leases
|
$
|
2.8
|
|
|
$
|
3.7
|
|
Finance leases
|
$
|
5.1
|
|
|
$
|
1.5
|
|
Other information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Weighted Average Remaining Lease Term
|
2020
|
|
2019
|
Operating leases
|
5.9 years
|
|
6.5 years
|
Finance leases
|
18.4 years
|
|
14.9 years
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
3.8
|
%
|
|
3.9
|
%
|
Finance leases
|
2.9
|
%
|
|
3.9
|
%
|
As of December 31, 2020, the future undiscounted cash flows associated with the Company's operating and financing lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Years Ended December 31,
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
5.5
|
|
|
$
|
0.4
|
|
2022
|
4.3
|
|
|
0.4
|
|
2023
|
3.8
|
|
|
0.4
|
|
2024
|
3.8
|
|
|
0.4
|
|
2025
|
3.6
|
|
|
0.4
|
|
Thereafter
|
5.5
|
|
|
6.0
|
|
Total future minimum lease payments
|
26.5
|
|
|
8.0
|
|
Less: Imputed interest
|
2.8
|
|
|
1.8
|
|
Present value of lease liabilities
|
$
|
23.7
|
|
|
$
|
6.2
|
|
|
|
|
|
Reported lease liabilities as of December 31, 2020
|
|
|
|
Accrued expense and other current liabilities (current maturities of leases)
|
$
|
4.7
|
|
|
$
|
0.2
|
|
Other liabilities (non-current maturities of leases)
|
19.0
|
|
|
6.0
|
|
Present value of lease liabilities
|
$
|
23.7
|
|
|
$
|
6.2
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
17. BOARD OF DIRECTOR AND EMPLOYEE BENEFIT PLANS
Board of Directors and Officers Retirement Plan
We provide eligible executives and members of our Board of Directors an opportunity to defer to a future date the receipt of base and bonus compensation for services as well as director’s fees through the 2005 Deferred Compensation Plan (the "Deferred Plan"). Our matching contribution on base compensation deferral of executives equals the matching contribution of our profit-sharing plan with certain limits.
Members of our Board of Directors may elect to invest the deferred director fee compensation into our common stock within the Deferred Plan. Investments in our common stock are credited as hypothetical shares of common stock based on the market price of the stock at the time the compensation was earned. Upon the end of the director's service, common stock shares are issued to the director.
On December 13, 2019, the Compensation Committee elected to freeze the Deferred Plan with respect to employee participant deferrals after the 2019 plan year. Members of our Board of Directors may continue to participate in the Deferred Plan.
On December 13, 2019, the Compensation Committee adopted the Churchill Downs Incorporated Restricted Stock Unit Deferral Plan, effective January 1, 2020. Certain individual employees who are management or highly compensated employees of the Company may elect to defer settlement of RSUs granted pursuant to the 2016 Incentive Plan.
Other Retirement Plans
We have a profit-sharing plan for all employees with three months or more of service who are not otherwise participating in an associated profit-sharing plan. We match contributions made by employees up to 3% of the employee’s annual compensation and match at 50% any contributions made by the employee up to an additional 2% of compensation with certain limits. We may also contribute a discretionary amount determined annually by the Board of Directors as well as a year-end discretionary match not to exceed 4% of compensation. Our cash contribution to the plan was $3.7 million in 2020, $4.1 million in 2019, and $3.0 million in 2018.
We are a member of a noncontributory defined benefit multi-employer retirement plan for all members of the Pari-mutuel Clerk’s Union of Kentucky and several other collectively bargained retirement plans, which are administered by unions. Cash contributions are made in accordance with negotiated labor contracts. Retirement plan expense was $0.3 million in 2020,$0.6 million in 2019, and $0.7 million in 2018. Our policy is to fund this expense as accrued, and we currently estimate that future contributions to these plans will not increase significantly from prior years.
18. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:
Restricted Cash
Our restricted cash accounts that are held in interest-bearing accounts qualify for Level 1 in the fair value hierarchy, which includes unadjusted quoted market prices in active markets for identical assets.
Debt
The fair value of the Company’s 2028 Senior Notes and 2027 Senior Notes are estimated based on unadjusted quoted prices for identical or similar liabilities in markets that are not active and as such are Level 2 measurements. The fair value of the Company's Senior Secured Term Loan B due 2024 (the "Term Loan B") and the Revolver approximates the gross carrying value as both are variable rate debt and as such are Level 2 measurements.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values by input level of the Company's financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(in millions)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
$
|
53.6
|
|
|
$
|
53.6
|
|
|
$
|
53.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Term Loan B
|
384.8
|
|
|
388.0
|
|
|
—
|
|
|
388.0
|
|
|
—
|
|
Revolver
|
149.7
|
|
|
149.7
|
|
|
—
|
|
|
149.7
|
|
|
—
|
|
2027 Senior Notes
|
593.2
|
|
|
635.2
|
|
|
|
|
635.2
|
|
|
|
2028 Senior Notes
|
494.6
|
|
|
526.9
|
|
|
—
|
|
|
526.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in millions)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
$
|
46.3
|
|
|
$
|
46.3
|
|
|
$
|
46.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Term Loan B
|
388.0
|
|
|
392.0
|
|
|
—
|
|
|
392.0
|
|
|
—
|
|
2027 Senior Notes
|
592.0
|
|
|
636.0
|
|
|
—
|
|
|
636.0
|
|
|
—
|
|
2028 Senior Notes
|
493.9
|
|
|
515.2
|
|
|
—
|
|
|
515.2
|
|
|
—
|
|
19. CONTINGENCIES
We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results of operations, or cash flows. Legal fees are expensed as incurred.
If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
20. NET INCOME PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the net income per common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except per share data)
|
2020
|
|
2019
|
|
2018
|
Numerator for basic net income (loss) per common share:
|
|
|
|
|
|
Net income from continuing operations
|
$
|
13.3
|
|
|
$
|
139.6
|
|
|
$
|
182.6
|
|
Net loss attributable to noncontrolling interest
|
(0.2)
|
|
|
(0.3)
|
|
|
—
|
|
Net income from continuing operations, net of loss attributable to noncontrolling interests
|
13.5
|
|
|
139.9
|
|
|
182.6
|
|
Net (loss) income from discontinued operations
|
(95.4)
|
|
|
(2.4)
|
|
|
170.2
|
|
Numerator for basic net (loss) income per common share
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
352.8
|
|
|
|
|
|
|
|
Numerator for diluted net income from continuing operations per common share
|
$
|
13.5
|
|
|
$
|
139.9
|
|
|
$
|
182.6
|
|
|
|
|
|
|
|
Numerator for diluted net (loss) income per common share
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
352.8
|
|
|
|
|
|
|
|
Denominator for net (loss) income per common share:
|
|
|
|
|
|
Basic
|
39.6
|
|
|
40.1
|
|
|
41.3
|
|
Plus dilutive effect of stock awards
|
0.5
|
|
|
0.5
|
|
|
0.3
|
|
Diluted
|
40.1
|
|
|
40.6
|
|
|
41.6
|
|
|
|
|
|
|
|
Net (loss) income per common share data:
|
|
|
|
|
|
Basic
|
|
|
|
|
|
Continuing operations
|
$
|
0.34
|
|
|
$
|
3.49
|
|
|
$
|
4.42
|
|
Discontinued operations
|
$
|
(2.41)
|
|
|
$
|
(0.06)
|
|
|
$
|
4.12
|
|
Net (loss) income per common share - basic
|
$
|
(2.07)
|
|
|
$
|
3.43
|
|
|
$
|
8.54
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing operations
|
$
|
0.33
|
|
|
$
|
3.44
|
|
|
$
|
4.39
|
|
Discontinued operations (1)
|
$
|
(2.41)
|
|
|
$
|
(0.06)
|
|
|
$
|
4.09
|
|
Net (loss) income per common share - diluted
|
$
|
(2.08)
|
|
|
$
|
3.38
|
|
|
$
|
8.48
|
|
(1) Amounts exclude all potential common equivalent shares for periods when there is a net loss from discontinued operations.
21. SEGMENT INFORMATION
We manage our operations through three reportable segments: Churchill Downs, Online Wagering and Gaming. Our operating segments reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources.
•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 an HRM facility that operates under the Churchill Downs pari-mutuel racing license at the auxiliary training facility for Churchill Downs Racetrack 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.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
•Online Wagering
The Online Wagering segment includes the revenue and expenses for the TwinSpires Horse Racing business and the TwinSpires Sports and Casino business. Both businesses are headquartered in Louisville, Kentucky.
TwinSpires Horse Racing operates the online horse racing wagering business for TwinSpires.com, BetAmerica.com, and other white-label platforms; facilitates high dollar wagering by international customers (through Velocity); and provides the Bloodstock Research Information Services platform for horse racing statistical data.
Our TwinSpires Sports and Casino business operates our sports betting and casino iGaming platform in multiple states, including Colorado, Indiana, Michigan, Mississippi, New Jersey, and Pennsylvania. The TwinSpires sports and casino business includes the mobile and online sports betting and casino results and the results of our three retail sportsbooks in Colorado, Indiana and Michigan which utilize a third party's casino license.
The results of the two retail sportsbooks at our Mississippi properties, our retail sportsbook at Presque Isle in Pennsylvania and the retail and online BetRivers sportsbook in Illinois provided by Rivers Des Plaines and managed by Rush Street Interactive, are included in the Gaming segment.
•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") and 200 table games located in eight states.
The Gaming segment revenue and expenses includes the following properties:
◦Calder Casino and Racing ("Calder")
◦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 management agreement
◦Ocean Downs Casino and Racetrack ("Ocean Downs")
◦Oxford Casino and Hotel ("Oxford")
◦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, the parent company of Rivers Des Plaines in Des Plaines, Illinois
◦50% equity investment in 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:
•Oak Grove
•Newport
•Turfway Park
•Arlington International Racecourse ("Arlington")
•United Tote
•Corporate
Eliminations include the elimination of intersegment transactions. We utilize non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA includes the following adjustments:
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Adjusted EBITDA includes our portion of EBITDA from our equity investments.
Adjusted EBITDA excludes:
•Transaction expense, net which includes:
◦Acquisition and disposition related charges, including fair value adjustments related to earnouts and deferred payments;
◦Calder racing exit costs; and
◦Other transaction expense, including legal, accounting, and other deal-related expense;
•Stock-based compensation expense;
•Midwest Gaming's impact on our investments in unconsolidated affiliates from:
◦The impact of changes in fair value of interest rate swaps; and
◦Recapitalization and transaction costs;
•Asset impairments;
•Gain on Ocean Downs/Saratoga Transaction;
•Loss on extinguishment of debt;
•Legal reserves;
•Pre-opening expense; and
•Other charges, recoveries and expenses
We utilize the Adjusted EBITDA metric to provide a more accurate measure of our core operating results and enable management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure provided in accordance with GAAP. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying consolidated statements of comprehensive (loss) income.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The tables below present net revenue from external customers and intercompany revenue from each of our segments, Adjusted EBITDA by segment and reconciles comprehensive (loss) income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Net revenue from external customers:
|
|
|
|
|
|
Churchill Downs:
|
|
|
|
|
|
Churchill Downs Racetrack
|
$
|
63.3
|
|
|
$
|
187.6
|
|
|
$
|
181.0
|
|
Derby City Gaming
|
79.5
|
|
|
86.6
|
|
|
14.8
|
|
Total Churchill Downs
|
142.8
|
|
|
274.2
|
|
|
195.8
|
|
Online Wagering:
|
|
|
|
|
|
TwinSpires Horse Racing
|
403.4
|
|
|
289.9
|
|
|
290.2
|
|
TwinSpires Sports and Casino
|
4.9
|
|
|
0.6
|
|
|
—
|
|
Total Online Wagering
|
408.3
|
|
|
290.5
|
|
|
290.2
|
|
Gaming:
|
|
|
|
|
|
Fair Grounds and VSI
|
97.6
|
|
|
123.0
|
|
|
117.7
|
|
Presque Isle
|
75.2
|
|
|
138.5
|
|
|
—
|
|
Ocean Downs
|
60.3
|
|
|
85.9
|
|
|
25.9
|
|
Calder
|
51.8
|
|
|
99.8
|
|
|
98.6
|
|
Oxford Casino
|
44.9
|
|
|
101.7
|
|
|
102.0
|
|
Riverwalk Casino
|
49.1
|
|
|
58.9
|
|
|
54.5
|
|
Harlow’s Casino
|
41.8
|
|
|
55.3
|
|
|
50.2
|
|
Lady Luck Nemacolin
|
20.7
|
|
|
29.3
|
|
|
—
|
|
Saratoga
|
—
|
|
|
—
|
|
|
0.6
|
|
Total Gaming
|
441.4
|
|
|
692.4
|
|
|
449.5
|
|
All Other
|
61.5
|
|
|
72.6
|
|
|
73.5
|
|
Net revenue from external customers
|
$
|
1,054.0
|
|
|
$
|
1,329.7
|
|
|
$
|
1,009.0
|
|
|
|
|
|
|
|
Intercompany net revenues:
|
|
|
|
|
|
Churchill Downs
|
$
|
17.7
|
|
|
$
|
15.2
|
|
|
$
|
12.7
|
|
Online Wagering
|
1.6
|
|
|
1.1
|
|
|
1.3
|
|
Gaming:
|
|
|
|
|
|
Fair Grounds and VSI
|
2.2
|
|
|
1.8
|
|
|
1.6
|
|
Presque Isle
|
0.2
|
|
|
0.5
|
|
|
—
|
|
Calder
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Total Gaming
|
2.5
|
|
|
2.4
|
|
|
1.7
|
|
All Other
|
13.2
|
|
|
11.6
|
|
|
11.2
|
|
Eliminations
|
(35.0)
|
|
|
(30.3)
|
|
|
(26.9)
|
|
Intercompany net revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2020
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
|
Total Segments
|
|
All Other
|
|
Total
|
Net revenue from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Pari-mutuel:
|
|
|
|
|
|
|
|
|
|
|
|
Live and simulcast racing
|
$
|
39.4
|
|
|
$
|
387.5
|
|
|
$
|
22.9
|
|
|
$
|
449.8
|
|
|
$
|
25.3
|
|
|
$
|
475.1
|
|
Historical racing(a)
|
76.0
|
|
|
—
|
|
|
—
|
|
|
76.0
|
|
|
17.6
|
|
|
93.6
|
|
Racing event-related services
|
21.0
|
|
|
—
|
|
|
3.4
|
|
|
24.4
|
|
|
0.3
|
|
|
24.7
|
|
Gaming(a)
|
—
|
|
|
5.1
|
|
|
387.5
|
|
|
392.6
|
|
|
—
|
|
|
392.6
|
|
Other(a)
|
6.4
|
|
|
15.7
|
|
|
27.6
|
|
|
49.7
|
|
|
18.3
|
|
|
68.0
|
|
Total
|
$
|
142.8
|
|
|
$
|
408.3
|
|
|
$
|
441.4
|
|
|
$
|
992.5
|
|
|
$
|
61.5
|
|
|
$
|
1,054.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
|
Total Segments
|
|
All Other
|
|
Total
|
Net revenue from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Pari-mutuel:
|
|
|
|
|
|
|
|
|
|
|
|
Live and simulcast racing
|
$
|
59.0
|
|
|
$
|
277.1
|
|
|
$
|
30.7
|
|
|
$
|
366.8
|
|
|
$
|
41.1
|
|
|
$
|
407.9
|
|
Historical racing(a)
|
81.6
|
|
|
—
|
|
|
—
|
|
|
81.6
|
|
|
—
|
|
|
81.6
|
|
Racing event-related services
|
118.7
|
|
|
—
|
|
|
4.1
|
|
|
122.8
|
|
|
5.6
|
|
|
128.4
|
|
Gaming(a)
|
—
|
|
|
0.6
|
|
|
585.2
|
|
|
585.8
|
|
|
—
|
|
|
585.8
|
|
Other(a)
|
14.9
|
|
|
12.8
|
|
|
72.4
|
|
|
100.1
|
|
|
25.9
|
|
|
126.0
|
|
Total
|
$
|
274.2
|
|
|
$
|
290.5
|
|
|
$
|
692.4
|
|
|
$
|
1,257.1
|
|
|
$
|
72.6
|
|
|
$
|
1,329.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2018
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
|
Total Segments
|
|
All Other
|
|
Total
|
Net revenue from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Pari-mutuel:
|
|
|
|
|
|
|
|
|
|
|
|
Live and simulcast racing
|
$
|
54.9
|
|
|
$
|
278.4
|
|
|
$
|
27.1
|
|
|
$
|
360.4
|
|
|
$
|
43.1
|
|
|
$
|
403.5
|
|
Historical racing(a)
|
13.8
|
|
|
—
|
|
|
—
|
|
|
13.8
|
|
|
—
|
|
|
13.8
|
|
Racing event-related services
|
115.2
|
|
|
—
|
|
|
3.9
|
|
|
119.1
|
|
|
5.8
|
|
|
124.9
|
|
Gaming(a)
|
—
|
|
|
—
|
|
|
365.9
|
|
|
365.9
|
|
|
—
|
|
|
365.9
|
|
Other(a)
|
11.9
|
|
|
11.8
|
|
|
52.6
|
|
|
76.3
|
|
|
24.6
|
|
|
100.9
|
|
Total
|
$
|
195.8
|
|
|
$
|
290.2
|
|
|
$
|
449.5
|
|
|
$
|
935.5
|
|
|
$
|
73.5
|
|
|
$
|
1,009.0
|
|
(a)Food and beverage, hotel, and other services furnished to customers for free as an inducement to wager or through the redemption of our customers' loyalty points are recorded at the estimated standalone selling prices in Other revenue with a corresponding offset recorded as a reduction in historical racing pari-mutuel revenue for HRMs or gaming revenue for our casino properties. These amounts were $13.1 million in 2020, $33.4 million in 2019, and $26.1 million in 2018.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Adjusted EBITDA by segment is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
Net revenue
|
$
|
160.5
|
|
|
$
|
409.9
|
|
|
$
|
443.9
|
|
|
|
|
|
|
|
Taxes and purses
|
(54.1)
|
|
|
(23.7)
|
|
|
(173.0)
|
|
Marketing and advertising
|
(4.1)
|
|
|
(16.5)
|
|
|
(7.5)
|
|
Salaries and benefits
|
(26.5)
|
|
|
(13.0)
|
|
|
(75.9)
|
|
Content expense
|
(1.0)
|
|
|
(204.9)
|
|
|
(3.5)
|
|
Selling, general and administrative expense
|
(7.0)
|
|
|
(8.9)
|
|
|
(25.4)
|
|
Other operating expense
|
(29.6)
|
|
|
(33.7)
|
|
|
(60.8)
|
|
Other income
|
0.1
|
|
|
0.1
|
|
|
78.9
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
38.3
|
|
|
$
|
109.3
|
|
|
$
|
176.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
Net revenue
|
$
|
289.4
|
|
|
$
|
291.6
|
|
|
$
|
694.8
|
|
|
|
|
|
|
|
Taxes and purses
|
(66.5)
|
|
|
(15.3)
|
|
|
(270.3)
|
|
Marketing and advertising
|
(7.1)
|
|
|
(12.2)
|
|
|
(21.5)
|
|
Salaries & benefits
|
(32.0)
|
|
|
(11.4)
|
|
|
(103.3)
|
|
Content expense
|
(2.4)
|
|
|
(152.8)
|
|
|
(6.0)
|
|
Selling, general and administrative expense
|
(8.0)
|
|
|
(7.2)
|
|
|
(29.0)
|
|
Other operating expense
|
(35.9)
|
|
|
(26.4)
|
|
|
(84.1)
|
|
Other income
|
0.2
|
|
|
—
|
|
|
100.3
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
137.7
|
|
|
$
|
66.3
|
|
|
$
|
280.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in millions)
|
Churchill Downs
|
|
Online Wagering
|
|
Gaming
|
Net revenue
|
$
|
208.5
|
|
|
$
|
291.5
|
|
|
$
|
451.2
|
|
|
|
|
|
|
|
Taxes and purses
|
(41.3)
|
|
|
(15.2)
|
|
|
(153.4)
|
|
Marketing and advertising
|
(5.7)
|
|
|
(6.0)
|
|
|
(15.5)
|
|
Salaries & benefits
|
(23.7)
|
|
|
(9.2)
|
|
|
(68.9)
|
|
Content expense
|
(2.2)
|
|
|
(152.0)
|
|
|
(4.1)
|
|
Selling, general and administrative expense
|
(5.3)
|
|
|
(5.9)
|
|
|
(18.6)
|
|
Other operating expense
|
(28.0)
|
|
|
(24.2)
|
|
|
(60.0)
|
|
Other income
|
0.1
|
|
|
—
|
|
|
43.3
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
102.4
|
|
|
$
|
79.0
|
|
|
$
|
174.0
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to Churchill Downs Incorporated
|
$
|
(81.9)
|
|
|
$
|
137.5
|
|
|
$
|
353.2
|
|
Foreign currency translation, net of tax
|
—
|
|
|
—
|
|
|
(0.6)
|
|
Change in pension benefits, net of tax
|
—
|
|
|
—
|
|
|
0.2
|
|
Net (loss) income attributable to Churchill Downs Incorporated
|
(81.9)
|
|
|
137.5
|
|
|
352.8
|
|
Net loss attributable to noncontrolling interest
|
0.2
|
|
|
0.3
|
|
|
—
|
|
Net (loss) income before noncontrolling interest
|
(82.1)
|
|
|
137.2
|
|
|
352.8
|
|
Loss (income) from discontinued operations, net of tax
|
95.4
|
|
|
2.4
|
|
|
(170.2)
|
|
Income from continuing operations, net of tax
|
13.3
|
|
|
139.6
|
|
|
182.6
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
Depreciation and amortization
|
92.9
|
|
|
96.4
|
|
|
63.6
|
|
Interest expense
|
80.0
|
|
|
70.9
|
|
|
40.1
|
|
Income tax (benefit) provision
|
(5.3)
|
|
|
56.8
|
|
|
51.3
|
|
EBITDA
|
$
|
180.9
|
|
|
$
|
363.7
|
|
|
$
|
337.6
|
|
|
|
|
|
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
Stock-based compensation expense
|
$
|
23.7
|
|
|
$
|
23.8
|
|
|
$
|
17.7
|
|
Legal reserves
|
—
|
|
|
3.6
|
|
|
—
|
|
Other, net
|
0.8
|
|
|
0.4
|
|
|
(0.6)
|
|
Pre-opening expense
|
11.2
|
|
|
5.1
|
|
|
4.8
|
|
Other income, expense:
|
|
|
|
|
|
Interest, depreciation and amortization expense related to equity investments
|
38.5
|
|
|
32.6
|
|
|
13.9
|
|
Changes in fair value of Midwest Gaming's interest rate swaps
|
12.9
|
|
|
12.4
|
|
|
—
|
|
Midwest Gaming's recapitalization and transactions costs
|
—
|
|
|
4.7
|
|
|
—
|
|
Other charges and recoveries, net
|
—
|
|
|
(0.2)
|
|
|
—
|
|
Gain on Ocean Downs/Saratoga transaction
|
—
|
|
|
—
|
|
|
(54.9)
|
|
Transaction expense, net
|
1.0
|
|
|
5.3
|
|
|
10.3
|
|
Impairment of tangible and other intangible assets
|
17.5
|
|
|
—
|
|
|
—
|
|
Total adjustments to EBITDA
|
105.6
|
|
|
87.7
|
|
|
(8.8)
|
|
Adjusted EBITDA
|
$
|
286.5
|
|
|
$
|
451.4
|
|
|
$
|
328.8
|
|
|
|
|
|
|
|
Adjusted EBITDA by segment:
|
|
|
|
|
|
Churchill Downs
|
$
|
38.3
|
|
|
$
|
137.7
|
|
|
$
|
102.4
|
|
Online Wagering
|
109.3
|
|
|
66.3
|
|
|
79.0
|
|
Gaming
|
176.7
|
|
|
280.9
|
|
|
174.0
|
|
Total segment Adjusted EBITDA
|
324.3
|
|
|
484.9
|
|
|
355.4
|
|
All Other
|
(37.8)
|
|
|
(33.5)
|
|
|
(26.6)
|
|
Total Adjusted EBITDA
|
$
|
286.5
|
|
|
$
|
451.4
|
|
|
$
|
328.8
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The table below presents information about equity in income of unconsolidated affiliates included in our reported segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Gaming
|
$
|
27.5
|
|
|
$
|
50.5
|
|
|
$
|
29.4
|
|
All Other
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
$
|
27.7
|
|
|
$
|
50.6
|
|
|
$
|
29.6
|
|
The table below presents total asset information for each of our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in millions)
|
2020
|
|
2019
|
Total assets:
|
|
|
|
Churchill Downs
|
$
|
377.7
|
|
|
$
|
370.3
|
|
Online Wagering
|
249.1
|
|
|
241.5
|
|
Gaming
|
957.4
|
|
|
1,030.1
|
|
Total segment assets
|
1,584.2
|
|
|
1,641.9
|
|
All Other
|
1,102.2
|
|
|
909.1
|
|
|
$
|
2,686.4
|
|
|
$
|
2,551.0
|
|
The table below presents total capital expenditures for each of our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Capital expenditures:
|
|
|
|
|
|
Churchill Downs
|
$
|
38.2
|
|
|
$
|
31.4
|
|
|
$
|
109.6
|
|
Online Wagering
|
11.6
|
|
|
9.7
|
|
|
9.7
|
|
Gaming
|
6.5
|
|
|
37.1
|
|
|
20.7
|
|
Total segment capital expenditures
|
56.3
|
|
|
78.2
|
|
|
140.0
|
|
All Other
|
177.9
|
|
|
53.0
|
|
|
9.4
|
|
Total capital expenditures
|
$
|
234.2
|
|
|
$
|
131.2
|
|
|
$
|
149.4
|
|
22. RELATED PARTY TRANSACTIONS
Directors and employees may from time to time own or have interests in horses racing at our racetracks. All such races are conducted under the regulations of each state’s respective regulatory agency, as applicable, and no director or employee receives any extra or special benefit with regard to having his or her horses selected to run in races or in connection with the actual running of races. There is no material financial statement impact attributable to directors or employees who may have interests in horses racing at our racetracks.
In the ordinary course of business, we may enter into transactions with certain of our officers and directors for the sale of personal seat licenses, suite accommodations, and tickets for our live racing events. We believe that each such transaction has been on terms no less favorable for us than could have been obtained in a transaction with a third party, and no officer or director received any extra or special benefit in connection with such transactions.
Refer to Note 23, Subsequent Events, for information regarding a related party transaction.
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
23. SUBSEQUENT EVENTS
Stock Repurchase Agreement
On February 1, 2021, the Company entered into an agreement (the “Stock Repurchase Agreement”) with an affiliate of The Duchossois Group, Inc. (“TDG”) to repurchase 1,000,000 shares of the Company’s common stock for $193.94 per share in a privately negotiated transaction. The aggregate purchase price was $193.9 million. The Stock Repurchase Agreement contains customary representations, warranties and covenants of the parties.
The repurchase of shares of common stock from TDG pursuant to the Stock Repurchase Agreement was approved by the Company's Board of Directors separately from, and will not reduce the authorized amount remaining under, the existing common stock repurchase program from October 2018. The Company repurchased the shares using available cash and borrowings under the Revolver.
Amendment to Credit Agreement
Also, on February 1, 2021, the Company entered into an amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment increased the amount of certain otherwise restricted payments permitted during the Financial Covenant Relief Period from $26.0 million to $226.0 million to accommodate the repurchase of shares of common stock from TDG described above.
Arlington Park
On February 23, 2021, the Company launched a process to sell the 326 acres at Arlington Park.
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
Year Ended December 31, 2020
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net revenues
|
$
|
252.9
|
|
|
$
|
185.1
|
|
|
$
|
337.8
|
|
|
$
|
278.2
|
|
Operating (loss) income
|
(11.6)
|
|
|
(0.4)
|
|
|
49.5
|
|
|
22.7
|
|
(Loss) income from continuing operations, net of tax
|
(22.6)
|
|
|
(23.6)
|
|
|
43.1
|
|
|
16.4
|
|
(Loss) income from discontinued operations, net of tax
|
(0.9)
|
|
|
(95.2)
|
|
|
—
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - basic (c):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.57)
|
|
|
$
|
(0.59)
|
|
|
$
|
1.09
|
|
|
$
|
0.41
|
|
Discontinued operations
|
$
|
(0.02)
|
|
|
$
|
(2.41)
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
Net (loss) income per common share - basic
|
$
|
(0.59)
|
|
|
$
|
(3.00)
|
|
|
$
|
1.09
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - diluted (c):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.57)
|
|
|
$
|
(0.59)
|
|
|
$
|
1.08
|
|
|
$
|
0.41
|
|
Discontinued operations
|
$
|
(0.02)
|
|
|
$
|
(2.41)
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
Net (loss) income per common share - diluted
|
$
|
(0.59)
|
|
|
$
|
(3.00)
|
|
|
$
|
1.08
|
|
|
$
|
0.43
|
|
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per common share data)
|
Year Ended December 31, 2019
|
|
First Quarter(a)
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter(b)
|
Net revenues
|
$
|
265.4
|
|
|
$
|
477.4
|
|
|
$
|
306.3
|
|
|
$
|
280.6
|
|
Operating income
|
28.0
|
|
|
156.4
|
|
|
27.8
|
|
|
3.5
|
|
Income from continuing operations, net of tax
|
11.9
|
|
|
108.3
|
|
|
15.2
|
|
|
4.2
|
|
Income (loss) from discontinued operations, net of tax
|
(0.3)
|
|
|
(1.2)
|
|
|
(0.4)
|
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic (c):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.30
|
|
|
$
|
2.70
|
|
|
$
|
0.38
|
|
|
$
|
0.11
|
|
Discontinued operations
|
(0.01)
|
|
|
(0.03)
|
|
|
(0.01)
|
|
|
(0.01)
|
|
Net income per common share - basic
|
$
|
0.29
|
|
|
$
|
2.67
|
|
|
$
|
0.37
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - diluted (c):
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.30
|
|
|
$
|
2.66
|
|
|
$
|
0.37
|
|
|
$
|
0.11
|
|
Discontinued operations
|
(0.01)
|
|
|
(0.03)
|
|
|
(0.01)
|
|
|
(0.01)
|
|
Net income per common share - diluted
|
$
|
0.29
|
|
|
$
|
2.63
|
|
|
$
|
0.36
|
|
|
$
|
0.10
|
|
(a)First quarter of 2019 includes the acquisitions of Presque Isle and Lady Luck Nemacolin, and the equity investment in Midwest Gaming.
(b)Fourth quarter of 2019 includes the acquisition of Turfway Park and $10.0 million accelerated amortization of the purchase and sale rights related to the Turfway Park Acquisition.
(c)Net (loss) income per common share calculations for each quarter are based on the weighted average number of shares outstanding during the respective period. The sum of the quarters may not equal the full-year income (loss) per share.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Churchill Downs Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Churchill Downs Incorporated and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Assessment for the Presque Isle Indefinite-Lived Gaming Rights Intangible Asset
As described in Notes 2, 7, and 8 to the consolidated financial statements, the Company’s indefinite-lived gaming rights intangible assets balance was $288.2 million as of December 31, 2020, of which $62.6 million relates to the Presque Isle indefinite-lived gaming rights intangible asset. Management performs an annual review for impairment as of April 1 of each fiscal year for its indefinite-lived intangible assets, or more frequently if events or circumstances indicate that it is more likely than not the relevant asset may be impaired. During the quarter ended March 31, 2020, management concluded it was more likely than not that the Presque Isle gaming rights intangible asset may be impaired due to the impact and uncertainty of the COVID-19 pandemic. Management performed an impairment assessment and recognized an impairment of $15.0 million for the Presque Isle indefinite-lived gaming rights intangible asset. The fair value of the Presque Isle indefinite-lived gaming rights intangible asset was determined by management using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. The primary inputs used by management in the estimation of the fair value of the Presque Isle indefinite-lived gaming rights intangible asset included estimated future revenue, operating expenses, start-up costs, and discount rate.
The principal considerations for our determination that performing procedures relating to the impairment assessment for the Presque Isle indefinite-lived gaming rights intangible asset is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of the gaming rights indefinite-lived intangible asset due to the significant judgment by management when developing the fair value estimate; (ii) significant audit effort in evaluating the significant assumptions related to estimated future revenue, operating expenses, start-up costs, and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the intangible asset impairment assessment, including controls over management’s valuation of the Presque Isle indefinite-lived gaming rights intangible asset. These procedures also included, among others, testing management’s process for developing the fair value of the Presque Isle indefinite-lived gaming rights intangible asset; evaluating the appropriateness of the Greenfield Method; testing the completeness and accuracy of underlying data used in the Greenfield Method; and evaluating the reasonableness of significant assumptions used by management related to estimated future revenue, operating expenses, start-up costs, and discount rate. Evaluating management’s assumptions related to estimated future revenue, operating expenses, and start-up costs involved evaluating whether the assumptions used were reasonable considering the current and past performance of Presque Isle and relevant third-party economic and industry data. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Greenfield Method and evaluating the reasonableness of the discount rate assumption.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
February 24, 2021
We have served as the Company’s auditor since 1990.