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 endedDecember 31, 2019 , filed with theSEC onFebruary 26, 2020 . Our Business The Company is an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event, theKentucky Derby . We own and operate three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines ("HRMs") inKentucky . We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing, sports and iGaming in theU.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 aKentucky corporation in 1928, and our principal executive offices are located inLouisville, 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 onSeptember 4-5, 2020 .Churchill Downs Racetrack suspended simulcast operations onMarch 15, 2020 and reopened onOctober 1, 2020 . •Derby City Gaming temporarily suspended operations onMarch 15, 2020 and reopened onJune 8, 2020 . Derby City Gaming is currently restricted to 33% of patron capacity. GamingWholly-Owned Properties •Calder Casino and Racing ("Calder") temporarily suspended operations onMarch 16, 2020 and reopened onJune 12, 2020 . Operations were temporarily suspended again onJuly 2, 2020 and reopened onAugust 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 onMarch 16, 2020 and reopened onJune 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 fromMarch 13, 2020 throughDecember 31, 2020 ; and •VSI temporarily suspended operations onMarch 16, 2020 and reopened onMay 18, 2020 , and is currently restricted to 50% of patron capacity. •Harlow'sCasino Resort and Spa ("Harlow's") temporarily suspended operations onMarch 16, 2020 and reopened onMay 21, 2020 . Harlow's is currently restricted to 50% of patron capacity. •Ocean Downs Casino and Racetrack ("Ocean Downs") temporarily suspended operations onMarch 15, 2020 and reopened onJune 19, 2020 .Ocean Downs is currently restricted to 50% of patron capacity. •Oxford Casino and Hotel ("Oxford") temporarily suspended operations onMarch 16, 2020 and reopened onJuly 9, 2020 . Oxford has certain operating hour restrictions and is currently restricted to 200 persons on the gaming floor. 36 -------------------------------------------------------------------------------- •Presque Isle Downs and Casino ("Presque Isle") temporarily suspended operations onMarch 16, 2020 and reopened onJune 26, 2020 . Operations were temporarily suspended again onDecember 12, 2020 and reopened onJanuary 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 onMarch 16, 2020 and reopened onMay 21, 2020 . Riverwalk is currently restricted to 50% of patron capacity. Managed Properties •Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") temporarily suspended operations onMarch 16, 2020 and reopened onJune 12, 2020 . Operations were temporarily suspended again onDecember 12, 2020 and reopened onJanuary 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 •RiversCasino Des Plaines ("Rivers Des Plaines") temporarily suspended operations onMarch 15, 2020 and reopened onJuly 1, 2020 . Operations were temporarily suspended onNovember 20, 2020 and remained suspended as ofDecember 31, 2020 .Rivers Des Plaines reopened onJanuary 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 onMarch 14, 2020 and reopened onJune 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 onMarch 16, 2020 . Four OTBs reopened onJune 5, 2020 and the remaining OTBs reopened on various dates inJuly 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 inMarch 2020 and five of these live racing days were run spectator-free. Live racing was canceled for the remaining three scheduled racing days inMarch 2020 .Turfway Park also ran 13 live racing dates inDecember 2020 . OnMarch 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 throughJuly 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 afterJuly 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 endedDecember 31, 2020 . The CARES Act also provides for deferred payment of the employer portion of social security taxes throughDecember 31, 2020 , with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 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 ofDecember 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. 37 -------------------------------------------------------------------------------- OnApril 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 endingJune 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 . OnFebruary 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 ofThe 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 withU.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, 38 -------------------------------------------------------------------------------- •Gain onOcean 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 theCommonwealth of Kentucky had banned horse racing and other activities for the first Saturday in May. We negotiated a new date and time frame withNBC on the first weekend inSeptember 2020 and modified our safety protocols to conduct the 146th running of theKentucky Derby . -The Kentucky Oaks and Derby were held onSeptember 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 inApril 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 onDecember 28, 2020 . 39 -------------------------------------------------------------------------------- •Derby City Gaming: -Derby City Gaming delivered record Adjusted EBITDA in 2020 despite a temporary closure fromMarch 15, 2020 toJune 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 atBronco Billy's Casino inCripple Creek, Colorado and atIsland Resort & Casino inHarris, Michigan . We have also launched our sportsbook and casino app inMichigan . 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 inOak 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 inNewport, Kentucky , as an extension ofTurfway 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 toBig Fish Games . •OnMarch 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$26.0 million for this period. •We formed aDiversity Council and conducted Diversity and Inclusion training for leaders and full-time team members in our Company. •The Company's total shareholder return was 43% for 2020 compared to 20% for the Russell 2000 and 18% for the S&P 500. The Company's five-year total shareholder return for 2020 was 325% compared to 86% for the Russell 2000 and 103% for the S&P 500. The preceding shareholder return calculations assume dividends are reinvested. 40 -------------------------------------------------------------------------------- We are committed to delivering strong financial results and long-term sustainable growth. We have strong cash flow and a solid balance sheet that supports organic growth as well as potential strategic acquisitions that we believe will create long-term value for our shareholders. Our Operations We manage our operations through three reportable segments: Churchill Downs, Online Wagering, and Gaming. Refer to Part I, Item 1. Business, of this Annual Report on Form 10-K for more information on our segments and a description of our competition and government regulations and potential legislative changes that affect our business. Consolidated Financial Results The following table reflects our net revenue, operating income, net (loss) income, Adjusted EBITDA, and certain other financial information: Years Ended December 31, (in millions) 2020 2019 Change Net revenue$ 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) Adjusted EBITDA 286.5 451.4 (164.9) Year EndedDecember 31, 2020 , Compared to the Year EndedDecember 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 atArlington partially offset by the opening ofOak Grove inSeptember 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 ourTwinSpires 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 thePresque Isle gaming rights and trademark intangible assets; and a$7.0 million decrease from All Other primarily due to the temporary suspension of operations atArlington partially offset by the opening ofOak Grove inSeptember 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 endedDecember 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 thePresque 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 toChurchill 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 41 -------------------------------------------------------------------------------- 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 atArlington . Partially offsetting these decreases was a$43.0 million increase from Online Wagering due to an increase in handle from higher net revenue per active player and an increase in active players for ourTwinSpires Horse Racing business. Financial Results by Segment Net Revenue by Segment The following table presents net revenue for our segments, including intercompany revenue: Years Ended December 31, (in millions) 2020 2019 Change Churchill Downs: Churchill Downs Racetrack$ 81.0 $ 202.8 $ (121.8) Derby City Gaming 79.5 86.6 (7.1) Total Churchill Downs 160.5 289.4 (128.9) Online Wagering: TwinSpires Horse Racing 405.0 291.0 114.0 TwinSpires Sports and Casino 4.9 0.6 4.3 Total Online Wagering 409.9 291.6 118.3 Gaming: Presque Isle 75.4 139.0 (63.6) Fair Grounds Slots and VSI 99.8 124.8 (25.0) Oxford 44.9 101.7 (56.8) Calder 51.9 99.9 (48.0) Ocean Downs 60.3 85.9 (25.6) Riverwalk 49.1 58.9 (9.8) Harlow's 41.8 55.3 (13.5) Lady Luck Nemacolin 20.7 29.3 (8.6) Total Gaming 443.9 694.8 (250.9) All Other 74.7 84.2 (9.5) Eliminations (35.0) (30.3) (4.7) Net Revenue$ 1,054.0 $ 1,329.7 $ (275.7) Year EndedDecember 31, 2020 , Compared to the Year EndedDecember 31, 2019 •Churchill Downs revenue decreased$128.9 million primarily due to a$121.8 million decrease fromChurchill 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 atTwinSpires 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. OurTwinSpires Sports and Casino net revenues increased$4.3 million compared to prior year primarily due to the launch of the casino platform inPennsylvania andIndiana in lateDecember 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 atArlington and a$4.2 million decrease as a result of the temporary 42 -------------------------------------------------------------------------------- suspension of operations at the majority of United Tote customer locations. Partially offsetting these decreases were a$16.6 million increase atOak Grove due to the opening of the HRM facility inSeptember 2020 and the hotel inOctober 2020 , a$5.8 million increase primarily from the increase inTurfway Park handle, and a$3.1 million increase atNewport due to the opening inOctober 2020 . Consolidated Operating Expense The following table is a summary of our consolidated operating expense: Years Ended December 31, (in millions) 2020 2019 Change Taxes and purses $ 268.3 $ 369.7$ (101.4) Content expense 180.7 139.6 41.1 Salaries and benefits 140.5 171.2 (30.7) Selling, general and administrative expense 114.8 122.0 (7.2) Depreciation and amortization 92.9 96.4 (3.5) Marketing and advertising expense 31.4 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 EndedDecember 31, 2020 , Compared to the Year EndedDecember 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 ofOak Grove inSeptember 2020 andNewport inOctober 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 ofJuly 2020 , partially offset by increased expenses due to the opening ofOak Grove inSeptember 2020 andNewport inOctober 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 forChurchill Downs Racetrack and Derby City Gaming, andTurfway 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 forTwinSpires Horse Racing and ourTwinSpires 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 toPresque Isle's gaming rights and a$2.5 million non-cash impairment charge related toPresque Isle's trademark. •Transaction expense, net was nominal for the year endedDecember 31, 2020 . For the year endedDecember 31, 2019 , transaction expense, net was related to the acquisitions ofPresque 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$21.3 million primarily driven by the temporary suspension of operations at our brick-and-mortar properties, partially offset by the operating expenses related to 43 --------------------------------------------------------------------------------Turfway Park and from the opening ofOak Grove inSeptember 2020 andNewport Racing and Gaming inOctober 2020 . Adjusted EBITDA We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results. Year Ended December 31, (in millions) 2020 2019 Change Churchill Downs$ 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 EndedDecember 31, 2020 , Compared to the Year EndedDecember 31, 2019 •Churchill Downs Adjusted EBITDA decreased$99.4 million due to a$101.0 million decrease atChurchill 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 inTwinSpires 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 theTwinSpires 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 fromArlington and United Tote, a$1.6 million decrease from higher expenses atTurfway 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$5.1 million increase from the opening ofOak Grove inSeptember 2020 . 44 --------------------------------------------------------------------------------
Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA
Years Ended December 31, (in millions) 2020 2019 Change Net (loss) income attributable to Churchill Downs Incorporated$ (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, (in millions) 2020 2019 Change 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 ofOak Grove andNewport ; 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 toOak Grove andNewport ; and a$19.2 million decrease in other intangibles primarily due the impairment ofPresque 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 45 -------------------------------------------------------------------------------- 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 toChurchill 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 inDecember 2020 , and a$1.3 million decrease in other equity components. Partially offsetting these decreases was a$23.7 million increase resulting from stock-based compensation. Liquidity and Capital Resources The following table is a summary of our liquidity and cash flows: Year Ended December 31, (in millions) 2020 2019 Change Cash Flows from: Operating activities$ 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 EndedDecember 31, 2020 , Compared to the Year EndedDecember 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 ofPresque 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, thePresque 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$18.7 million decrease from other financing activities. 46 --------------------------------------------------------------------------------
Credit Facilities and Indebtedness The following table presents our debt outstanding, bond premium and debt issuance costs:
As of December 31, (in millions) 2020 2019 Change Term Loan B due 2024$ 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 OnDecember 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 endedDecember 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 onDecember 31, 2020 . The Company had$67.4 million of cash and cash equivalents onDecember 31, 2020 . OnMarch 16, 2020 , we borrowed$675.4 million on the Revolver to provide the Company with additional financial flexibility. OnDecember 31, 2020 , we repaid$545.0 million of the borrowings on the Revolver. OnMarch 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 fromDecember 27, 2022 to at leastSeptember 27, 2024 , which is 91 days prior to the latest maturity date of the term loan facility onDecember 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. OnApril 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 endingJune 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. 47 -------------------------------------------------------------------------------- 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 . OnFebruary 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 ofThe 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 onDecember 31, 2020 (as a result of the Second Amendment), the Company was compliant with all applicable covenants onDecember 31, 2020 . 2027 Senior Notes OnMarch 25, 2019 , we completed an offering of$600.0 million in aggregate principal amount of 5.50% Senior Unsecured Notes that mature onApril 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 onApril 1st andOctober 1st of each year, commencing onOctober 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, datedMarch 25, 2019 (the "2027 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2027 Guarantors"), andU.S. Bank National Association , as trustee. The Company may redeem some or all of the 2027 Senior Notes at any time prior toApril 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 toApril 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 fromMarch 25, 2019 . 2028 Senior Notes OnDecember 27, 2017 , we completed an offering of$500.0 million in aggregate principal amount of 4.75% Senior Unsecured Notes that mature onJanuary 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 onJanuary 15th andJuly 15th of each year, commencing onJuly 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 onDecember 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, datedDecember 27, 2017 (the "2028 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2028 Guarantors"), andU.S. Bank National Association , as trustee. The Company may redeem some or all of the 2028 Senior Notes at any time prior toJanuary 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 toJanuary 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 48 -------------------------------------------------------------------------------- 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 fromDecember 27, 2017 . Contractual Obligations Our commitments to make future payments as ofDecember 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 ofDecember 31, 2020 . (2) Assumes no change in the weighted average borrowing rate of 1.90%, which was the rate in place as ofDecember 31, 2020 . (3) Includes the maximum estimated exposure where we are contractually obligated to make future minimum payments. As ofDecember 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 49 -------------------------------------------------------------------------------- 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 onApril 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. 50
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