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.
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•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.
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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,
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•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.
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•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.
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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 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
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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:
                                     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 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
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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:
                                                          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 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
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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,
(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 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.

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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 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
                                       45
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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,
(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 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.
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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
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.
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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
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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
                                       49
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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.

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