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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission file number 001-33998
Churchill Downs Incorporated
(Exact name of registrant as specified in its charter)
Kentucky
61-0156015
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
600 North Hurstbourne Parkway, Suite 400 Louisville, Kentucky 40222
(502) 636-4400
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  x
The number of shares outstanding of Registrant’s common stock at April 10, 2019 was 40,199,527 shares.
 
 
 


CHURCHILL DOWNS INCORPORATED
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended March 31,
(in millions, except per common share data)
2019
 
2018
Net revenue:
 
 
 
Churchill Downs
$
21.0

 
$
2.0

Online Wagering
63.1

 
63.2

Gaming
168.8

 
111.5

All Other
12.5

 
12.6

Total net revenue
265.4

 
189.3

Operating expense:
 
 
 
Churchill Downs
23.4

 
9.9

Online Wagering
45.1

 
44.0

Gaming
125.0

 
79.6

All Other
15.5

 
16.3

Selling, general and administrative expense
24.9

 
18.4

Transaction expense, net
3.5

 
1.4

Total operating expense
237.4

 
169.6

Operating income
28.0

 
19.7

Other income (expense):
 
 
 
Interest expense, net
(13.7
)
 
(9.6
)
Equity in income of unconsolidated investments
4.1

 
6.5

Miscellaneous, net
—

 
0.1

Total other income (expense)
(9.6
)
 
(3.0
)
  Income from continuing operations before provision for income taxes
18.4

 
16.7

Income tax provision
(6.5
)
 
(2.6
)
Income from continuing operations, net of tax
11.9

 
14.1

(Loss) income from discontinued operations, net of tax
(0.3
)
 
167.9

Net income
$
11.6

 
$
182.0

 
 
 
 
Net income (loss) per common share data - basic:
 
 
 
Continuing operations
$
0.30

 
$
0.33

Discontinued operations
$
(0.01
)
 
$
3.87

Net income per common share data - basic
$
0.29

 
$
4.20

 
 
 
 
Net income (loss) per common share data - diluted:
 
 
 
Continuing operations
$
0.30

 
$
0.32

Discontinued operations
$
(0.01
)
 
$
3.86

Net income per common share data - diluted
$
0.29

 
$
4.18

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
40.4

 
43.3

Diluted
40.6

 
43.5

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation, net of tax
$
—

 
$
0.6

Change in pension benefits, net of tax
—

 
(0.2
)
Other comprehensive income (loss)
—

 
0.4

Comprehensive income
$
11.6

 
$
182.4

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

3

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions)
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119.7

 
$
133.3

Restricted cash
37.7

 
40.0

Accounts receivable, net
47.5

 
28.8

Income taxes receivable
16.7

 
17.0

Other current assets
37.8

 
22.4

Total current assets
259.4

 
241.5

Property and equipment, net
866.5

 
757.5

Investment in and advances to unconsolidated affiliates
625.7

 
108.1

Goodwill
363.8

 
338.0

Other intangible assets, net
345.0

 
264.0

Other assets
18.1

 
16.1

Total assets
$
2,478.5

 
$
1,725.2

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
72.1

 
$
47.0

Purses payable
16.1

 
15.8

Account wagering deposit liabilities
30.7

 
29.6

Accrued expense
78.0

 
89.8

Current deferred revenue
96.8

 
47.9

Current maturities of long-term debt
4.0

 
4.0

Dividends payable
—

 
22.5

Total current liabilities
297.7

 
256.6

Long-term debt, net of current maturities and loan origination fees
386.5

 
387.3

Notes payable, net of debt issuance costs
1,084.3

 
493.0

Non-current deferred revenue
21.0

 
21.1

Deferred income taxes
194.0

 
78.2

Other liabilities
38.1

 
15.7

Total liabilities
2,021.6

 
1,251.9

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Preferred stock, no par value; 0.3 shares authorized; no shares issued or outstanding
—

 
—

Common stock, no par value; 150.0 shares authorized; 40.2 shares issued and outstanding at March 31, 2019 and 40.4 shares at December 31, 2018
—

 
—

Retained earnings
457.8

 
474.2

Accumulated other comprehensive loss
(0.9
)
 
(0.9
)
Total shareholders' equity
456.9

 
473.3

Total liabilities and shareholders' equity
$
2,478.5

 
$
1,725.2

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

4

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
Three Months Ended March 31, 2019
 
Common Stock
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
(in millions)
Shares
 
Amount
 
 
 
Balance, December 31, 2018
40.4

 
$
—

 
$
474.2

 
$
(0.9
)
 
$
473.3

Net income
 
 
 
 
11.6

 
 
 
11.6

Repurchase of common stock
(0.3
)
 
(4.7
)
 
(27.9
)
 
 
 
(32.6
)
Issuance of restricted stock awards, net of forfeitures
0.1

 
—

 
 
 
 
 
—

Stock-based compensation
 
 
4.7

 
 
 
 
 
4.7

Adoption of ASC 842
 
 
 
 
(0.3
)
 
 
 
(0.3
)
Other
 
 
 
 
0.2

 
 
 
0.2

Balance, March 31, 2019
40.2

 
$
—

 
$
457.8

 
$
(0.9
)
 
$
456.9



 
Three Months Ended March 31, 2018
 
Common Stock
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
(in millions)
Shares
 
Amount
 
 
 
Balance, December 31, 2017
46.2

 
$
7.3

 
$
634.3

 
$
(1.3
)
 
$
640.3

Net income
 
 
 
 
182.0

 
 
 
182.0

Issuance of common stock
0.1

 
—

 
 
 
 
 
—

Repurchase of common stock
(5.8
)
 
(13.5
)
 
(500.9
)
 
 
 
(514.4
)
Issuance of restricted stock awards, net of forfeitures
0.1

 
—

 
 
 
 
 
—

Stock-based compensation
 
 
6.2

 
 
 
 
 
6.2

Adoption of ASC 606
 
 
 
 
29.7

 
 
 
29.7

Other
 
 
 
 
 
 
0.4

 
0.4

Balance, March 31, 2018
40.6

 
$
—

 
$
345.1

 
$
(0.9
)
 
$
344.2


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



5

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
11.6

 
$
182.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20.8

 
13.8

Gain on sale of Big Fish Games
—

 
(219.5
)
Distributions from unconsolidated affiliates
6.0

 
4.5

Equity in income of unconsolidated affiliates
(4.1
)
 
(6.5
)
Stock-based compensation
4.7

 
6.2

Deferred income taxes
6.4

 
2.1

Other
0.4

 
(3.2
)
Changes in operating assets and liabilities, net of business acquisitions and dispositions:
 
 
 
Income taxes
0.3

 
52.4

Deferred revenue
46.2

 
35.8

Other assets and liabilities
(22.0
)
 
(11.7
)
Net cash provided by operating activities
70.3

 
55.9

Cash flows from investing activities:
 
 
 
Capital maintenance expenditures
(13.9
)
 
(7.5
)
Capital project expenditures
(14.2
)
 
(26.5
)
Acquisition of businesses, net of cash acquired
(171.3
)
 
—

Proceeds from sale of Big Fish Games
—

 
970.7

Investments in and advances to unconsolidated affiliates
(409.8
)
 
—

Other
(9.9
)
 
—

Net cash (used in) provided by investing activities
(619.1
)
 
936.7

Cash flows from financing activities:
 
 
 
Proceeds from borrowings under long-term debt obligations
1,231.9


100.9

Repayments of borrowings under long-term debt obligations
(632.9
)

(343.9
)
Big Fish Games earnout payment
—


(31.8
)
Big Fish Games deferred payment
—


(26.4
)
Payment of dividends
(22.2
)

(23.7
)
Repurchase of common stock
(34.1
)

(514.4
)
Debt issuance costs
(7.5
)

—

Other
(2.3
)

(4.5
)
Net cash provided by (used in) financing activities
532.9

 
(843.8
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(15.9
)
 
148.8

Effect of exchange rate changes on cash flows
—

 
(0.1
)
Cash, cash equivalents and restricted cash, beginning of period
173.3

 
85.5

Cash, cash equivalents and restricted cash, end of period
$
157.4

 
$
234.2

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

6

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

 
Three Months Ended March 31,
(in millions)
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
18.8

 
$
4.6

Income taxes
0.5

 
0.2

Schedule of non-cash investing and financing activities:
 
 
 
Property and equipment additions included in accounts payable and accrued expenses
3.7

 
6.3

Deferred tax liability assumed from equity investment
109.6


—

Repurchase of common stock included in accrued expenses
1.0


—

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

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. DESCRIPTION OF BUSINESS
Basis of Presentation
The Churchill Downs Incorporated (the "Company", "we", "us", "our") financial statements are presented in conformity with the requirements of this Quarterly Report on Form 10-Q and consequently do not include all of the disclosures normally required by U.S. generally accepted accounting principles ("GAAP") or those normally made in our Annual Report on Form 10-K. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
The following information is unaudited. All per share amounts assume dilution unless otherwise noted. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
In the opinion of management, all adjustments necessary for a fair statement of this information have been made, and all such adjustments are of a normal, recurring nature.
Segments
During the first quarter of 2019, we realigned our operating segments to reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources. Our internal management reporting changed primarily due to the continued growth in our Churchill Downs Racetrack and Derby City Gaming business and our casino and associated racing businesses, which resulted in our chief operating decision maker's decision to realign our operating segments primarily based on the regulatory licenses governing each business. Since each of these individual businesses operates under single or interdependent licenses, each of these businesses represents an operating segment. As our TwinSpires business and online sports betting and iGaming businesses are managed together, these businesses represent an operating segment. For financial reporting purposes, we aggregate our operating segments that are similar into three reportable segments as follows:
•
Churchill Downs
The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming.
Churchill Downs Racetrack is the home of The Kentucky Derby and conducts live racing during the year. Derby City Gaming is a historical racing machine facility that operates under the Churchill Downs pari-mutuel racing license at its ancillary training facility in Louisville, Kentucky.
Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming; simulcast fees earned from other wagering sites; admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services.
•
Online Wagering
The Online Wagering segment includes the revenue and expenses for the TwinSpires business ("TwinSpires") and the online Sports Betting and iGaming business.
TwinSpires operates our online horseracing wagering business on TwinSpires.com, BetAmerica.com and other Company platforms; high dollar wagering by international customers ("Velocity"); and horseracing statistical data generated by our information business that provides data information and processing services to the equine industry ("Brisnet").
Our Sports Betting and iGaming business includes the online BetAmerica sports betting and casino gaming operations.
•
Gaming
The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or Jai Alai facilities which support the casino license as applicable. The Gaming segment has approximately 11,000 slot machines and video lottery terminals ("VLTs") located in eight states.
The Gaming segment revenue and expenses includes the following properties:
–
Calder Casino and Racing ("Calder")
–
Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI")
–
Harlow’s Casino Resort and Spa ("Harlow's")
–
Lady Luck Casino Nemacolin management agreement ("Lady Luck Nemacolin")

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


–
Ocean Downs Casino and Racetrack ("Ocean Downs")
–
Oxford Casino and Hotel ("Oxford")
–
Presque Isle Downs and Casino ("Presque Isle")
–
Riverwalk Casino Hotel ("Riverwalk")
The Gaming segment also includes net income for our ownership portion of the Company’s equity investments in the following:
–
61.3% equity investment in Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois ("Rivers Des Plaines")
–
50% equity investment in Miami Valley Gaming and Racing ("MVG")
The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, retail sports betting, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and / or other miscellaneous operations.
We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results:
•
Arlington International Racecourse ("Arlington")
•
United Tote
We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results were reclassified to conform to this presentation.
Effective January 1, 2019, the Company does not allocate corporate and other related expenses to the reportable segments in the accompanying condensed consolidated statements of comprehensive income. The prior year results in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.
Acquisitions of Presque Isle and Lady Luck Nemacolin
On January 11, 2019, we completed the previously announced acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc. ("ERI") for cash consideration of $178.9 million, subject to certain working capital and other purchase price adjustments (the "Presque Isle Transaction").
On March 8, 2019, the Company completed the previously announced acquisition of Lady Luck Nemacolin in Farmington, Pennsylvania, by which we assumed management and acquired certain assets related to the management of Lady Luck Nemacolin from ERI for cash consideration of $100,000 (the "Lady Luck Nemacolin Transaction").
Acquisition of Certain Ownership Interests of Midwest Gaming Holdings, LLC
On October 31, 2018, the Company announced that it had entered into a definitive purchase agreement pursuant to which the Company acquired certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines in Des Plaines, Illinois, for cash (the "Sale Transaction").
The Sale Transaction was comprised of (i) the Company’s purchase of 100% of the ownership stake in Midwest Gaming held by affiliates and co-investors of Clairvest Group Inc. ("Clairvest") for approximately $291.0 million and (ii) the Company’s offer to purchase, on the same terms, additional units of Midwest Gaming held by High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC, and Casino Investors, LLC ("Casino Investors") (collectively, the "Sellers"). On March 5, 2019, the Company completed the Sale Transaction.
Following the closing of the Sale Transaction, the parties entered into a recapitalization transaction pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from new credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors (the "Recapitalization" and together with the Sale Transaction, the "Transactions").
Based on the results of the purchase of the Clairvest ownership stake and the purchase, on the same terms, of additional units held by High Plaines and Casino Investors, the Company acquired, at the closing of the Sale Transaction, approximately 42% of Midwest Gaming for aggregate cash consideration of approximately $406.6 million. As a result of the Recapitalization on March 6, 2019, the Company's ownership of Midwest Gaming increased to 61.3%.
The total aggregate cash consideration paid at closing of the Sale Transaction was $409.8 million, which included $3.2 million for certain transaction costs of the Sellers. We recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Refer to Note 12, Investments in and Advances to Unconsolidated Affiliates, for further information on the Transactions.
Sale of Big Fish Games, Inc.
On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell its mobile gaming subsidiary, Big Fish Games, Inc. ("Big Fish Games"), a Washington corporation, to Aristocrat Technologies, Inc. (the "Purchaser"), a Nevada corporation, an indirect, wholly owned subsidiary of Aristocrat Leisure Limited, an Australian corporation (the "Big Fish Transaction"). On January 9, 2018, pursuant to the Stock Purchase Agreement, the Company completed the Big Fish Transaction. The Purchaser paid an aggregate consideration of $990.0 million in cash in connection with the Big Fish Transaction, subject to customary adjustments for working capital and indebtedness and certain other adjustments as set forth in the Stock Purchase Agreement.
The Big Fish Games segment and related Big Fish Transaction meet the criteria for discontinued operation presentation. Accordingly, the condensed consolidated statements of comprehensive income and the notes to financial statements reflect the Big Fish Games segment as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these condensed consolidated financial statements reflect continuing operations only. The condensed consolidated statements of cash flows include both continuing and discontinued operations. Refer to Note 5, Discontinued Operations, for further information on the discontinued operations relating to the Big Fish Transaction.
Stock Split
On October 31, 2018, the Company announced a three-for-one split (the "Stock Split") of the Company's common stock for shareholders of record as of January 11, 2019. The additional shares resulting from the Stock Split were distributed on January 25, 2019. Our common stock began trading at the split-adjusted price on January 28, 2019. All share and per-share amounts in the Company’s condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the effects of the Stock Split.
Seasonality
Churchill Downs
Due to the seasonal nature of our live racing business at Churchill Downs, revenue and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. Historically, the majority of our live racing revenue occurs during the second quarter.
Online Wagering
Due to the seasonal nature of the racing business, revenue and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. Historically, our revenue is higher in the second quarter with the running of the Kentucky Derby and the Kentucky Oaks.
Gaming
Revenue from the properties in our Gaming segment has a seasonal component and is typically higher during the first and second quarters.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncement - Adopted on January 1, 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases, and subsequently has issued additional guidance (collectively, "ASC 842"), which requires companies to generally recognize operating and financing lease liabilities and corresponding right-of-use assets ("ROUAs") on the balance sheet. We adopted ASC 842 on January 1, 2019 using the modified transition method. As part of the transition to ASC 842, we elected the package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We recognized the cumulative effect of applying ASC 842 as an opening balance sheet adjustment at January 1, 2019. The comparative information has not been retrospectively adjusted and continues to be reported under the accounting standards in effect for those periods.
The adoption of ASC 842 had no impact on our accompanying condensed consolidated statements of comprehensive income or statements of cash flows. Due to the adoption of ASC 842, we recognized operating lease ROUAs and lease liabilities for our operating leases with lease terms greater than one year. We do not have any material finance leases or any material operating leases where we are the lessor. We expect the adoption of ASC 842 will not materially impact our results of operations, financial condition, or cash flows on an ongoing basis.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The cumulative effects of the changes made to our accompanying condensed consolidated balance sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:
(in millions)
As Reported at December 31, 2018
 
Adoption of ASC 842
 
Balance at January 1, 2019
ASSETS
 
 
 
 
 
Other current assets
$
22.4

 
$
(0.3
)
 
$
22.1

Property and equipment, net
757.5

 
25.3

 
782.8

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Accrued expense
89.8

 
3.8

 
93.6

Other liabilities
15.7

 
21.5

 
37.2

 
 
 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
 
 
Retained earnings
474.2

 
(0.3
)
 
473.9


Recent Accounting Pronouncements - effective in 2020 or thereafter
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other: Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The guidance is effective in 2020 with early adoption permitted and may be applied prospectively or retrospectively. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The guidance will become effective in 2020, and is to be applied through a modified retrospective approach during the year of adoption. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This new guidance simplifies the accounting for goodwill impairments by removing step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. The new guidance is effective in 2020 with early adoption permitted for any goodwill impairment test performed between January 1, 2017 and January 1, 2020, and is to be applied prospectively. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.
3. SIGNIFICANT ACCOUNTING POLICIES
Except for the accounting policy for leases, which was updated as a result of our adoption of ASC 842 on January 1, 2019, as described in Note 2, Recent Accounting Pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in property and equipment, net; accrued expense; and other liabilities on our condensed consolidated balance sheets.
Operating lease ROUAs and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The operating lease ROUAs also include any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred. Our lease terms include all non-cancelable periods and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As an accounting policy, we generally do not separate lease and non-lease components for our lease contracts. We do not apply the ROUA and leases liability recognition requirements to short-term leases.
4. ACQUISITIONS
Presque Isle
On January 11, 2019, the Company completed the Presque Isle Transaction, which had a cash purchase price of $178.9 million, subject to certain working capital and other purchase price adjustments, which preliminarily totaled $0.8 million. The fair values of the Presque Isle Transaction were based upon preliminary valuations. Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The primary areas of the preliminary valuations that are not yet finalized relate to the amounts for income taxes, intangible assets, working capital adjustments, and the final amount of residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed, net of cash acquired of $8.4 million, at the date of the acquisition.
(in millions)
Total
Current assets
$
2.5

Property and equipment
78.5

Goodwill
25.8

Intangible assets
71.2

Current liabilities
(6.1
)
Non-current liabilities
(0.6
)
 
$
171.3


The preliminary fair value of the intangible assets consists of the following:
(in millions)
Fair Value Recognized
 
Weighted-Average Useful Life
Gaming rights
$
56.0

 
N/A
Trademark
15.2

 
N/A
Total intangible assets
$
71.2

 
 

Current assets and current liabilities were valued at the existing carrying values as these items are short term in nature and represent management's estimated fair value of the respective items at January 11, 2019.
The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures. The fair value of the land was determined using the market approach and the fair values of the remaining property and equipment were primarily determined using the cost replacement method which is based on replacement or reproduction costs of the assets.
The fair value of the Presque Isle gaming rights was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream. This method assumes that the gaming rights intangible asset provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights. Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets. The estimated future revenue and operating expenses and start-up costs of Presque Isle were the primary inputs in the valuation. The gaming rights intangible asset was assigned an indefinite useful life based on the Company's expected use of the asset and determination that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the gaming rights. The renewal of the gaming rights in Pennsylvania is subject to various legal requirements. However, the Company's historical experience has not indicated, nor does the Company expect, any limitations regarding its ability to continue to renew its gaming rights in Pennsylvania.
The trademark intangible asset was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset. The trademark was assigned an indefinite useful life based on the Company’s intention to keep the Presque Isle name for an indefinite period of time.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Goodwill of $25.8 million was recognized due to the expected contribution of Presque Isle to the Company's overall business strategy. The goodwill was assigned to the Gaming segment and is deductible for tax purposes.
For the period from the Presque Isle Transaction on January 11, 2019 through March 31, 2019, net revenue was $29.7 million, and net income was not material for the period.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of Presque Isle occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Presque Isle Transaction was not materially different than our historical net income.
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Net revenue
$
268.6

 
$
222.5


Lady Luck Nemacolin
On March 8, 2019, we completed the Lady Luck Nemacolin Transaction, by which we assumed management and acquired certain assets related to the management of Lady Luck Nemacolin from ERI for cash consideration of $100,000. The Lady Luck Nemacolin Transaction did not meet the definition of a business and therefore was accounted for as an asset acquisition. The net assets acquired in conjunction with the Lady Luck Nemacolin Transaction were not material.
Ocean Downs
On July 16, 2018, the Company announced its entry into a tax-efficient partial liquidation agreement (the "Liquidation Agreement") for the remaining 50% ownership of the Casino at Ocean Downs and Ocean Downs Racetrack located in Berlin, Maryland ("Ocean Downs") owned by Saratoga Casino Holdings LLC ("SCH") in exchange for the Company's 25% equity interest in SCH, which is the parent company of Saratoga Casino Hotel in Saratoga Springs, New York ("Saratoga New York") and Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga Colorado") (collectively, the "Ocean Downs/Saratoga Transaction"). As part of the Ocean Downs/Saratoga Transaction, Saratoga Harness Racing, Inc. ("SHRI") has agreed to grant the Company and its affiliates exclusive rights to operate online sports betting and iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.
On August 31, 2018, the Company completed the Ocean Downs/Saratoga Transaction, which resulted in the Company owning 100% of the equity interests of Ocean Downs. We therefore consolidated Ocean Downs as of the transaction date. Upon the closing of the Ocean Downs/Saratoga Transaction, the Company no longer has an equity interest or management involvement in Saratoga New York or Saratoga Colorado. Prior to the Ocean Downs/Saratoga Transaction, the Company held an effective 62.5% ownership interest in Ocean Downs, and a 25% ownership interest in Saratoga New York and Saratoga Colorado, all of which were accounted for under the equity method. The consideration transferred to SCH to acquire the remaining interest in Ocean Downs was the Company's equity investments in Saratoga New York and Saratoga Colorado, which had an aggregate fair value of $47.8 million at the acquisition date. Under the acquisition method, the fair values of the consideration transferred and the Company's equity method investment in Ocean Downs, which had a fair value of $80.5 million at the acquisition date, were allocated to the assets acquired and liabilities assumed in the Ocean Downs/Saratoga Transaction. The Company's carrying values in these equity method investments were significantly less than the fair values, resulting in a pre-tax gain of $54.9 million, which is included in the accompanying consolidated statements of comprehensive income. The fair value of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado was determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company's acquisition of the remaining 50% interest in Ocean Downs occurred as of January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition been consummated as of January 1, 2018. The unaudited pro forma net income giving effect to the Ocean Downs/Saratoga Transaction was not materially different than our historical net income.
 
Three Months Ended March 31,
(in millions)
2018
Net revenue
$
206.2



13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5. DISCONTINUED OPERATIONS
On January 9, 2018, the Company completed the Big Fish Transaction, which had a purchase price of $990.0 million. The Company received cash proceeds of $970.7 million, which was net of $5.2 million of working capital adjustments and $14.1 million of transaction costs. The Company derecognized the following upon the Big Fish Transaction:
(in millions)
 
Cash and cash equivalents
$
0.3

Accounts receivable
34.7

Game software development, net
6.7

Other current assets
17.0

Property and equipment, net
17.8

Game software development, net
13.8

Goodwill
530.7

Other intangible assets, net
238.4

Other assets
24.0

Accounts payable
(8.5
)
Accrued expense
(22.6
)
Deferred revenue
(44.2
)
Deferred income taxes
(52.0
)
Other liabilities
(4.9
)
Carrying value of Big Fish Games
$
751.2


The Company recognized a gain of $219.5 million upon the sale recorded in income from discontinued operations on the condensed consolidated statement of comprehensive income for the three months ended March 31, 2018. The gain consisted of cash proceeds of $970.7 million offset by the carrying value of Big Fish Games of $751.2 million. The income tax provision on the gain was $51.2 million, resulting in an after tax gain of $168.3 million.
The following table presents the financial results of Big Fish Games included in "(loss) income from discontinued operations, net of tax" in the accompanying condensed consolidated statements of comprehensive income:
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Net revenue
$
—

 
$
13.2

 
 
 
 
Operating expenses
—

 
8.4

Selling, general and administrative expense
0.4

 
4.3

Research and development
—

 
0.9

Total operating expense
0.4

 
13.6

Operating loss
(0.4
)
 
(0.4
)
Other income (expense)
 
 
 
Gain on sale of Big Fish Games
—

 
219.5

Other expense
—

 
(0.1
)
Total other income (expense)
—

 
219.4

(Loss) income from discontinued operations before provision for income taxes
(0.4
)
 
219.0

Income tax benefit (provision)
0.1

 
(51.1
)
(Loss) income from discontinued operations, net of tax
$
(0.3
)
 
$
167.9



14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Stock-Based Compensation
For the three months ended March 31, 2018, the Company recognized $3.4 million of stock-based compensation expense related to Big Fish Games, which included the impact of the accelerated vesting dates of restricted stock awards held by Big Fish Games' employees in conjunction with the Big Fish Transaction.
Earnout Liabilities
As of December 31, 2017, we had $34.2 million of deferred earnout consideration and $28.4 million of deferred payments due to the founder of Big Fish Games, both of which were paid on January 3, 2018.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
In the first quarter of 2019, we realigned our segments as described in Note 1, Description of Business. This change resulted in the allocation of the previous Racing segment goodwill balance of $51.7 million as follows: $49.7 million to the Churchill Downs segment, $1.0 million to the Gaming segment, and $1.0 million to All Other, based on the relative fair value approach. The Company evaluated whether an interim goodwill impairment test should be performed as a result of our segment changes. Based on this evaluation, the Company determined this event did not indicate it was more likely than not that a goodwill impairment exists.
Goodwill, by segment, is comprised of the following:
 
Churchill Downs
 
Online Wagering
 
Gaming
 
All Other
 
Total
Balances as of December 31, 2018
$
49.7

 
$
148.2

 
$
139.1

 
$
1.0

 
$
338.0

Additions
—

 
—

 
25.8

 
—

 
25.8

Balances as of March 31, 2019
$
49.7

 
$
148.2

 
$
164.9

 
$
1.0

 
$
363.8


During the first quarter of 2019, we established goodwill of $25.8 million related to the Presque Isle Transaction.
Other intangible assets are comprised of the following:
 
March 31, 2019
 
December 31, 2018
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Definite-lived intangible assets
$
32.1

 
$
(15.3
)
 
$
16.8

 
$
32.1

 
$
(14.1
)
 
$
18.0

Indefinite-lived intangible assets
 
 
 
 
328.2

 
 
 
 
 
246.0

Total


 


 
$
345.0

 
 
 
 
 
$
264.0


During the first quarter of 2019, we established indefinite-lived assets of $56.0 million for gaming rights and $15.2 million for trademarks related to the Presque Isle Transaction. We also established indefinite-lived assets of $8.0 million for online gaming rights in Pennsylvania during first quarter of 2019 related to our Online Wagering operations, as well as indefinite-lived assets of $3.0 million for gaming rights related to our Gaming segment.
7. INCOME TAXES
The Company’s effective income tax rate for the three months ended March 31, 2019 was higher than the U.S. federal statutory rate of 21.0% primarily due to a $2.8 million non-cash tax impact from the re-measurement of our net deferred tax liabilities based on an increase in income attributable to states with higher tax rates compared to the prior year quarter, as well as state income taxes and certain expenses that are not deductible for income tax purposes. These increases were partially offset by tax benefits resulting from tax deductions from vesting of restricted stock units in excess of book deductions.
The Company's effective income tax rate for the three months ended March 31, 2018 was lower than the U.S. federal statutory rate of 21.0% due a tax benefit resulting from tax deductions from vesting restricted stock units in excess of book deductions that were recognized. This benefit was partially offset by state income taxes and certain expenses that are not deductible for the purposes of income taxes.
We also recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership. Refer to Note 12, Investments in and Advances to Unconsolidated Affiliates, for further information.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8. SHAREHOLDERS’ EQUITY
On October 30, 2018, the Board of Directors of the Company approved a new common stock repurchase program of up to $300.0 million. The new program replaced the prior $250.0 million program that was authorized in April 2017 and had unused authorization of $78.3 million. The new authorized amount includes and is not in addition to any unspent amount remaining under the prior authorization. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended or discontinued at any time.
For the three months ended March 31, 2019, we repurchased 282,416 shares of our common stock under the October 2018 stock repurchase program at an aggregate purchase price of $25.0 million, based on trade date. We had approximately $243.0 million of repurchase authority remaining under this program at March 31, 2019, based on trade date. As of March 31, 2019, we accrued $1.0 million for cash settlement for repurchases of our common stock compared to $2.5 million at December 31, 2018.
For the three months ended March 31, 2019, we repurchased 79,233 shares of our common stock related to employee vestings of stock-based compensation at a total cost of $7.6 million.
On November 29, 2017, the Board of Directors of the Company authorized a $500.0 million share repurchase program in a "modified Dutch auction" tender offer (the "Tender Offer") utilizing a portion of the proceeds from the Big Fish Transaction. The Company completed the Tender Offer on February 12, 2018, and repurchased 5,660,376 shares of the Company's common stock at a purchase price of $88.33 per share with an aggregate cost of $500.0 million, excluding fees and expenses related to the Tender Offer.
9. STOCK-BASED COMPENSATION PLANS
We have stock-based employee compensation plans with awards outstanding under the Churchill Downs Incorporated 2007 Omnibus Stock Incentive Plan, the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan (the "2016 Plan"), and the Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan. Our total stock-based compensation expense, which includes expenses related to restricted stock awards ("RSAs"), restricted stock unit awards ("RSUs"), performance share unit awards ("PSUs"), and stock options associated with our employee stock purchase plan was $4.7 million for the three months ended March 31, 2019 and $2.8 million for the three months ended March 31, 2018. Stock-based compensation expense for Big Fish Games included as a discontinued operation in the accompanying condensed consolidated statements of comprehensive income was $3.4 million for the three months ended March 31, 2018.
During the three months ended March 31, 2019, the Company awarded RSAs to employees and RSUs and PSUs to certain named executive officers. The vesting criteria for the PSU awards granted in 2019 were based on a three year service period with two performance conditions and a market condition related to relative total shareholder return ("TSR") consistent with prior year grants. The total compensation cost we will recognize under the PSUs will be determined using the Monte Carlo valuation methodology, which factors in the value of the TSR market condition when determining the grant date fair value of the PSU. Compensation cost for each PSU is recognized during the performance and service period based on the probable achievement of the two performance criteria. The PSUs are converted into shares of our common stock at the time the PSU award value is finalized.
A summary of the RSAs, RSUs, and PSUs granted during 2019 is presented below (shares/units in thousands):
Grant Year
 
Award Type
 
Number of Shares/Units Awarded
 
Vesting Terms
 
 
 
 
 
 
 
2019
 
RSA
 
64
 
Vest equally over three service periods ending in 2020, 2021, and 2022
2019
 
RSU
 
55
 
Vest equally over three service periods ending in 2019, 2020, and 2021
2019
 
PSU
 
53
 
Three year performance and service period ending in 2021

10. DEBT
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 our 2017 Senior Secured credit agreement (the "2017 Credit Agreement"). In connection with the offering, we capitalized $9.0 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 "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 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.
11. REVENUE FROM CONTRACTS WITH CUSTOMERS
Performance Obligations
As of March 31, 2019, the Churchill Downs segment had remaining performance obligations, on contracts with a duration greater than one year, with an aggregate transaction price of $193.4 million. The revenue we expect to recognize on these remaining performance obligations is $54.4 million for the remainder of 2019, $38.0 million in 2020, $29.0 million in 2021, and the remainder thereafter.
As of March 31, 2019, our remaining performance obligations in segments other than Churchill Downs were not material.
Contract Assets and Contract Liabilities
As of March 31, 2019 and December 31, 2018, contract assets were not material.
As of March 31, 2019 and December 31, 2018, contract liabilities were $121.9 million and $69.9 million, respectively, which are included in current deferred revenue, non-current deferred revenue, and accrued expense in the accompanying condensed consolidated balance sheets. Contract liabilities primarily relate to the Churchill Downs segment and the increase during the first quarter of 2019 was primarily due to cash payments received for unfulfilled performance obligations. We recognized $2.7 million of revenue during the three months ended March 31, 2019 that was included in the contract liabilities balance at December 31, 2018.
Disaggregation of Revenue
In Note 17, Segment Information, the Company has included its disaggregated revenue disclosures as follows: 
•
For the Churchill Downs segment, revenue is disaggregated between Churchill Downs Racetrack and Derby City Gaming given that Churchill Downs Racetrack's revenues primarily revolve around live racing events while Derby City Gaming's revenues primarily revolve around historical racing events. Within the Churchill Downs segment, revenue is further disaggregated between live and simulcast racing, historical racing, racing event-related services, and other services.
•
For the Online Wagering segment, revenue is disaggregated between the TwinSpires business and online sports betting and iGaming business given that TwinSpires' revenue is primarily related to online pari-mutuel wagering on live race events while online sports betting and iGaming revenue relates to casino gaming service offerings.   Online sports betting and iGaming service offerings are currently nominal. Within the Online Wagering segment, revenue is further disaggregated between live and simulcast racing, gaming, and other services.
•
For the Gaming segment, revenue is disaggregated by location given the geographic economic factors that affect the revenue of Gaming service offerings. Within the Gaming segment, revenue is further disaggregated between live and simulcast racing, racing event-related services, gaming, and other services.
We believe that these disclosures depict how the amount, nature, timing, and uncertainty of cash flows are affected by economic factors.
12. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Midwest Gaming
On March 5, 2019, the Company completed the Sale Transaction to acquire approximately 42% of Midwest Gaming for aggregate cash consideration of approximately $406.6 million. Following the closing of the Sale Transaction, the parties entered into a

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recapitalization pursuant to which Midwest Gaming used approximately $300.0 million in proceeds from new credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors. As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3%.
The total aggregate cash consideration paid at closing of the Sale Transaction was $409.8 million, which included $3.2 million for certain transaction costs of the Sellers. We recognized a $109.6 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership.
High Plaines retained ownership of 36% and Casino Investors retained ownership of 2.7%. A new LLC agreement was entered into by all members as a result of the change in ownership structure. Under the new LLC agreement, both the Company and High Plaines have participating rights over Midwest Gaming, and both must consent to Midwest Gaming's operating, investing and financing decisions. As a result, we account for Midwest Gaming using the equity method.
Summarized Financial Results for our Unconsolidated Affiliates
Summarized below are the financial results for our unconsolidated affiliates. The three months ended March 31, 2019 summarized income statement information and March 31, 2019 summarized balance sheet information includes the following equity investments: MVG, Midwest Gaming from the transaction date of March 5, 2019, and two other immaterial joint ventures. The three months ended March 31, 2018 summarized income statement information includes the following equity investments: MVG, Saratoga New York, Saratoga Colorado, Ocean Downs, and two other immaterial joint ventures. December 31, 2018 summarized balance sheet information included MVG and two other immaterial joint ventures.

 
Three Months Ended March 31,
(in millions)
2019
 
2018
Net revenue
$
89.5

 
$
107.4

 
 
 
 
Operating and SG&A expense
61.0

 
84.1

Depreciation and amortization
2.2

 
6.6

Total operating expense
63.2

 
90.7

Operating income
26.3

 
16.7

Interest and other, net
(17.0
)
 
(2.9
)
Net income
$
9.3

 
$
13.8


(in millions)
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
$
67.1

 
$
24.0

Property and equipment, net
243.6

 
95.7

Other assets, net
235.4

 
106.7

Total assets
$
546.1

 
$
226.4

 
 
 
 
Liabilities and Members' Equity
 
 
 
Current liabilities
$
87.2

 
$
21.2

Long-term debt
752.3

 
—

Other liabilities
7.5

 
—

Members' equity
(300.9
)
 
205.2

Total liabilities and members' equity
$
546.1

 
$
226.4


13. LEASES
Our operating leases with terms greater than one year are primarily related to buildings and land. Our operating leases with terms less than one year are primarily related to equipment. Most of our building and land leases have terms of 2 to 10 years and include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Certain of our lease agreements include lease payments based on a percentage of net gaming revenue and others include rental payment adjustments

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


periodically for inflation. As of March 31, 2019, operating lease ROUAs included in property and equipment, net were $25.3 million.
The components of total lease cost were as follows:
(in millions)
Three Months Ended March 31, 2019
Short-term lease cost (a) (b)
$
2.5

Operating lease cost (b)
1.5

Total lease cost
$
4.0

(a) Includes leases with terms of one month or less
(b) Includes variable lease costs, which were not material
Other information related to operating leases was as follows:
(in millions, except lease term and discount rate)
Three Months Ended March 31, 2019
Supplemental cash flow information

Cash paid for amounts included in the measurement of lease liabilities
$
1.0



ROUAs obtained in exchange for lease obligations
$
0.8




Weighted average remaining lease term
7.2 years




Weighted average discount rate
4.0
%

As of March 31, 2019, future minimum operating lease payments on non-cancelable leases were as follows (in millions):
Years Ended December 31,
 
Totals
2019 (excludes three months ended March 31, 2019)
 
$
4.1

2020
 
4.9

2021
 
4.3

2022
 
3.3

2023
 
3.0

Thereafter
 
11.2

Total future minimum lease payments
 
30.8

Less: Imputed interest
 
4.0

Present value of lease liabilities
 
$
26.8

 
 
 
Reported lease liabilities as of March 31, 2019
 
 
Accrued expense (current maturities of leases)
 
$
4.3

Other liabilities (non-current maturities of leases)
 
22.5

Present value of lease liabilities
 
$
26.8



19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As required by ASC 842, the future minimum operating lease payments on non-cancelable leases as of December 31, 2018 under the accounting standards in effect as of that period were as follows (in millions):
Years Ended December 31,
 
 
2019
$
5.0

2020
4.5

2021
3.8

2022
3.1

2023
3.0

Thereafter
11.2

Total
$
30.6


14. FAIR VALUE OF ASSETS AND LIABILITIES
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate.
Restricted Cash
Our restricted cash accounts that are held in interest-bearing accounts qualify for Level 1 in the fair value hierarchy, which includes unadjusted quoted market prices in active markets for identical assets.
Debt
The fair value of the Company’s 4.75% Senior Notes due 2028 (the "2028 Senior Notes") and 2027 Senior Notes are estimated based on unadjusted quoted prices for identical or similar liabilities in markets that are not active and as such are Level 2 measurements. The fair value of the Company's Senior Secured Term Loan B due 2024 (the "Term Loan B") approximates its gross carrying value as it is variable rate debt and as such is a Level 2 measurement.
The carrying amounts and estimated fair values by input level of the Company's financial instruments are as follows:
 
March 31, 2019
(in millions)
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Restricted cash
37.7

 
$
37.7

 
$
37.7

 
$
—

 
$
—

Financial liabilities:
 
 
 
 
 
 
 
 
 
Term Loan B
390.5

 
395.0

 
—

 
395.0

 
—

2027 Senior Notes
591.0

 
607.7

 
—

 
607.7

 
—

2028 Senior Notes
493.3

 
476.9

 
—

 
476.9

 
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(in millions)
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
Restricted cash
40.0

 
$
40.0

 
$
40.0

 
$
—

 
$
—

Financial liabilities:
 
 
 
 
 
 
 
 
 
Term Loan B
391.3

 
396.0

 
—

 
396.0

 
—

2028 Senior Notes
493.0

 
452.4

 
—

 
452.4

 
—


15. CONTINGENCIES
We are involved in litigation arising in the ordinary course of conducting business. We carry insurance for workers' compensation claims from our employees and general liability for claims from independent contractors, customers and guests. We are self-insured up to an aggregate stop loss for our general liability and workers' compensation coverages.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results of operations, or cash flows. Legal fees are expensed as incurred.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in the early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated.
If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.
16. NET INCOME PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the net income per common share computations:
 
Three Months Ended March 31,
(in millions, except per share data)
2019
 
2018
Numerator for basic net income per common share:
 
 
 
Net income from continuing operations
$
11.9

 
$
14.1

Net (loss) income from discontinued operations
(0.3
)
 
167.9

Numerator for basic net income per common share
$
11.6

 
$
182.0

 
 
 
 
Numerator for diluted net income from continuing operations per common share
$
11.9

 
$
14.1

Numerator for diluted net income per common share:
$
11.6

 
$
182.0

 
 
 
 
Denominator for net income per common share:
 
 
 
Basic
40.4

 
43.3

Plus dilutive effect of stock awards
0.2

 
0.2

Diluted
40.6

 
43.5

 
 
 
 
Net income (loss) per common share data:
 
 
 
Basic
 
 
 
Continuing operations
$
0.30

 
$
0.33

Discontinued operations
$
(0.01
)
 
$
3.87

Net income per common share - basic
$
0.29

 
$
4.20