2012 Annual Report

2012 ANNUAL REPORT Directors and Officers Board of Directors Terms Expiring in 2013 Richard L. Duchossois Chairman, The Duchossois Group, Inc. James F. McDonald Retired Chairman and CEO, Scientific Atlanta, Inc., and Former Senior Vice President, Cisco Sytems, Inc. R. Alex Rankin President, Sterling G. Thompson Co., and President, Upson Downs Farm, Inc. Ulysses L. Bridgeman, Jr. Owner and President, BF Companies, Inc., a Wendy’s Franchisee and EJR, Inc., a Chili’s Franchisee Terms Expiring in 2014 Robert L. Fealy President and Chief Operating Officer, The Duchossois Group, Inc. Daniel P. Harrington President and Chief Executive Officer, HTV Industries, Inc. Darrell R. Wells General Partner, Security Management Company Terms Expiring in 2015 Leonard S. Coleman, Jr. Former President, National League of Professional Baseball Clubs Craig J. Duchossois Chief Executive Officer and Director, The Duchossois Group, Inc. Robert L. Evans Chairman and Chief Executive Officer, Churchill Downs Incorporated G. Watts Humphrey, Jr. Lead Independent Director, Churchill Downs Incorporated; President, GWH Holdings, Inc.; Chief Executive Officer, IPEG and Centria; and Owner, Shawnee Farms Executive Officers Robert L. Evans Chairman and Chief Executive Officer William C. Carstanjen President and Chief Operating Officer William E. Mudd Executive Vice President and Chief Financial Officer Alan K. Tse Executive Vice President, General Counsel and Secretary Directors Emeriti Charles W. Bidwill, Jr. Catesby W. Clay J. David Grissom Thomas H. Meeker Carl F. Pollard Dear Shareholder, The value of your common stock investment in Churchill Downs Incorporated increased 27% in 2012 (on a December 31 to December 31 basis), following a 20% increase in 2011, and a 16% increase in 2010. In 2012, your Company achieved record revenues of $732.4 million and the second highest EBITDA (earnings before interest, taxes, depreciation and amortization) and EPS (earnings per diluted share of common stock) in the Company’s history. While EBITDA declined $7.2 million from $158.7 million in 2011 to $151.5 million in 2012, and EPS from continuing operations declined $0.21 from $3.55 in 2011 to $3.34 in 2012, these declines reflect the $19.3 million in Illinois Horse Racing Equity Trust Fund proceeds that we received on a one-time basis in 2011. Excluding those proceeds in 2011, both EBITDA and EPS increased in 2012 to what would have been all-time record levels. Mr. Evans and Mr. Humphrey While our financial performance in 2012 was solid, it was also important that we continued to develop our portfolio of growth opportunities for the years ahead. Our most treasured assets, the Kentucky Oaks and Kentucky Derby, continued to set customer attendance and financial records. Our online wagering platform, TwinSpires.com, continued to grow, accounting for 7.9% of the approximately $10.9 billion total wagered on U.S. thoroughbred racing in 2012 (as published by Equibase.com), up from 7.2% in 2011. In March 2012, we announced plans to build a video lottery terminal (VLT) gaming facility and harness racetrack north of Cincinnati, Ohio, with our partner, Delaware North Companies Gaming & Entertainment, Inc. That project is now fully underway and we expect to open the property in early 2014. In October 2012, we completed the $146 million acquisition of Riverwalk Casino Hotel in Vicksburg, Miss. You can rest assured that we will always honor and protect the heritage and traditions of our first 138 years while we work to build your Company for the next 138 years. Robert L. Evans Chairman of the Board and Chief Executive Officer Message From G. Watts Humphrey, Jr., Lead Independent Director It was my honor recently to be elected by the Board of Directors to serve as your Lead Independent Director for a second, two-year term, ending in 2015. My primary role is to lead the Board’s independent oversight of your Company’s strategy, operations and performance. Our strong financial performance in 2012 allowed us to increase the annual dividend to you from $0.60 per share to $0.72 per share, our second consecutive 20% increase. In addition, in order to avoid the higher personal income tax rates on dividends that became effective on January 1, 2013, we paid the $0.72 dividend in December 2012. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR 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 (Exact name of registrant as specified in its charter) Kentucky 61-0156015 (State or other jurisdiction of incorporation or organization) (IRS 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) Securities registered pursuant to Section 12(b) of the Act: Common Stock, No Par Value The NASDAQ Stock Market LLC (Title of each class registered) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of February 25, 2013, 17,610,679 shares of the Registrant’s Common Stock were outstanding. As of June 30, 2012 (based upon the closing sale price for such date on the NASDAQ Global Market), the aggregate market value of the shares held by non- affiliates of the Registrant was $777,753,545. Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2013 are incorporated by reference herein in response to Items 10, 11, 12, 13 and 14 of Part III of Form 10-K. The exhibit index is located on pages 103-105. CHURCHILL DOWNS INCORPORATED INDEX TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 2012 Part I Item 1. Business 3 Item 1A. Risk Factors 21 Item 1B. Unresolved Staff Comments 32 Item 2. Properties 32 Item 3. Legal Proceedings 32 Item 4. Mine Safety Disclosures 34 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 6. Selected Financial Data 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 60 Item 8. Financial Statements and Supplementary Data 61 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 97 Item 9A. Controls and Procedures 97 Item 9B. Other Information 98 Part III Item 10. Directors, Executive Officers and Corporate Governance 98 Item 11. Executive Compensation 98 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 98 Item 13. Certain Relationships and Related Transactions, and Director Independence 99 Item 14. Principal Accounting Fees and Services 99 Part IV Item 15. Exhibits and Financial Statement Schedule 100 Signatures 101 Schedule II—Valuation and Qualifying Accounts 102 Exhibit Index 103 2 PART I ITEM 1. BUSINESS A. Introduction Churchill Downs Incorporated (the “Company”) is a diversified provider of pari-mutuel horseracing, casino gaming, entertainment, and is the country’s premier source of online account wagering on horseracing events. We offer gaming products through our casinos in Mississippi, our slot and video poker operations in Louisiana and our slot and poker operations in Florida. We were organized as a Kentucky corporation in 1928. Our principal executive offices are located at 600 North Hurstbourne Parkway, Suite 400, Louisville, Kentucky, 40222. We manage our operations through four operating segments as follows: 1. Racing Operations, which includes: • Churchill Downs Racetrack (“Churchill Downs”) in Louisville, Kentucky, an internationally known thoroughbred racing operation and home of the Kentucky Derby since 1875; • Arlington International Race Course (“Arlington”), a thoroughbred racing operation in Arlington Heights along with ten off-track betting facilities (“OTBs”) in Illinois; • Calder Race Course (“Calder”), a thoroughbred racing operation in Miami Gardens, Florida; and • Fair Grounds Race Course (“Fair Grounds”), a thoroughbred racing operation in New Orleans along with twelve OTBs in Louisiana.

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