Accel Entertainment, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The filing reports the three months ended March 31, 2023, compared with the same period in 2022. Accel operates distributed gaming, amusement, ATM and gaming-terminal manufacturing businesses. Results include Century Gaming, acquired June 1, 2022; the company reported one operating segment.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $293.2 million | $196.9 million | +48.9% |
| Operating income | $27.7 million | $21.2 million | +30.5% |
| Net income | $9.2 million | $15.8 million | -41.8% |
| Diluted EPS | $0.11 | $0.17 | Down $0.06 |
| Adjusted EBITDA (non-GAAP) | $46.1 million | $35.2 million | +30.9% |
| Operating cash flow | $38.0 million | $22.1 million | +$15.9 million |
Gaming revenue was $279.4 million, amusement revenue $6.8 million, manufacturing revenue $2.1 million and ATM/other revenue $4.9 million. Revenue growth was primarily attributed to more locations and terminals following the Century acquisition. Illinois generated $219.8 million; Montana $36.5 million and Nevada $30.0 million.
Operating margin was approximately 9.4%, versus 10.8% a year earlier; net margin was approximately 3.1%, versus 8.0%. The filing does not report a GAAP gross margin. Net income declined despite higher operating income, principally reflecting increased interest expense and a swing from a contingent-earnout fair-value gain to a loss. Adjusted EBITDA is a company-defined non-GAAP measure.
Cash, investment and financing. Cash and equivalents were $228.5 million at March 31, 2023, versus $224.1 million at year-end 2022. Operating cash flow was $38.0 million; investing outflow was $23.6 million, including $21.5 million of property and equipment purchases; financing outflow was $10.0 million. Accel expects 2023 property-and-equipment capital expenditures of approximately $50–60 million.
Credit-facility borrowings were $540.8 million, with $328 million of availability reported under the facility. Debt, net of issuance costs, was $537.6 million, including $23.5 million of current maturities. The weighted-average interest rate was approximately 6.8%, excluding caplet effects, versus 3.6% in Q1 2022. Accel estimated a 100-basis-point rate increase would add approximately $2.4 million to annual interest expense at the quarter-end debt balance. Cash exceeded current debt maturities, but total borrowings substantially exceeded cash.
Current assets were $299.3 million and current liabilities $92.9 million. The company held a $32.1 million investment in Gold Rush convertible notes, classified as current. It repurchased 476,718 shares for $4.2 million in Q1; approximately $107.8 million remained available under its $200 million repurchase authorization at March 31.
Material changes and management commentary
- Locations increased 41.4% to 3,628 and gaming terminals increased 72.0% to 23,497 year over year, substantially reflecting Century, which contributed $66.3 million of revenue and $1.7 million of net income in Q1 2023.
- Cost of revenue rose 54.5% to $205.0 million, faster than revenue. G&A increased 38.2% to $43.0 million, reflecting Century-related costs, higher payroll and professional fees.
- Interest expense, net nearly doubled to $7.9 million, driven mainly by higher average debt and rates; caplets provided a partial offset, including $1.9 million of interest income in Q1.
- Management said it had not observed material macroeconomic effects on business or outlook to date, but noted inflation, wage and fuel cost increases, higher rates, potential recession effects on consumer gaming activity, and supply-chain concerns. It accelerated certain gaming-component expenditures during Q1.
Outlook, risks and unusual items
- Management believes cash, operating cash flow and credit-facility availability should cover requirements for the next 12 months, and expects to remain in covenant compliance. No full-year revenue or earnings guidance is provided.
- Accel disclosed previously identified material weaknesses in disclosure controls and procedures remained present at March 31; management concluded those controls were not effective. Century was still being integrated into internal controls.
- An Illinois Gaming Board disciplinary complaint seeks a $5 million fine; summary-judgment motions were pending, with a decision expected in Q2 2023. The company also described litigation involving location contracts and municipal terminal-operator taxes; some claims have no estimable potential damages or recorded reserve.
- The Gold Rush notes had not been repaid and were treated as in default for disclosure purposes. The IGB denied transfer of shares following Accel’s attempted conversion; Accel is pursuing legal remedies and carries the notes at $32.1 million fair value. Related litigation is ongoing.
- Q1 included a $4.6 million noncash loss from revaluing contingent earnout shares, compared with a $3.4 million gain in Q1 2022. The tax rate increased to 39.5% from 23.4%, primarily due to the tax treatment of that fair-value change.
- On February 13, 2023, Accel acquired Rendezvous Casino and Burger Bar in Montana for $2.6 million. Subsequent to quarter-end, it agreed to acquire a Louisiana operator and obtained an option on another; it paid a $3.5 million purchase-price advance on April 11.
- Results may be seasonal: management says revenue per machine per day is typically lower in summer and higher during colder months. Accel also identified risks from economic weakness, lower discretionary spending, financial-market instability and access to credit.
Most important facts for investors to verify
- Whether acquisition-driven location and terminal growth translates into sustained profitability, given cost-of-revenue growth exceeding revenue growth.
- Debt, borrowing availability, floating-rate exposure, covenant compliance and the expected $50–60 million 2023 capital-expenditure program.
- Progress in remediating the disclosed material weaknesses and integrating Century into internal controls.
- Developments in the $5 million IGB complaint, Gold Rush note recovery and litigation, and municipal tax disputes or penalties.
- Performance of the Louisiana acquisition and option, and whether subsequent acquisition spending affects liquidity or leverage.