Accel Entertainment, Inc. — Q3 2023 Form 10-Q
Business and period: Accel operates distributed gaming terminals, amusement devices and ATMs in licensed non-casino locations. It reported the quarter and nine months ended September 30, 2023. Results include Century Gaming, acquired June 1, 2022; therefore, the nine-month comparison includes Century for only part of 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $287.5 | $267.0 | $873.4 | $691.7 |
| Operating income | $25.1 | $23.2 | $82.0 | $71.8 |
| Net income | $10.5 | $22.4 | $29.6 | $60.7 |
| Diluted EPS | $0.12 | $0.25 | $0.34 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $44.1 | $41.1 | $136.9 | $119.1 |
Revenue increased 7.7% in Q3 and 26.3% year to date. Net gaming revenue was $274.1 million for Q3 and $831.1 million for nine months. Operating income rose 8.1% and 14.2%, respectively, while net income declined 53.4% and 51.2%. The filing attributes revenue growth chiefly to more locations and terminals, with Century a major contributor to year-to-date growth. Adjusted EBITDA increased 7.3% in Q3 and 14.9% year to date.
Reported operating margin was approximately 8.7% in Q3 2023, compared with 8.7% in Q3 2022; for the nine-month periods it was approximately 9.4% versus 10.4%. Net margin was approximately 3.6% versus 8.4% in Q3 and 3.4% versus 8.8% year to date. These ratios are calculated from reported revenue and income.
Cash flow and liquidity: Nine-month operating cash flow was $92.0 million, versus $78.3 million. Investing used $35.4 million, compared with $168.9 million, reflecting lower acquisition spending and $32.1 million of proceeds from the convertible-note settlement, partly offset by higher capital spending. Financing used $50.3 million, versus $103.9 million provided in 2022. Cash was $230.4 million at September 30, 2023, up from $224.1 million at year-end 2022. The company forecast 2023 property-and-equipment capital expenditures of approximately $70–80 million and said cash, operating cash flows and available credit should cover requirements for the next 12 months.
Debt: Credit-facility principal was $515.5 million at quarter-end; reported debt net of issuance costs was $512.5 million, including the separately presented interest-rate-caplet liability. The weighted-average interest rate was approximately 7.2%; the company reported $342 million of remaining credit availability and compliance with debt covenants. The facility matures October 22, 2026; the delayed-draw borrowing window was extended to October 22, 2024. A 100-basis-point rate increase would, at the reported debt balance and absent other changes, add approximately $2.2 million of annual interest expense. Caplets hedge interest-rate exposure on the first $300 million of term debt.
Material changes and notable items
- Q3 cost growth broadly tracked revenue, but G&A rose 13.5%, faster than revenue, due to payroll, stock-based compensation, and parts and repairs. Nine-month G&A also reflected the $1.1 million Illinois Gaming Board settlement.
- Interest expense rose 34.9% in Q3 and 74.9% year to date, principally because of higher rates and, year to date, higher average debt. The nine-month weighted-average rate, excluding caplets, was approximately 7.2%, versus 3.7% in 2022.
- Net income comparisons were affected by contingent earnout-share fair-value movements: Q3 2023 recorded a $1.6 million loss versus a $10.4 million gain in Q3 2022; year to date recorded an $11.1 million loss versus a $19.5 million gain. These non-cash changes were primarily tied to the company’s share price.
- The company repurchased 1.7 million shares for $15.7 million during the first nine months of 2023. The share repurchase authorization had approximately $96.4 million remaining at September 30.
- Location count grew 4.8% year over year to 3,687, and gaming terminals grew 7.1% to 24,016 across the reported primary markets.
Outlook, risks and contingencies
Management reported no material business or outlook impact from macroeconomic conditions to date, but warned that recession, inflation, higher rates, reduced discretionary spending, or financial-market disruption could affect location partners, player activity, liquidity and financing costs. The company noted higher wage costs and accelerated some 2023 equipment spending to manage supply-chain needs. It did not provide earnings or revenue guidance in the supplied filing text.
The filing describes ongoing litigation, including disputes related to Illinois gaming-location agreements; management said it could not estimate potential damages in one matter and had established no reserve. An Illinois municipality tax dispute remains pending; related matters produced a $1.4 million loss in the first nine months of 2023. The Illinois Gaming Board settlement resolved a disciplinary complaint for $1.1 million, paid in Q3, and requires additional compliance steps. Other ordinary-course claims are also disclosed; management believes they will not materially affect financial position or results.
Controls: Management concluded disclosure controls and procedures were ineffective at September 30, 2023 because previously identified material weaknesses remained. Management nevertheless stated that the financial statements fairly present the company’s financial condition, results and cash flows in all material respects.
Important facts for investors to verify
- How much of reported revenue and growth reflects organic performance versus Century and other market expansion, and how location and terminal productivity is trending.
- Whether operating-cost growth, especially payroll, repairs and depreciation, affects margins as the business expands.
- Debt repayment capacity and sensitivity to floating rates, including the extent and duration of protection from the caplets and continued covenant compliance.
- Whether the $70–80 million 2023 capital-spending estimate and stated 12-month liquidity expectations remain achievable.
- Developments in the Illinois location-agreement and tax litigation, and any resulting financial or regulatory exposure.
- Progress in remediating the disclosed material weaknesses in disclosure controls.
- The effect of non-cash earnout remeasurement on reported earnings and the potential share conversion conditions for remaining earnout tranches.