Accel Entertainment, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Accel operates distributed gaming, amusement, manufacturing and ATM businesses across multiple U.S. states. Q2 2023 included a full quarter of Century Gaming; Q2 2022 included Century only from its June 1, 2022 acquisition date, making year-over-year comparisons materially affected by the acquisition.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $292.6 million | $227.9 million | $585.9 million | $424.8 million |
| Operating income | $29.2 million | $27.3 million | $56.8 million | $48.5 million |
| Net income | $10.0 million | $22.5 million | $19.2 million | $38.3 million |
| Diluted EPS | $0.11 | $0.24 | $0.22 | $0.41 |
| Adjusted EBITDA (non-GAAP) | $46.6 million | $42.7 million | $92.7 million | $78.0 million |
Q2 revenue grew 28.4%; first-half revenue grew 37.9%. Growth was principally associated with more locations and terminals, particularly following the Century acquisition. Q2 operating margin was approximately 10.0% versus 12.0% a year earlier; net margin was approximately 3.4% versus 9.9%. Adjusted EBITDA rose 9.1% in Q2 and 18.9% in the first half.
Net gaming revenue was $277.6 million in Q2, up 27.1%; manufacturing revenue was $4.4 million, up from $0.9 million. Operating expenses grew faster than revenue in Q2, including cost of revenue (+30.8%), general and administrative expense (+35.2%) and depreciation and amortization (+43.2%). The company attributed higher G&A partly to payroll, parts and repair costs, and a $1.1 million Illinois Gaming Board settlement. Net income declined as higher interest expense and a contingent earnout fair-value loss more than offset revenue growth. The prior-year quarter had a fair-value gain on the earnout liability.
Cash flow and liquidity: First-half operating cash flow was $63.8 million, compared with $41.2 million. Investing used $16.2 million, versus $137.3 million, reflecting lower acquisition spending, proceeds from the Gold Rush note settlement and higher equipment purchases. Financing used $38.3 million, versus $117.4 million provided in the prior period. Cash was $233.4 million at June 30, 2023. Management said cash, operating cash flow and available credit should meet needs for the next 12 months.
Debt: Credit-facility borrowings were $521.1 million at June 30; reported debt, net of issuance costs, was $518.2 million. The weighted-average interest rate was approximately 7.0% at quarter-end. A 100-basis-point increase in rates would add an estimated $2.2 million in annual interest expense at the reported debt balance, before considering hedging effects. The company had $342 million of credit availability and was in compliance with its debt covenants.
Other metrics: At June 30, Accel reported 3,655 locations and 23,759 gaming terminals in its primary markets, increases of 4.8% and 7.4%, respectively, year over year. The effective tax rate was 37.9% for Q2 and 38.7% for the first half, elevated in part by the contingent earnout fair-value change.
Material changes, outlook and risks
- The company converted its credit facility reference rate from LIBOR to SOFR in June; it said the accounting impact was not material. In June it drew $100 million on the delayed-draw term loan and used the proceeds to repay an equal amount of revolving debt. Management anticipated a further amendment to extend delayed-draw availability beyond October 22, 2023.
- Management expects 2023 property and equipment capital expenditures of approximately $60–70 million; first-half purchases were $41.6 million. It reported no material macroeconomic impact to date but cited inflation, higher wages and interest expense, potential recession effects on location partners and players, and supply-chain concerns. Results may be seasonal, with gaming revenue typically lower in summer.
- Interest-rate exposure remains significant despite caplets hedging the first $300 million of term debt. Credit-facility covenants include a maximum first-lien net leverage ratio of 4.50:1.00 and a minimum fixed-charge coverage ratio of 1.20:1.00.
- The IGB settled a disciplinary complaint in July 2023 for $1.1 million, paid in Q3. Accel also agreed to additional compliance training, disclosures and consultation with the IGB on similar initiatives. An Illinois municipal terminal-operator tax dispute remained pending; the company had obtained a temporary restraining order and a permanent-injunction hearing was scheduled for October 2023. Other litigation includes disputes over gaming-location contracts; management said it could not estimate potential damages in one such matter.
- Disclosure controls and procedures were deemed ineffective at June 30 because previously identified material weaknesses remained. Management stated that it believes the financial statements fairly present the company’s position and results. Century control integration was substantially complete, but Century was to be included in the annual controls evaluation for 2023.
- The board’s $200 million repurchase program had approximately $99.7 million remaining at June 30. The company repurchased 887,174 shares in Q2 at an average $9.14 per share. CEO Andrew Rubenstein adopted a Rule 10b5-1 plan allowing potential sales of up to 750,000 shares between August 2023 and April 2024, subject to specified price thresholds.
Most important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth reflects acquisitions versus comparable-location and organic growth, given the limited Century contribution in the prior-year quarter.
- Whether operating profitability can keep pace with rising operating costs, depreciation, taxes and floating-rate interest expense.
- Actual 2023 capital spending, delayed-draw facility extension and remaining borrowing capacity, alongside covenant compliance.
- Progress in remediating the material weaknesses in disclosure controls and internal control over financial reporting.
- Outcomes and potential financial exposure from the IGB settlement, Illinois municipal tax matters and other gaming-contract litigation.