Accel Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Accel operates distributed gaming terminals and related amusement, ATM, and manufacturing businesses. Its June 1 acquisition of Century expanded operations into Montana and Nevada and added gaming-terminal manufacturing.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $227.9 million | $202.0 million | $424.8 million | $349.0 million |
| Operating income | $27.3 million | $24.9 million | $48.5 million | $34.5 million |
| Net income | $22.5 million | $12.4 million | $38.3 million | $13.9 million |
| Diluted EPS | $0.24 | $0.13 | $0.41 | $0.15 |
| Adjusted EBITDA | $42.7 million | $43.0 million | $78.0 million | $68.8 million |
Q2 revenue rose 12.8%; six-month revenue rose 21.7%. Net gaming revenue was $218.4 million in Q2 and $406.9 million for the half year. The filing reports Q2 Adjusted EBITDA essentially flat year over year and six-month growth of 13.3%. Operating margin was approximately 12.0% in Q2 versus 12.3% a year earlier, and 11.4% for the first half versus 9.9%.
Reported earnings benefited from a noncash gain on contingent earnout shares of $5.7 million in Q2 and $9.1 million for the first half, compared with losses in the prior-year periods. Lower amortization from extended asset useful-life estimates also increased net income by approximately $2.8 million in Q2 and $5.7 million for the first half. These factors make reported profit growth less indicative of underlying operating trends.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $41.2 million, down from $54.2 million. Investing cash outflow was $137.3 million, primarily reflecting acquisitions and capital spending; financing cash inflow was $117.4 million.
- Cash and cash equivalents were $220.2 million at June 30, 2022, compared with $198.8 million at year-end 2021.
- Credit-facility borrowings were $505.9 million gross; balance-sheet debt, net of issuance costs, was $502.1 million. Gross debt less cash was approximately $285.7 million. Undrawn credit availability was approximately $381 million.
- The weighted-average interest rate was approximately 3.2%. Accel hedged interest-rate exposure on the first $300 million of term-loan principal with four-year caplets. Management estimated that a 100-basis-point rate increase on the outstanding facility would add approximately $5.1 million in annual interest expense, assuming debt remained unchanged.
- Accel repurchased $36.9 million of common stock during the first half. The company reported compliance with credit covenants at quarter-end.
Changes, outlook, and risks
- Century was acquired for total consideration of $164.3 million, including repayment of its debt; the transaction was largely debt-financed. Century contributed $21.1 million of revenue and $1.0 million of net income from the acquisition date through June 30. Purchase-price allocation remained preliminary, with $53.3 million recorded as goodwill.
- First-half revenue comparisons also reflect Illinois gaming shutdowns and restrictions that affected 18 of 181 gaming days in the first half of 2021. Management attributed growth to more locations and terminals, higher location hold-per-day, reopening effects, and Century. At June 30, Accel reported 3,489 locations and 22,128 gaming terminals.
- Management said cash, operating cash flow, and borrowing availability should meet capital needs for the next 12 months and expects covenant compliance over that period. The filing provides no specific revenue or earnings guidance.
- Risks include gaming-license requirements, consumer spending and economic conditions, COVID-related operating restrictions, seasonality, and integrating Century. Illinois remains the largest market by revenue. The company also noted that Illinois’ 72-hour equipment-removal rule reduced reported locations and terminals, though management said revenue was not materially affected.
- Legal matters include an Illinois Gaming Board disciplinary complaint seeking a $5 million fine; both sides filed summary-judgment motions in July 2022. Accel recorded a $1.0 million legal loss and paid $1.6 million in legal settlements during the first half. Gold Rush convertible notes of $32.1 million remained classified as a current asset and were deemed in default for disclosure purposes; Accel and Gold Rush have filed lawsuits against each other, and regulatory approval to transfer the conversion shares was denied. Accel is pursuing legal and administrative remedies.
- Management stated disclosure controls were not effective as of June 30 because previously reported material weaknesses remained. Management nevertheless believes the financial statements fairly present the company’s financial condition and results.
- After quarter-end, on August 1, Accel acquired Nebraska MAD and ATM assets for approximately $12 million, including $2.5 million of contingent consideration.
Important facts for investors to verify
- How much of revenue and EBITDA growth is organic versus attributable to Century, the 2021 shutdown comparison, and other acquired operations.
- Century integration progress, final purchase-price allocation, and the sustainability of acquisition-related returns.
- Debt levels, floating-rate exposure, covenant headroom, and whether cash flow supports acquisitions and share repurchases.
- Resolution and recoverability of the Gold Rush notes, including the effects of the IGB’s transfer denial and ongoing litigation.
- Outcomes of the $5 million IGB complaint and other legal proceedings, and whether further losses or penalties become probable.
- Remediation of the material weaknesses in disclosure controls and internal control over financial reporting.
- Whether earnings trends remain strong after separating noncash fair-value gains and the benefit from longer useful-life estimates.