Accel Entertainment, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Accel operates video gaming terminals (VGTs), ATMs and amusement devices, primarily in Illinois. It completed a reverse recapitalization and began trading on the NYSE as ACEL in November 2019.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $424.4 million | $332.0 million |
| Operating income | $13.3 million | $24.9 million |
| Net income (loss) | $(5.9) million | $10.8 million |
| Adjusted EBITDA (non-GAAP) | $79.6 million | $63.8 million |
| Cash from operating activities | $45.6 million | $44.3 million |
| Cash used in investing activities | $(151.5) million | $(73.5) million |
| Cash and cash equivalents at year-end | $125.4 million | $92.2 million |
| Total debt at year-end | $358.5 million | $232.6 million |
- Revenue rose 27.8%; net video gaming revenue increased 27.6% to $410.6 million. Excluding acquisitions, net video gaming revenue grew 21.2%, according to management.
- Operating margin declined to approximately 3.1% from 7.5%; net margin was approximately (1.4%) versus 3.3%. Adjusted EBITDA margin was approximately 18.8%, compared with 19.2% in 2018. These margins are calculated from reported figures.
- Adjusted EBITDA increased 25.3%, largely reflecting growth in locations and terminals. It is a non-GAAP measure and should be considered alongside GAAP results.
- At year-end, Accel operated 10,499 VGTs at 2,312 establishments, up 37.3% and 37.1%, respectively. Hold-per-day increased to $130 from $125.
- FY 2019 investing outflows included $100.9 million for business and asset acquisitions and $30 million invested in convertible notes. Operating cash flow was nearly flat year over year.
- Year-end current assets were $151.5 million and current liabilities $54.9 million (approximately 2.8x current ratio). Cash less total debt was approximately negative $233.1 million; this simple measure excludes other obligations and undrawn credit availability.
Fourth-quarter results
Q4 2019 revenue was $121.4 million, versus $90.9 million in Q4 2018. Accel reported an operating loss of $5.7 million and net loss of $12.6 million, compared with operating income of $6.3 million and net income of $1.9 million in Q4 2018. Management attributed the 2019 quarterly losses to elevated one-time Business Combination costs and increased fair-value adjustments to acquisition-related contingent consideration; Grand River Jackpot contributed to revenue.
Changes, outlook and key risks
- Expenses grew faster than revenue: total operating expenses rose 33.8%. Video gaming expenses increased partly because Illinois gaming tax rose from 30% to 33% effective July 1, 2019. The tax was scheduled to increase to 34% on July 1, 2020.
- Other expenses, net rose to $19.6 million from $3.0 million, primarily reflecting Business Combination costs and contingent-consideration remeasurement. Interest expense rose 33.3% to $12.9 million; the company also recorded a $1.1 million debt-extinguishment loss.
- Accel said cash, operating cash flow and borrowing availability should cover capital requirements for the next 12 months. It expected approximately $25 million in 2020 capital expenditures. This is not earnings guidance; the filing provides no quantified revenue or profit forecast.
- A new senior secured credit facility was entered into in November 2019, with $358.5 million drawn and approximately $106.5 million of availability at year-end. The facility matures in 2024, carries variable-rate debt, and includes leverage and fixed-charge covenants. Accel reported covenant compliance at year-end; a 100-basis-point rate increase was estimated to add about $3.6 million to annual interest expense, assuming debt stayed constant.
- Growth plans include gaining share in Illinois, expanding into Pennsylvania and pursuing acquisitions. Accel held a conditional Pennsylvania terminal-operator license and had an agreement with one conditionally licensed truck-stop partner, but had not begun Pennsylvania gaming operations.
- Material risks include dependence on Illinois and gaming regulation, higher gaming taxes, competition and acquisition integration, variable-rate debt and covenant compliance, supplier disruption, and COVID-19-related potential reductions in customer traffic or equipment supply. These COVID-19 risks were identified in the filing, but their eventual impact was uncertain.
- Three internal-control material weaknesses remained unremediated at December 31, 2019: financial statement review and accounting resources; business-combination and route-acquisition accounting; and IT access/change controls. Disclosure controls were deemed ineffective. Management described remediation efforts as in process. The auditor issued an unqualified opinion on the financial statements; management did not provide an internal-control effectiveness assessment.
- Contingencies include long-running disputes involving J&J and 10 establishments, with petitions pending before the Illinois Gaming Board and no estimated loss or reserve; and a competitor lawsuit seeking $10 million, for which Accel had not accrued a loss because it was not considered probable or reasonably estimable.
Most important facts for investors to verify
- Whether acquisition-driven expansion translates into sustained organic growth and improved GAAP operating profitability after the 2019 one-time costs.
- The effects of Illinois’ scheduled tax increase, regulatory changes and local gaming restrictions on per-terminal economics.
- Debt levels, variable-rate exposure, available borrowing capacity and continuing compliance with credit-facility covenants.
- Progress in remediating the three material weaknesses and whether future filings report effective controls.
- Developments in the pending litigation and the timing, final licensing and economics of Pennsylvania operations.
- The status and recoverability of the $30 million convertible-note investment, which was subordinated to the borrower’s credit facility.