Accel Entertainment, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Accel operates video gaming terminals and related amusement and ATM equipment, primarily in Illinois. The Illinois Gaming Board’s COVID-19 shutdown suspended gaming from March 16 through June 30; operations resumed July 1, subject to health protocols and later regional restrictions.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $136.3 million | $101.3 million | $241.9 million | $303.0 million |
| Operating income (loss) | $9.0 million | $1.0 million | ($12.7 million) | $19.0 million |
| Net income (loss) | $12.1 million | ($1.6 million) | ($11.1 million) | $6.7 million |
| Net income (loss) per diluted share | $0.14 | ($0.03) | ($0.14) | $0.11 |
| Adjusted EBITDA, non-GAAP | $23.1 million | $18.1 million | $29.2 million | $58.8 million |
| Operating cash flow | Not separately stated | Not separately stated | $4.1 million | $45.7 million |
Q3 revenue increased 34.6% year over year; net video gaming revenue rose 32.2%. Excluding Grand River Jackpot, Q3 net video gaming revenue increased 19.7%, which management attributed to more locations and terminals. For the first nine months, revenue declined 20.1%, principally because the shutdown removed 106 of 274 possible gaming days. Excluding Grand River, nine-month net video gaming revenue fell 29.5%.
Calculated operating margin was approximately 6.6% in Q3 2020 versus 1.0% in Q3 2019, and approximately negative 5.3% for the first nine months of 2020 versus 6.3% in 2019. Q3’s $12.1 million net income included a $6.6 million income tax benefit, including an $8 million favorable return-to-provision adjustment; the nine-month tax benefit was $11.8 million. These tax items materially affect reported net results.
At September 30, cash and cash equivalents were $179.1 million, total assets $564.6 million, and stockholders’ equity $158.0 million. Gross debt was $357.1 million ($349.0 million net of issuance costs), compared with $358.5 million gross debt at year-end 2019. The weighted-average borrowing rate was approximately 3.2%; about $95 million of credit-facility availability remained. Management said cash, operating cash flow and borrowing availability should cover requirements for the next 12 months. Operating cash flow was sharply lower year over year; investing cash use was $23.1 million and financing cash provided was $72.7 million for the nine months.
Material changes and unusual items
- Q3 cost of revenue increased 39.7%, faster than revenue, partly due to the Illinois gaming tax rate rising to 34% on July 1, 2020. For the nine-month period, cost of revenue declined 16.3% as gaming activity was suspended, but video gaming expenses as a percentage of revenue increased to 66.9% from 63.8%.
- In Q1, Accel extended estimated useful lives of video gaming terminals and equipment from seven to ten years. This reduced depreciation expense by $6.4 million for the first nine months and increased net income (or reduced net loss) by $4.6 million, or $0.06 per share.
- On September 28, Accel issued 8 million Class A-1 shares at $10.50 per share, receiving approximately $78.7 million net. Underwriters later bought another 1,133,015 shares in October, generating approximately $11.3 million net. Accel also exchanged warrants for shares during the quarter.
- Q3 G&A increased 31.9%, including higher operating costs, payroll-related costs and stock compensation. Nine-month stock-based compensation was $4.1 million versus $0.4 million in 2019.
- Adjusted EBITDA rose 27.4% in Q3 but fell 50.4% for the nine-month period. This is a company-defined non-GAAP measure and should be assessed alongside GAAP results.
Outlook, risks and contingencies
- Management provided no specific earnings or revenue guidance. It estimated 2020 capital expenditures at approximately $27 million.
- Management warned that renewed regional or statewide COVID-19 closures, operating-hour limits, occupancy restrictions, weaker consumer demand or partner-location closures could reduce revenue and cash flow. Some Illinois regions had limits on gaming hours and one customer per VGT.
- The August 2020 credit amendment waived financial covenant breach requirements for the periods ending September 30, 2020 through March 31, 2021. Accel reported covenant compliance at September 30 and expected to remain compliant over the following 12 months, subject to uncertainty around COVID-19 assumptions.
- Accel reported no impairment of goodwill or long-lived assets at September 30, but said further restrictions could lead to material impairment losses. Its $30 million investment in another terminal operator’s convertible notes had payment timing extended to December 31, 2020; carrying value was assessed as approximating fair value.
- Material unresolved litigation includes disputes concerning rights to 10 Illinois gaming locations, with related petitions pending before the Illinois Gaming Board, and a separate lawsuit seeking $10 million. Accel had not accrued losses for these matters, stating losses were not probable or reasonably estimable.
- Disclosure controls were deemed ineffective 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.
- Other risks include dependence on Illinois, gaming-license and regulatory requirements, competition, leverage and variable interest rates. A 1 percentage-point rate increase would add approximately $3.6 million of annual interest expense if debt remained unchanged.
Important facts for investors to verify
- Whether gaming activity and location-level demand remain durable under regional restrictions, and how renewed closures would affect cash generation.
- The sustainability of Q3 operating improvement, separating organic growth, Grand River contributions and the benefit from the useful-life estimate change.
- The size and recurrence of tax benefits, and the company’s underlying profitability excluding unusual tax and other items.
- Debt covenant status after the waiver period, remaining credit availability, floating-rate exposure and repayment needs.
- Resolution and potential financial impact of pending litigation and regulatory petitions; no clear damages estimate is provided for certain disputes.
- Progress in remediating material weaknesses in disclosure controls and the dilution effect of share offerings, warrant exchanges and equity awards.