Accel Entertainment, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. Accel operates video gaming terminals and related equipment primarily in Illinois. At quarter-end it had 11,164 terminals across 2,353 locations.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $105.2 million | $97.4 million |
| Operating income | $2.1 million | $8.7 million |
| Net income (loss) | $(2.0) million | $4.0 million |
| Adjusted EBITDA, non-GAAP | $14.8 million | $19.8 million |
| Operating cash flow | $(4.3) million | $17.9 million |
| Capital expenditures, net | $3.7 million | $5.6 million |
Revenue grew 8.0%, including $12.3 million contributed by the 2019 Grand River Jackpot acquisition. Excluding Grand River, net video gaming revenue declined 5.2%, reflecting the March shutdown partly offset by terminal and location growth. Video gaming expenses were $68.0 million, or 64.6% of net video gaming revenue, versus 63.2% a year earlier; the increase reflected Illinois’s gaming tax increase from 30% to 33% in July 2019. Operating margin was approximately 2.0%, down from 8.9%; net margin was approximately negative 1.9%, versus positive 4.1%.
General and administrative expense rose 45.5% to $23.5 million, including higher operating costs, professional fees and stock compensation. Interest expense increased 39.4% to $4.2 million as borrowings rose, partly offset by lower rates. A change in estimated useful lives for gaming terminals and equipment—from seven to ten years—reduced Q1 depreciation expense by $2.6 million ($2.4 million after tax). Adjusted EBITDA declined 24.8% year over year.
Financial position and liquidity
- Cash and cash equivalents were $166.5 million at March 31, 2020, up from $125.4 million at year-end. The filing separately notes a $50 million fixed-rate 90-day deposit maturing June 30, 2020.
- Gross debt was $411.8 million, up from $358.5 million at December 31, 2019; debt net of issuance costs and current maturities was $384.8 million. The weighted-average interest rate was approximately 4.1%.
- Approximately $49.5 million remained available under the senior secured credit agreement. Accel drew $65 million on its delayed-draw term loan in March to bolster liquidity.
- Current assets were $195.0 million and current liabilities $47.1 million. Operating cash use reflected the net loss and working-capital movements; financing cash inflow was $49.2 million, principally from increased borrowing.
- Debt covenants require first-lien net leverage of no more than 4.50 to 1.00 and fixed-charge coverage of at least 1.20 to 1.00. The company reported compliance at quarter-end.
Material changes, outlook and risks
The Illinois Gaming Board ordered all state video gaming terminals shut down beginning March 16, affecting 15 of 91 gaming days in Q1. After quarter-end, the shutdown was extended through April 30 and then, on April 30, until further notice; the state stay-at-home order had been extended through May 30. Accel reported that revenues, results and cash flows were materially affected and that the duration of the disruption and customer return were uncertain.
To conserve cash, Accel furloughed approximately 90% of employees, deferred certain vendor payments and said senior management voluntarily forwent base salaries. Management estimated monthly cash expenses of $2–$3 million during the shutdown. It stated that cash, operating cash flows and borrowing availability should be sufficient for the next 12 months and expected covenant compliance over that period, but cautioned that materially different COVID-19 conditions could create a covenant breach. This outlook depends on uncertain reopening and recovery assumptions; no specific revenue or earnings guidance was provided.
The company recorded no goodwill or long-lived-asset impairment at March 31, but warned that a more prolonged shutdown could result in material impairment losses. The $30 million investment in another terminal operator’s convertible notes was valued at approximately carrying value; its fair-value assessment uses Level 3 inputs. Accel reversed a $2.5 million contingent Grand River payment in Q1 amid the shutdown, contributing to a favorable remeasurement of contingent consideration.
Legal matters include unresolved disputes over rights to certain Illinois gaming locations and other employment/non-compete litigation. Accel said it had not recorded reserves for specified matters because losses were not probable or reasonably estimable; one suit seeks $10 million. The filing also reports that disclosure controls were ineffective as of March 31 because previously disclosed material weaknesses remained, although management stated the financial statements fairly present the company’s results in all material respects.
Key facts for investors to verify
- Current Illinois gaming restart conditions, timing, location-partner retention and player demand after reopening.
- Cash burn during the shutdown, the maturity of the $50 million deposit, and remaining credit-facility availability.
- Debt covenant headroom and compliance under downside operating scenarios; floating-rate debt exposure was estimated at about $4.1 million of additional annual interest for a 1% rate increase at the quarter-end balance.
- Underlying performance excluding Grand River, including the reported hold-per-day decline to $124 from $134 ($132 excluding Grand River for Q1 2020).
- Potential impairment of goodwill and long-lived assets, Level 3 note valuation assumptions, and outcomes of pending litigation and gaming-agreement petitions.
- Progress in remediating the disclosed material weaknesses in disclosure controls.