Accel Entertainment, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Accel operates distributed gaming and amusement equipment in licensed venues. Results include Century Gaming from its June 1, 2022 acquisition.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $267.0m | $193.4m | $691.7m | $542.4m |
| Operating income | $23.2m | $18.6m | $71.8m | $53.1m |
| Net income | $22.4m | $10.8m | $60.7m | $24.8m |
| Diluted EPS | $0.25 | $0.11 | $0.66 | $0.26 |
| Adjusted EBITDA (non-GAAP) | $41.1m | $37.6m | $119.1m | $106.4m |
Revenue grew 38.1% in Q3 and 27.5% for the nine-month period. Net gaming revenue was $255.6m in Q3 and $662.5m year to date. Operating margins were approximately 8.7% for Q3 and 10.4% year to date, versus 9.6% and 9.8% in the comparable 2021 periods. Net margins were approximately 8.4% and 8.8%, versus 5.6% and 4.6%.
For the nine months, operating cash flow was $78.3m, compared with $80.3m. Investing cash outflow was $168.9m, principally reflecting acquisitions and capital spending; financing cash inflow was $103.9m. Cash and equivalents were $212.1m at quarter end.
Balance sheet, debt and liquidity
Funded borrowings under the senior secured credit facility were $525.0m, compared with $350.0m at December 31, 2021; reported debt net of issuance costs was $521.4m. The facility had approximately $355m of remaining availability and a weighted-average interest rate of about 3.7% at quarter end. The company reported compliance with its debt covenants and expects to meet obligations and remain compliant over the next 12 months. Current assets were $283.7m and current liabilities $92.7m.
Management believes cash, operating cash flow and available borrowing capacity will cover capital requirements for the next 12 months. It estimated 2022 capital expenditures of approximately $38m–$43m. Accel hedged the first $300m of term-loan exposure with interest-rate caplets; management estimated a 100-basis-point increase in rates would otherwise add about $2.3m of annual interest expense at the reported debt balance.
Key changes and unusual items
- Century’s acquisition expanded operations into Montana and Nevada and added gaming-terminal manufacturing. The acquisition consideration was $164.3m; the preliminary allocation included $53.3m of goodwill. The company also acquired Nebraska and regional amusement/ATM operations during 2022.
- Reported earnings benefited from a $10.4m Q3 and $19.5m year-to-date gain from remeasurement of contingent earnout shares. This non-cash fair-value item was driven primarily by Accel’s share price.
- Management’s 2021 estimate changes lengthened useful lives for gaming equipment and certain acquired contracts. The changes increased 2022 net income by $2.9m in Q3 and $8.5m year to date, including $0.09 per share year to date.
- Interest expense increased 106.9% in Q3 and 44.1% year to date, primarily from higher average debt and interest rates, partly offset by caplet benefits.
- Q3 and year-to-date comparisons also reflect Century and, for the nine-month comparison, the 2021 Illinois COVID-related shutdown, which affected 18 gaming days. The filing attributes growth primarily to expanded locations and terminals and these comparability factors.
- The company repurchased 5.68m shares for $61.9m during the first nine months under its $200m authorization. Approximately $129.1m remained available at September 30.
Outlook, risks and contingencies
Management reported no material adverse business impact to date from inflation, fuel costs, rising rates or recession concerns, but warned that reduced discretionary spending, partner closures, supply-chain disruption and future COVID-related restrictions could affect results. The business remains subject to extensive gaming regulation, licensing and geographic concentration risks; successful integration of Century is also a stated risk. Seasonal patterns may affect gaming activity.
Notable legal matters include an Illinois Gaming Board disciplinary complaint seeking a $5m fine; the filing reports motions for summary judgment were filed. Accel and Gold Rush have filed opposing lawsuits concerning $32.1m of convertible notes. The IGB denied transfer of the Gold Rush shares; the notes are disclosed as in default for presentation purposes, classified as current, and carried at fair value. Accel recorded a $1.2m legal loss for the nine months related to legal proceedings and disclosed additional unresolved litigation. Management says other ordinary-course claims are not expected to materially affect financial position or results, but one longstanding location-contract matter has no estimable potential damages.
Controls: Management concluded disclosure controls were not effective at September 30, 2022 because material weaknesses previously reported in the 2021 Form 10-K remained present.
Guidance: The filing provides estimated 2022 capital expenditures of $38m–$43m and a 12-month liquidity and covenant expectation; it does not provide a clear revenue or earnings forecast.
Important facts for investors to verify
- Whether Century integration, acquired-market growth and the preliminary purchase-price allocation meet management’s expectations.
- Progress and potential outcomes of the $5m IGB matter, Gold Rush disputes, and other gaming-related litigation and regulatory proceedings.
- Debt levels, floating-rate exposure, hedge effectiveness, covenant headroom and the $355m stated borrowing availability.
- The quality of reported earnings after separating contingent-earnout fair-value gains and the benefit from extended useful-life estimates.
- Remediation of the disclosed material weaknesses and the status of the company’s gaming licenses and market expansion.
- Whether share repurchases and planned capital expenditures remain appropriate given acquisition spending, interest costs and economic conditions.