Accel Entertainment, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021. Accel operates video gaming terminals and related amusement and ATM services, principally in Illinois. Results are consolidated across one reportable segment.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $196.9 million | $147.1 million | Up 33.9% |
| Operating income | $21.2 million | $9.6 million | Up 121.9% |
| Net income | $15.8 million | $1.5 million | Up $14.3 million |
| Diluted EPS | $0.17 | $0.02 | — |
| Adjusted EBITDA (non-GAAP) | $35.2 million | $25.8 million | Up 36.5% |
| Cash from operations | $22.1 million | $21.6 million | Up $0.5 million |
| Cash and cash equivalents | $194.9 million | $198.8 million at Dec. 31, 2021 | Down $3.9 million |
| Debt under credit facility, before issuance costs | $345.6 million | $350.0 million at Dec. 31, 2021 | Down $4.4 million |
Revenue growth was led by net gaming revenue, up 34.2% to $188.5 million; amusement revenue was $5.0 million, up 23.2%, and ATM and other revenue was $3.4 million, up 34.5%. Operating margin was approximately 10.8%, compared with 6.5%; net margin was approximately 8.0%, compared with 1.0%. The effective tax rate was 23.4%, versus 56.0%.
Operating cash flow was $22.1 million. Investing activities used $6.4 million, primarily for $6.8 million of property and equipment purchases. Financing activities used $19.6 million, including $13.9 million for share repurchases. Cash declined by $3.9 million during the quarter.
At March 31, current assets were $254.6 million and current liabilities were $72.4 million. The company reported approximately $550 million of availability under its credit agreement and said it had sufficient liquidity for the next 12 months. Its term loan had a weighted-average interest rate of approximately 3.6%; the company was in compliance with debt covenants.
Changes versus the prior comparable period
- The comparison is materially affected by the Illinois gaming shutdown and staggered reopening in Q1 2021, which reduced gaming operations by an average of 18 of 90 days. Accel attributed higher Q1 2022 gaming revenue to the absence of that shutdown, more terminals and locations, and higher location hold-per-day.
- At March 31, 2022, Accel reported 2,565 Illinois locations and 13,663 terminals, up 3.8% and 7.4%, respectively, year over year. Location hold-per-day was $811, up 3.4% from a Q1 2021 measure calculated using 72 gaming days.
- Reported net income benefited from a $3.4 million noncash gain on remeasurement of contingent earnout shares, compared with a $2.8 million loss in Q1 2021. Q1 2022 comprehensive income also included a $4.9 million after-tax unrealized gain on interest rate caplets.
- Fourth-quarter 2021 useful-life estimate changes reduced Q1 2022 depreciation by $1.2 million and amortization by $2.7 million, increasing net income by a combined $2.8 million, or $0.03 per share, according to the filing.
Outlook, risks and unusual items
- Outlook: No specific quarterly or full-year earnings guidance is provided. Management expects cash, operating cash flows and credit availability to cover requirements for the next 12 months and expects covenant compliance over that period.
- Century Gaming acquisition: The announced $140 million cash-and-stock acquisition was expected to close in Q2 2022, subject to customary conditions and gaming regulatory approvals. The filing describes funding from cash and credit-facility capacity, plus approximately 490,000 shares.
- Interest-rate exposure: A 100-basis-point increase in rates on the $345.6 million floating-rate debt balance would increase annual interest expense by approximately $3.5 million, assuming the balance stayed constant. In January, Accel entered into four-year interest rate caplets covering the first $300 million of term debt, with protection when one-month LIBOR exceeds 2%.
- Legal and regulatory matters: The Illinois Gaming Board disciplinary complaint seeks a $5 million fine; Accel denies wrongdoing and is contesting it. The company recorded $1.6 million of estimated legal reserves at quarter-end, including a $1.0 million Q1 loss. Other disputes include litigation over location agreements and the Gold Rush convertible notes.
- Gold Rush investment: Accel carried $32.1 million of convertible notes as a current asset at fair value. The IGB denied transfer of the Gold Rush shares Accel elected to receive; the notes were treated as in default for disclosure and presentation purposes because no repayment had been received. Accel filed suit in March and sought judicial review of the IGB decision in April.
- Controls: Management reported that previously identified material weaknesses remained and concluded disclosure controls and procedures were not effective as of March 31, 2022.
- Other risks: Future COVID-related gaming restrictions or shutdowns could adversely affect results and could lead to material impairment losses. Results are also subject to seasonality, gaming regulation, and variable interest rates.
Important facts for investors to verify
- How much of revenue and profit growth reflects recovery from the Q1 2021 shutdown versus sustainable growth in locations, terminals and hold-per-day.
- The effect of the longer useful-life and amortization estimates on reported earnings and comparability, and the company’s non-GAAP adjustments.
- The outcome, recoverability and timing of the Gold Rush notes and the company’s material legal and regulatory proceedings, including the potential $5 million IGB fine.
- The Century Gaming transaction’s closing, regulatory approvals, final funding mix and impact on leverage and liquidity.
- Floating-rate debt exposure and the extent to which the caplets mitigate higher interest costs; confirm current covenant headroom and credit availability.
- Remediation progress for the disclosed material weaknesses in disclosure controls.