Accel Entertainment, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Accel operates distributed video gaming terminals, amusement equipment and ATMs, primarily in Illinois. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions. The 2020 comparative figures are identified as restated.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $193.4 | $135.1 | $542.4 | $241.9 |
| Operating income (loss) | $18.6 | $9.0 | $53.1 | $(12.7) |
| Net income | $10.8 | $6.8 | $24.8 | $8.1 |
| Diluted EPS | $0.11 | $0.08 | $0.26 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $37.6 | $23.1 | $106.4 | $29.2 |
- Q3 revenue rose 43.1%; nine-month revenue rose 124.2%. Nine-month comparison is heavily affected by Illinois gaming shutdowns in 2020.
- Operating margin was approximately 9.6% in Q3 2021 versus 6.7% in Q3 2020; for the nine-month periods it was approximately 9.8% versus negative 5.3%.
- Net gaming revenue was $186.0 million in Q3 and $520.9 million for nine months. Management cited more terminals and locations, higher location hold-per-day, higher bet-limit software and the addition of a sixth VGT as growth factors.
- Cash from operations was $80.3 million for nine months, versus $4.1 million a year earlier. Investing used $21.2 million, including $18.8 million of property and equipment purchases; financing used $13.6 million. Cash increased to $179.9 million from $134.5 million at year-end 2020.
- At September 30, gross debt was $333.9 million, with $18.3 million current and $309.7 million long-term net of issuance costs. The company reported approximately $100 million of credit-facility availability and was in covenant compliance. Weighted-average interest rate was approximately 3.2%.
- Assets totaled $600.3 million; current liabilities were $65.5 million. The filing reports no dividends.
Material changes and business developments
- Illinois operations had resumed statewide by January 23, 2021. Shutdowns affected approximately 7% of gaming days in the first nine months of 2021, compared with 39% in the comparable 2020 period. At quarter-end, Accel operated 13,384 Illinois VGTs across 2,549 locations, up 15.4% and 7.9%, respectively, year over year.
- Q3 location hold-per-day increased 33.9% to $798; the nine-month figure increased 39.3% to $815. The Illinois gaming tax rate increased from 33% to 34% beginning July 1, 2020.
- On October 22, 2021, after quarter-end, Accel amended its credit agreement: revolving capacity increased from $100 million to $150 million; a $350 million term loan refinanced existing debt; and a new $400 million delayed-draw term facility was established. Maturity was extended to October 22, 2026; stated interest rates and covenants were unchanged.
- Accel announced a planned $140 million cash-and-stock acquisition of Century Gaming, expected to close in the first half of 2022 subject to customary conditions and gaming regulatory approvals. It acquired Georgia operator Island Games in May 2021 for approximately $2.9 million.
Outlook, risks and unusual items
- Management said cash, operating cash flow and borrowing availability should cover capital needs for the next 12 months, and expects to meet obligations and remain within debt covenants. No quantified revenue or earnings guidance is provided.
- COVID-19, variants and possible renewed state or regional gaming restrictions remain significant risks; renewed closures could materially affect results and potentially cause impairment losses. Management also noted seasonality, with gaming revenue generally lower in summer.
- Interest-rate exposure is material: management estimated a 100-basis-point increase would raise annual interest expense by approximately $3.3 million, assuming debt remained at $333.9 million.
- Accel notified a terminal-operator investee in July 2021 that it was converting $30 million of convertible notes and accrued interest into equity. Regulatory approval remained pending at September 30, and the parties were discussing ownership percentage; changes in valuation assumptions could materially affect the investment, recorded at $37.6 million as a Level 3 asset.
- Fair-value changes and other unusual items affected reported earnings, including a $6.9 million nine-month loss on contingent earnout shares and $8.9 million of other expenses, primarily including contingent-consideration remeasurement. Q3 2020 tax benefit included an $8 million favorable return-to-provision adjustment.
- Legal matters include an Illinois Gaming Board disciplinary complaint seeking a $5 million fine and litigation seeking $10 million on its face. Accel disputes the allegations and recorded no accrual, stating losses were not probable or reasonably estimable. A separate J&J-related dispute has no current damages estimate; the IGB had ruled largely in Accel’s favor, and J&J challenged those rulings.
- Disclosure controls and procedures were not effective at September 30 because previously identified material weaknesses remained. Management nevertheless stated it believes the financial statements fairly present the company’s financial condition, results and cash flows.
Investor verification priorities
- Review the prior-period restatements and the disclosed material weaknesses in financial reporting controls.
- Confirm the status, final terms and financing of the Century Gaming acquisition, and the post-quarter credit-agreement refinancing and delayed-draw facility.
- Track regulatory approval and ownership discussions regarding conversion of the $30 million convertible notes, including potential fair-value changes.
- Monitor Illinois gaming restrictions, location hold-per-day and terminal/location growth, and assess how much reported growth reflects recovery from 2020 shutdowns.
- Follow outcomes of the IGB complaint and pending litigation, for which the company has not recorded reserves.