Accel Entertainment(ACEL) - 2023 Q1 - Quarterly Report

Part I: Financial Information Financial Statements This section presents the unaudited condensed consolidated financial statements for Accel Entertainment, Inc. for the quarter ended March 31, 2023, including statements of operations, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies and significant events Condensed Consolidated Statements of Operations and Comprehensive Income For the three months ended March 31, 2023, total net revenues increased by 48.9% year-over-year to $293.2 million, primarily driven by the acquisition of Century, while net income decreased by 41.8% to $9.2 million from $15.8 million in the prior-year period, impacted by higher operating costs, increased interest expense, and a $4.6 million loss on the change in fair value of contingent earnout shares, compared to a $3.4 million gain in Q1 2022, with diluted earnings per share falling to $0.11 from $0.17 Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except EPS) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Net Revenues | $293,208 | $196,891 | 48.9% | | Operating Income | $27,672 | $21,207 | 30.5% | | Net Income | $9,182 | $15,788 | (41.8)% | | Diluted EPS | $0.11 | $0.17 | (35.3)% | - The significant decrease in net income was largely driven by a loss on the change in fair value of contingent earnout shares of $4.6 million in Q1 2023, compared to a gain of $3.4 million in Q1 2022[5] Condensed Consolidated Balance Sheets As of March 31, 2023, the company's total assets increased slightly to $870.3 million from $862.8 million at year-end 2022, with key assets including $228.5 million in cash and cash equivalents, $225.8 million in net property and equipment, and $101.6 million in goodwill, while total liabilities remained stable at $687.8 million, with total debt (net of current maturities) at $514.1 million, and total stockholders' equity grew to $182.5 million Balance Sheet Summary (in thousands) | Account | March 31, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $228,529 | $224,113 | | Total assets | $870,328 | $862,769 | | Total debt, net of current maturities | $514,146 | $518,566 | | Total liabilities | $687,842 | $684,179 | | Total stockholders' equity | $182,486 | $178,590 | Condensed Consolidated Statements of Cash Flows For the first three months of 2023, net cash provided by operating activities increased significantly to $38.0 million from $22.1 million in the prior-year period, mainly due to favorable working capital changes, while net cash used in investing activities rose to $23.6 million, driven by higher purchases of property and equipment, and net cash used in financing activities decreased to $10.0 million from $19.6 million, primarily due to reduced share repurchases Cash Flow Summary for Three Months Ended March 31 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,983 | $22,061 | | Net cash used in investing activities | $(23,585) | $(6,387) | | Net cash used in financing activities | $(9,982) | $(19,562) | | Net increase (decrease) in cash | $4,416 | $(3,888) | Notes to the Condensed Consolidated Financial Statements The notes detail the company's business operations, accounting policies, and specifics behind the financial statements, including the impact of the Century Gaming acquisition in June 2022, which expanded operations into Montana and Nevada, and provide details on acquisitions, debt facilities, legal contingencies, and the ongoing $200 million share repurchase program - The company is a leading distributed gaming operator in the U.S., with operations expanded into Montana and Nevada following the acquisition of Century Gaming, Inc. in June 2022[16][17] Net Revenues by State for Three Months Ended March 31 (in thousands) | State | 2023 | 2022 | | :--- | :--- | :--- | | Illinois | $219,843 | $194,859 | | Montana | $36,451 | $— | | Nevada | $29,961 | $— | | Other | $6,953 | $2,032 | | Total | $293,208 | $196,891 | - The company is involved in several legal proceedings, including a dispute with Gold Rush over convertible notes, litigation with J&J Ventures Gaming, and a disciplinary complaint from the Illinois Gaming Board (IGB) seeking a $5 million fine[96][103][104] - Under its $200 million share repurchase program, the company bought back 476,718 shares for $4.2 million during the first quarter of 2023, and as of March 31, 2023, a total of 8.8 million shares have been repurchased for $92.2 million under the plan[89] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 48.9% year-over-year revenue growth in Q1 2023 primarily to the acquisition of Century Gaming, with increased operating expenses driven by Century's integration, higher payroll costs, and increased professional fees, while interest expense rose 97.2% due to higher average debt and interest rates, Adjusted EBITDA increased 30.9% to $46.1 million, and the company maintains a strong liquidity position with $228.5 million in cash and believes it has sufficient capital for the next twelve months - The acquisition of Century Gaming, Inc. on June 1, 2022, for $164.3 million is the primary driver of increased revenues and expenses in the first quarter of 2023[120] Key Business Metrics as of March 31 | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Locations | 3,628 | 2,565 | 41.4% | | Total Gaming Terminals | 23,497 | 13,663 | 72.0% | Non-GAAP Financial Measures for Three Months Ended March 31 (in thousands) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Adjusted Net Income | $21,064 | $17,605 | 19.6% | | Adjusted EBITDA | $46,118 | $35,242 | 30.9% | - The company believes its cash on hand of $228.5 million, cash flows from operations, and borrowing availability under its credit facility are sufficient to meet capital requirements for the next twelve months[154] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations on its $540.8 million of borrowings under its senior secured credit facility, which it mitigates through interest rate caplets hedging the first $300 million of its term loan if the 1-month LIBOR rate exceeds 2%, where a hypothetical 1% increase in interest rates would increase annual interest expense by approximately $2.4 million on the outstanding floating-rate debt - The company's main market risk is interest rate risk on its $540.8 million of floating-rate debt as of March 31, 2023[176] - To manage interest rate risk, the company uses interest rate caplets to hedge the first $300 million of its term loan against the 1-month LIBOR rate rising above 2%[176] Controls and Procedures Management, including the CEO and CFO, concluded that as of March 31, 2023, the company's disclosure controls and procedures were not effective due to previously identified material weaknesses in the Annual Report on Form 10-K for the year ended December 31, 2022, though management believes the condensed consolidated financial statements in this report are fairly presented in all material respects - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to previously identified material weaknesses[179] - Notwithstanding the material weaknesses, management asserts that the financial statements included in the Form 10-Q are fairly presented in all material respects[180] Part II: Other Information Legal Proceedings This section incorporates by reference the information on legal matters discussed in Note 16, "Commitments and Contingencies," of the condensed consolidated financial statements, covering key legal issues including disputes with J&J Ventures, Gold Rush, and a disciplinary complaint from the Illinois Gaming Board - Information regarding legal proceedings is detailed in Note 16 of the financial statements[183] Risk Factors The company states there have been no material changes to the risk factors disclosed in its 2022 Annual Report on Form 10-K, except for newly highlighted risks, including the potential adverse effects of unfavorable economic conditions (recession, inflation, rising interest rates) on discretionary spending and location partner viability, and risks related to adverse developments in the financial services industry, which could impact access to credit and liquidity - New risk factors have been added concerning unfavorable economic conditions, such as recession and inflation, which could reduce players' disposable income and harm the business[186][188] - The company has also identified new risks related to adverse developments in the financial services industry, which could impact its financial condition and access to capital[190][191] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity under its publicly announced $200 million program, where during the first quarter of 2023, the company repurchased a total of 476,718 shares of its Class A-1 common stock at an average price of $8.82 per share, for a total cost of approximately $4.2 million, and as of March 31, 2023, approximately $107.8 million remained available for future repurchases under the program Share Repurchases in Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining in Program (in millions) | | :--- | :--- | :--- | :--- | | Jan 2023 | 249,821 | $8.69 | $109.8 | | Feb 2023 | 1,600 | $9.02 | $109.8 | | Mar 2023 | 225,297 | $8.97 | $107.8 | | Total Q1 | 476,718 | $8.82 | $107.8 | Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None Mine Safety Disclosures This item is not applicable to the company's business - Not applicable Exhibits This section lists the exhibits filed with the Form 10-Q, including forms of Restricted Stock Unit Award Agreements, officer certifications as required by the Sarbanes-Oxley Act, and XBRL data files - Exhibits filed include forms of employee stock award agreements and required CEO/CFO certifications[198]