Accel Entertainment(ACEL) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2023, show a significant increase in total net revenues to $585.9 million for the six-month period, up 37.9% year-over-year, largely driven by the acquisition of Century Gaming, though net income decreased by 49.9% to $19.2 million for the same period, impacted by higher operating expenses, increased interest expense, and a loss on the change in fair value of contingent earnout shares, while the balance sheet remains stable with total assets at $863.3 million and cash flow from operations increased to $63.8 million for the first six months of 2023 Condensed Consolidated Statements of Operations and Comprehensive Income For the three months ended June 30, 2023, total net revenues increased 28.4% YoY to $292.6 million, while net income decreased 55.6% to $10.0 million, and for the six-month period, revenues grew 37.9% to $585.9 million, but net income fell 49.9% to $19.2 million, primarily driven by higher operating costs, a significant increase in interest expense, and a loss on the change in fair value of contingent earnout shares, which contrasted with a gain in the prior year Condensed Consolidated Statements of Operations (Unaudited, In thousands) | Financial Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $292,647 | $227,869 | $585,855 | $424,760 | | Operating income | $29,164 | $27,315 | $56,836 | $48,522 | | Net income | $9,983 | $22,464 | $19,165 | $38,252 | | Diluted EPS | $0.11 | $0.24 | $0.22 | $0.41 | Condensed Consolidated Balance Sheets As of June 30, 2023, the company's balance sheet shows total assets of $863.3 million, a slight increase from $862.8 million at year-end 2022, with cash and cash equivalents increasing to $233.4 million, while total liabilities decreased slightly to $674.5 million, primarily due to a reduction in long-term debt, and total stockholders' equity grew to $188.7 million from $178.6 million at the end of 2022 Condensed Consolidated Balance Sheet Highlights (Unaudited, In thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $233,434 | $224,113 | | Total current assets | $280,911 | $299,212 | | Property and equipment, net | $235,682 | $211,844 | | Goodwill | $101,554 | $100,707 | | Total assets | $863,294 | $862,769 | | Liabilities & Equity | | | | Total current liabilities | $92,752 | $89,905 | | Debt, net of current maturities | $489,721 | $518,566 | | Total liabilities | $674,546 | $684,179 | | Total stockholders' equity | $188,748 | $178,590 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities increased significantly to $63.8 million from $41.2 million in the prior-year period, net cash used in investing activities decreased sharply to $16.2 million from $137.3 million, mainly due to lower acquisition spending compared to the Century acquisition in 2022, and net cash used in financing activities was $38.3 million, a reversal from $117.4 million provided in the prior year, reflecting lower debt proceeds and continued share repurchases Condensed Consolidated Statements of Cash Flows (Unaudited, In thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $63,845 | $41,211 | | Net cash used in investing activities | ($16,245) | ($137,267) | | Net cash (used in) provided by financing activities | ($38,279) | $117,438 | | Net increase in cash and cash equivalents | $9,321 | $21,382 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's accounting policies and provide further information on financial statement items, including its business as a distributed gaming operator in seven states, the settlement of the Gold Rush convertible notes for $32.5 million, recent business acquisitions including Rendezvous and IGE, a pending acquisition in Louisiana, details of the $518.2 million in outstanding debt, and a $1.1 million settlement with the Illinois Gaming Board (IGB) - The company operates as a distributed gaming operator in Illinois, Montana, Nevada, Georgia, Nebraska, Iowa, and Pennsylvania[15] - On May 31, 2023, the company settled its dispute with Gold Rush Amusements, receiving $32.5 million and resolving all outstanding obligations under the convertible notes[29] - In 2023, the company acquired Rendezvous Casino in Montana for $2.6 million and certain assets of Illinois Gaming Entertainment for $1.5 million, with a pending acquisition of a Louisiana operator also underway[54][55][56] - On July 6, 2023, the company entered into a settlement agreement with the Illinois Gaming Board (IGB) for $1.1 million related to a 2020 disciplinary complaint[115] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 28.4% revenue growth for Q2 2023 primarily to the full-quarter impact of the Century Gaming acquisition and organic growth in locations and gaming terminals, despite net income declining due to increased costs, higher interest rates on debt, and non-cash charges related to contingent earnout shares, while the company maintains strong liquidity with $233.4 million in cash and $342 million available under its credit facility, with key metrics showing a 4.8% increase in locations and a 7.4% increase in gaming terminals year-over-year Results of Operations For Q2 2023, revenues rose 28.4% YoY to $292.6 million, driven by a 27.1% increase in net gaming revenue, with operating income growing modestly by 6.8% to $29.2 million, while net income fell 55.6% to $10.0 million, and for the six-month period, revenues increased 37.9% to $585.9 million, with operating income up 17.1% to $56.8 million, while net income decreased 49.9% to $19.2 million, largely fueled by the Century acquisition which expanded operations in Montana and Nevada Q2 2023 vs Q2 2022 Performance (In thousands) | Metric | Q2 2023 | Q2 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $292,647 | $227,869 | $64,778 | 28.4% | | Operating income | $29,164 | $27,315 | $1,849 | 6.8% | | Net income | $9,983 | $22,464 | ($12,481) | (55.6)% | H1 2023 vs H1 2022 Performance (In thousands) | Metric | H1 2023 | H1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $585,855 | $424,760 | $161,095 | 37.9% | | Operating income | $56,836 | $48,522 | $8,314 | 17.1% | | Net income | $19,165 | $38,252 | ($19,087) | (49.9)% | - The increase in revenues for both the three and six-month periods was primarily driven by higher net gaming revenue attributable to an increase in gaming terminals and locations, largely due to the acquisition of Century[146][158] Key Business Metrics As of June 30, 2023, the company operated in 3,655 locations, a 4.8% increase from the prior year, with the total number of gaming terminals growing by 7.4% to 23,759, and growth observed across all primary markets: Illinois, Montana, and Nevada Number of Locations by State | State | As of June 30, 2023 | As of June 30, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Illinois | 2,690 | 2,572 | 4.6% | | Montana | 610 | 585 | 4.3% | | Nevada | 355 | 332 | 6.9% | | Total | 3,655 | 3,489 | 4.8% | Number of Gaming Terminals by State | State | As of June 30, 2023 | As of June 30, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Illinois | 14,767 | 13,801 | 7.0% | | Montana | 6,210 | 5,742 | 8.2% | | Nevada | 2,782 | 2,585 | 7.6% | | Total | 23,759 | 22,128 | 7.4% | Non-GAAP Financial Measures Adjusted EBITDA for Q2 2023 was $46.6 million, a 9.1% increase from $42.7 million in Q2 2022, and for the six months ended June 30, 2023, Adjusted EBITDA grew 18.9% to $92.7 million, reflecting the increase in locations and gaming terminals, primarily from the Century acquisition Adjusted EBITDA Reconciliation (In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $9,983 | $22,464 | $19,165 | $38,252 | | Adjusted EBITDA | $46,612 | $42,716 | $92,730 | $77,958 | Liquidity and Capital Resources The company believes its $233.4 million in cash, operating cash flows, and borrowing availability will be sufficient for capital requirements over the next twelve months, with total debt under the Senior Secured Credit Facility at $521.1 million as of June 30, 2023, and $342 million of availability remaining, and in June 2023, the credit agreement was amended to replace LIBOR with SOFR as the reference interest rate - As of June 30, 2023, the company had $233.4 million in cash and cash equivalents[177] - The company was in compliance with all debt covenants as of June 30, 2023, and had $342 million of availability under its Credit Agreement[182][189] - In June 2023, the Credit Agreement was amended to replace the LIBOR interest rate with the Secured Overnight Financing Rate (SOFR)[182] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations on its $521.1 million of floating-rate debt, where a 100 basis point (1.0%) increase in interest rates would increase annual interest expense by approximately $2.2 million, a risk partially mitigated by interest rate caplets hedging the first $300 million of the term loan - The company is exposed to interest rate risk on its $521.1 million of borrowings under its senior secured credit facility[200] - A 1.0% (100 basis points) increase in interest rates would increase annual interest expense by approximately $2.2 million[200] - To mitigate risk, the company uses interest rate caplets to hedge the variability of cash flows on the first $300 million of its term loan[200] Controls and Procedures Management, including the CEO and CFO, concluded that as of June 30, 2023, the company's disclosure controls and procedures were not effective, based on the continued presence of material weaknesses previously identified in the 2022 Annual Report on Form 10-K, despite management's belief that the financial statements are fairly presented - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2023[202] - The ineffectiveness is due to material weaknesses previously identified in the Annual Report on Form 10-K for the year ended December 31, 2022, which were still present[202] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, with a notable recent development being the July 6, 2023 settlement with the Illinois Gaming Board (IGB) for $1.1 million regarding a 2020 disciplinary complaint, and other ongoing matters include disputes with competitors over contractual rights and challenges to municipal taxes - On July 6, 2023, the company and the IGB entered into a settlement agreement for $1.1 million to resolve a disciplinary complaint from December 2020, with the amount paid in Q3 2023[115] - The company is involved in ongoing litigation with J&J Ventures Gaming, LLC over contractual rights to certain licensed establishments dating back to 2012[106][108] Risk Factors The company highlights updated risks related to unfavorable macroeconomic conditions and instability in the financial services industry, where a recession, inflation, or rising interest rates could reduce players' disposable income and harm business, and instability in the banking sector could make it more difficult for the company to obtain financing on favorable terms - Unfavorable economic conditions, such as recession, inflation, and rising interest rates, could reduce players' disposable income and gaming activity, adversely affecting revenue[210][211] - Adverse developments in the financial services industry, such as bank failures, could lead to market-wide credit and liquidity problems, potentially making it more difficult for Accel to obtain financing on favorable terms[213][214] Unregistered Sales of Equity Securities and Use of Proceeds Under its $200 million share repurchase program, the company repurchased 887,174 shares of its Class A-1 common stock during the second quarter of 2023 for a total cost of approximately $8.1 million, with approximately $99.7 million remaining available for future repurchases as of June 30, 2023 Share Repurchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining in Program (millions) | | :--- | :--- | :--- | :--- | | April 2023 | 481,515 | $8.96 | $103.5 | | May 2023 | 311,442 | $9.26 | $100.6 | | June 2023 | 94,217 | $9.66 | $99.7 | | Total | 887,174 | $9.14 | | - The company has a board-approved share repurchase program for up to $200 million of its Class A-1 common stock[215] Other Information On May 18, 2023, CEO and President Andrew Rubenstein entered into a pre-arranged Rule 10b5-1 stock sale plan, allowing for the potential sale of up to 750,000 shares of Class A-1 common stock between August 16, 2023, and April 1, 2024, subject to certain minimum price thresholds - CEO Andrew Rubenstein established a Rule 10b5-1 trading plan for the potential sale of up to 750,000 shares of Class A-1 common stock[220] - The sales are scheduled to occur between August 16, 2023, and April 1, 2024, provided the stock price meets specified minimum thresholds[220]