Accel Entertainment(ACEL) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023, covering operations, balance sheets, and cash flows Condensed Consolidated Statements of Operations and Comprehensive Income For Q3 2023, total net revenues grew 7.7% to $287.5 million, but net income declined 53.4% to $10.5 million, primarily due to a loss on contingent earnout shares and higher interest expenses Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 | YoY Change | Nine Months 2023 | Nine Months 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $287,497 | $266,967 | 7.7% | $873,352 | $691,727 | 26.3% | | Operating Income | $25,120 | $23,239 | 8.1% | $81,956 | $71,761 | 14.2% | | Net Income | $10,450 | $22,444 | (53.4%) | $29,615 | $60,696 | (51.2%) | | Diluted EPS | $0.12 | $0.25 | (52.0%) | $0.34 | $0.66 | (48.5%) | Condensed Consolidated Balance Sheets As of September 30, 2023, total assets increased slightly to $871.4 million, while total liabilities decreased to $672.6 million, and stockholders' equity grew to $198.8 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $230,388 | $224,113 | | Total current assets | $282,650 | $299,212 | | Total assets | $871,408 | $862,769 | | Total current liabilities | $92,217 | $89,905 | | Total debt, net of current maturities | $484,004 | $518,566 | | Total liabilities | $672,634 | $684,179 | | Total stockholders' equity | $198,774 | $178,590 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash from operations increased to $92.0 million, while investing activities used less cash, and financing activities reversed to a net use Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $92,007 | $78,250 | | Net cash used in investing activities | $(35,404) | $(168,871) | | Net cash (used in) provided by financing activities | $(50,328) | $103,898 | | Net increase in cash and cash equivalents | $6,275 | $13,277 | Notes to the Condensed Consolidated Financial Statements The notes provide detailed information on business operations, accounting policies, acquisitions, debt, and legal contingencies, including revenue disaggregation and share repurchase program details - The company's business primarily consists of installing, maintaining, and operating gaming terminals and ATMs in non-casino locations like restaurants, bars, and convenience stores across several states including Illinois, Montana, and Nevada[19] Net Revenues by State (in thousands) | State | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Illinois | $212,113 | $200,914 | $647,903 | $601,735 | | Montana | $39,362 | $33,456 | $115,088 | $44,282 | | Nevada | $28,003 | $28,439 | $87,833 | $37,359 | | Other | $8,019 | $4,158 | $22,528 | $8,351 | - In May 2023, the company settled its dispute with Gold Rush Amusements, receiving $32.5 million, which resolved all outstanding obligations under the convertible notes[33] - The company's Board of Directors approved a $200 million share repurchase program, under which 10,010,374 shares totaling $103.6 million were acquired as of September 30, 2023[103] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial results, highlighting a 26.3% year-over-year revenue increase for the first nine months of 2023, despite a significant decline in net income due to non-cash charges and higher interest expenses Results of Operations For Q3 2023, revenues increased 7.7% to $287.5 million, but net income fell 53.4% to $10.5 million, primarily due to a loss on contingent earnout shares and increased net interest expense Q3 2023 vs Q3 2022 Performance (in thousands) | Metric | Q3 2023 | Q3 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $287,497 | $266,967 | $20,530 | 7.7% | | Operating income | $25,120 | $23,239 | $1,881 | 8.1% | | Net income | $10,450 | $22,444 | $(11,994) | (53.4)% | Nine Months 2023 vs 2022 Performance (in thousands) | Metric | Nine Months 2023 | Nine Months 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $873,352 | $691,727 | $181,625 | 26.3% | | Operating income | $81,956 | $71,761 | $10,195 | 14.2% | | Net income | $29,615 | $60,696 | $(31,081) | (51.2)% | - The increase in general and administrative expenses for the nine months ended Sep 30, 2023, was driven by higher payroll costs, parts and repair expense, stock-based compensation, and a $1.1 million settlement with the Illinois Gaming Board (IGB)[168] Key Business Metrics The company's growth is monitored through the number of locations and gaming terminals, which increased by 4.8% and 7.1% respectively year-over-year as of September 30, 2023 Number of Locations by State | State | As of Sep 30, 2023 | As of Sep 30, 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Illinois | 2,724 | 2,596 | 4.9% | | Montana | 611 | 586 | 4.3% | | Nevada | 352 | 335 | 5.1% | | Total locations | 3,687 | 3,517 | 4.8% | Number of Gaming Terminals by State | State | As of Sep 30, 2023 | As of Sep 30, 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Illinois | 15,020 | 14,033 | 7.0% | | Montana | 6,252 | 5,782 | 8.1% | | Nevada | 2,744 | 2,614 | 5.0% | | Total gaming terminals | 24,016 | 22,429 | 7.1% | Non-GAAP Financial Measures Adjusted EBITDA, a non-GAAP measure, increased by 7.3% to $44.1 million for Q3 2023 and by 14.9% to $136.9 million for the nine-month period, reflecting growth in locations and terminals Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $10,450 | $22,444 | $29,615 | $60,696 | | Adjusted EBITDA | $44,138 | $41,125 | $136,869 | $119,083 | Liquidity and Capital Resources The company ended Q3 2023 with $230.4 million in cash and cash equivalents, believing existing cash, operating cash flows, and borrowing availability are sufficient for future capital requirements - As of September 30, 2023, the company had $230.4 million in cash and cash equivalents[185] - In June 2023, the company drew $100 million on its delayed draw term loan facility, with $342 million remaining available under the Credit Agreement as of September 30, 2023[189] - The company was in compliance with all debt covenants as of September 30, 2023, and expects to remain so for the next 12 months[195] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $515.5 million floating-rate debt, which it mitigates using interest rate caplets to hedge cash flow variability - The company is exposed to interest rate risk on its $515.5 million of floating-rate debt, where a 1.0% increase would raise annual interest expense by approximately $2.2 million[208] - To manage interest rate risk, the company uses a 4-year series of interest rate caplets to hedge cash flow variability on the first $300 million of its term loan, protecting against the 1-month LIBOR/SOFR rate exceeding 2%[208] Controls and Procedures Management concluded that previously identified material weaknesses in internal controls persisted as of September 30, 2023, rendering disclosure controls ineffective, yet the financial statements are fairly presented - The CEO and CFO concluded that material weaknesses identified in the 2022 Form 10-K were still present as of September 30, 2023, rendering disclosure controls and procedures ineffective[210] - Notwithstanding the material weaknesses, management asserts that the condensed consolidated financial statements in this Form 10-Q are fairly presented in all material respects[211] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal matters, including a $1.1 million settlement with the Illinois Gaming Board in Q3 2023 and ongoing disputes with competitors over contractual rights - On July 6, 2023, the company entered into a settlement agreement with the IGB for $1.1 million to resolve a disciplinary complaint, which was paid in Q3 2023[121] - The company remains involved in a series of litigated matters with J&J Ventures Gaming, LLC, stemming from claims of tortious interference with contracts dating back to 2012[112][114] Risk Factors The company highlights key business risks, emphasizing that unfavorable economic conditions and instability in the financial services industry could adversely affect revenue and operations - Unfavorable economic conditions, including recession, inflation, and rising interest rates, pose a significant risk by potentially reducing players' disposable income and gaming activity, adversely affecting revenue[217][219] - Instability in the U.S. and global banking systems could lead to less favorable financing terms, tighter credit access, and potential financial distress for location partners, negatively impacting operations[218][222] Issuer Purchases of Equity Securities Under its $200 million share repurchase program, the company bought back 301,199 shares of Class A-1 common stock in Q3 2023 at an average price of $11.10 per share, with $96.4 million remaining available Share Repurchases in Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Max. Value Remaining for Purchase (in millions) | | :--- | :--- | :--- | :--- | | July 2023 | — | $— | $99.7 | | August 2023 | — | $— | $99.7 | | September 2023 | 301,199 | $11.10 | $96.4 | | Total Q3 | 301,199 | $11.10 | | - The share repurchase program, approved in November 2021, authorizes up to $200 million in repurchases of Class A-1 common stock[224]