RCI Hospitality Holdings, Inc. — Q3 FY2015 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended June 30, 2015 (fiscal year ending September 30). RCI operates adult nightclubs and Bombshells restaurants and bars; it reported 45 establishments as of July 31, 2015. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $35.76, up 7.3% year over year | $109.66, up 14.7% |
| Operating income (GAAP) | $14.15 vs. $2.89 | $17.68 vs. $15.97 |
| Operating margin (GAAP) | 39.6% vs. 8.7%; includes $8.17 gain on Texas patron-tax settlement | 16.1% vs. 16.7% |
| Net income attributable to RCI shareholders | $8.27 vs. $0.69; diluted EPS $0.78 vs. $0.07 | $8.79 vs. $6.82; diluted EPS $0.85 vs. $0.69 |
| Adjusted EBITDA (non-GAAP) | $8.21 vs. $7.74 | $28.29 vs. $24.20 |
| Cash provided by operating activities | Not presented for the quarter | $18.28 vs. $13.80 |
- For the quarter, nightclub sales were $30.57 million and Bombshells sales were $4.79 million. Quarterly same-location sales fell 5.3% to $30.2 million from $31.9 million. For nine months, same-location revenue increased modestly to $84.3 million from $83.8 million.
- Nine-month cash flows: investing outflow $6.18 million and financing outflow $7.33 million, resulting in a $4.77 million increase in cash. Cash was $14.73 million at June 30, compared with $9.96 million at September 30, 2014.
- Working capital was negative $1.7 million, improved from negative $15.8 million at September 30, 2014. Total debt was $84.36 million ($11.39 million current and $72.97 million long-term), versus $70.35 million at September 30, 2014.
- At June 30, total assets were $264.99 million and total stockholders’ equity, including noncontrolling interests, was $128.99 million.
Material changes and unusual items
- Quarterly GAAP operating income and earnings were materially boosted by an $8.17 million pre-tax gain from settling the Texas patron-tax matter. The company agreed to pay $10 million over 84 months; the discounted $7.2 million liability was classified as long-term debt. The settlement also reduced the reported current tax liability.
- The New York wage-and-hour class action was settled, subject to court approval, with up to $15 million available to claimants and attorneys. RCI accrued $10.3 million at June 30; scheduled initial and subsequent payments are described in the filing.
- In the nine-month period, reported operating expenses included $10.56 million of lawsuit and other one-time costs, primarily associated with the New York settlement, and a $1.36 million impairment charge for the Lubbock club’s indefinite-lived intangible assets. The prior-year comparison included $3.23 million of quarterly one-time costs.
- Acquisitions included Down in Texas Saloon in January for approximately $6.8 million and The Seville in May for approximately $8.5 million. The company also acquired a controlling interest in energy-drink distributor Drink Robust; the filing recorded a $0.58 million gain on its prior investment.
- Subsequent to quarter-end, a subsidiary acquired the building housing its Miami Gardens nightclub for $15.3 million, financed in part with an $11.325 million note.
Outlook, risks and contingencies
- Management said the near-term outlook remained strong and expected substantial operating cash flow in 2015, but provided no quantified revenue, earnings, or cash-flow guidance. It said cash generation and borrowing capacity supported financial commitments and growth plans.
- Management is considering additional Bombshells locations and expects to continue evaluating nightclub acquisitions. Expansion may require more debt or equity; the company cautioned that future financing on reasonable terms is not assured.
- Risks include regulation of adult-entertainment businesses, competition, same-store sales performance, dependence on key personnel, acquisition and opening execution, and financing availability. Nightclub operations are seasonal, with historically weaker results from April through September.
- Former liability insurer Indemnity Insurance Corporation was placed into liquidation. RCI has filed claims with the receiver but said recovery is uncertain; multiple pending or threatened lawsuits relate to incidents during the former coverage period.
- The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Underlying quarterly profitability after removing the $8.17 million patron-tax settlement gain; reported GAAP operating margin is not a clean indicator of recurring performance.
- Final court approval, claimant participation, payment amount, and timing for the New York settlement, and whether the $10.3 million accrual adequately reflects the ultimate obligation.
- Same-location operating trends: quarterly same-location sales declined, while nine-month same-location revenue was nearly flat; assess performance separately from acquisition-led growth.
- Debt service and liquidity following acquisitions, the Miami Gardens property purchase, and the company’s negative working capital.
- Potential recovery from the insolvent former insurer and the outcome of related litigation; also review the filing’s referenced FY2014 risk factors.
- The filing’s MD&A comparison gives prior-year quarterly operating income as $2.557 million in one table, whereas the consolidated income statement reports $2.892 million. Reconcile this discrepancy against the filed financial statements.