RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016; comparisons are to the periods ended March 31, 2015. Amounts are in U.S. dollars unless stated otherwise. The company operated adult nightclubs and Bombshells restaurants and bars; it reported 43 establishments as of April 30, 2016.
Financial performance
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Revenue | $34.4 million, down 1.7% year over year | $67.9 million, down 1.9% |
| Operating income | $7.55 million; 22.0% margin | $13.27 million; 19.5% margin |
| Net income attributable to RCIHH | $5.51 million; diluted EPS $0.54 | $8.06 million; diluted EPS $0.78 |
| Operating cash flow | Not separately provided | $11.11 million, versus $13.12 million |
| Adjusted EBITDA (non-GAAP) | $9.65 million, versus $10.20 million | $17.84 million, versus $19.83 million in the reconciliation table |
For the six months, cash flow from investing was negative $12.93 million, including $13.56 million of property and equipment additions. Financing cash flow was positive $2.86 million. Cash increased by $1.04 million to $9.06 million. Operating cash flow less reported capital additions was approximately negative $2.45 million.
At March 31, 2016, total assets were $276.47 million and total liabilities were $144.55 million. Total debt, including current maturities, was $101.71 million, compared with $94.58 million at September 30, 2015. Current assets of $17.65 million were below current liabilities of $20.42 million; management reported negative working capital of $2.8 million, improved from negative $5.7 million. Stockholders’ equity totaled $131.92 million.
Changes versus prior periods
- Quarterly revenue declined $0.6 million, mainly from slightly lower same-location club sales. Six-month revenue fell $1.3 million; management cited lower same-store sales and lower VIP spending. Nightclub sales decreased, while Bombshells sales increased modestly.
- Reported quarterly operating results improved from a $2.62 million loss to $7.55 million income, largely because the prior-year quarter included $10.30 million of lawsuit settlement and other one-time costs. Excluding those costs, management reported operating margins of 22.1% for 2016 and 22.0% for 2015.
- Six-month net income attributable to RCIHH rose from $0.52 million to $8.06 million, while adjusted EBITDA declined. The 2015 comparison included $10.55 million of lawsuit and one-time costs and a $1.36 million impairment.
- Interest expense increased to $3.88 million for the six months from $3.40 million. Debt rose with real-estate purchases and construction financing. The company bought the New York club property for $10.0 million, financed with a 5% bank loan, and was constructing a headquarters using a loan facility.
- The company repurchased and retired 500,902 shares for $4.7 million and paid $0.03 per share in dividends during the six-month period.
Outlook, risks and unusual items
- Management said the near-term outlook remained strong and expected substantial operating cash flow in fiscal 2016, but gave no quantified revenue or earnings guidance. It cited seasonal softness in nightclub revenue from April through September.
- A $1.75 million FICA tip-credit benefit, relating to prior years and an estimate through March 31, 2016, reduced income tax expense. This is a significant nonrecurring item in interpreting reported earnings.
- The company’s Texas patron-tax settlement requires $10 million in installments over 84 months, without interest, and ongoing monthly remittance based on $5 per customer. The discounted settlement balance was $6.6 million at March 31, 2016.
- The New York wage-and-hour settlement had $3.6 million accrued at period-end. The company also described unresolved litigation concerning a Bombshells lease and possible claims connected to its former insurer, which is in liquidation; recovery from the insurer is uncertain.
- Management cited risks including regulation and legal requirements for adult businesses, competition, real-estate conditions, financing availability, expansion execution, key-person dependence, and cybersecurity. The company stated it had no established credit lines beyond its existing debt and described future financing availability as uncertain.
- The filing reports effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the filing’s six-month adjusted EBITDA figures: the non-GAAP reconciliation reports $19.831 million for 2015, while the liquidity discussion lists $19.612 million.
- Assess how much of current-period earnings reflects sustainable operations versus the $1.75 million tax credit and the unusually large prior-year lawsuit charge.
- Review debt maturities, interest rates, the Texas patron-tax payment schedule, and financing needs for property purchases and expansion.
- Track same-store sales and VIP spending, nightclub versus Bombshells performance, and the seasonal effects management describes.
- Monitor the outcome and potential costs of the disclosed legal matters, including the landlord dispute and claims involving the former insurer.