RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2015, in the company’s fiscal year ending September 30, 2015. The filing is unaudited. RCI operates adult nightclubs and Bombshells restaurants and bars; it reported 45 establishments as of April 30, 2015.
Financial performance
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Revenue | $37.4 million, up 13.8% year over year | $73.9 million, up 18.6% |
| Operating income (loss) | $(2.6) million; 2014: $7.5 million | $3.5 million; 2014: $13.1 million |
| Net income (loss) attributable to RCI shareholders | $(2.8) million; diluted EPS $(0.28) | $0.5 million; diluted EPS $0.05 |
| Adjusted EBITDA (non-GAAP) | $10.2 million; 2014: $9.2 million | $20.2 million; 2014: $16.5 million |
Revenue growth reflected recent acquisitions and openings, as well as same-location club revenue growth of 2.1% for the quarter and 3.0% for the six-month period. Management cited severe winter weather, particularly in Dallas/Fort Worth, as a headwind in the quarter. Bombshells revenue was $4.8 million for the quarter and $9.7 million for six months; the segment reported operating income of $0.6 million and $1.1 million, respectively.
Reported operating results were heavily affected by a $10.3 million accrual for a New York wage-and-hour class-action settlement. Management stated that, excluding this settlement, quarterly operating income would have been $7.7 million and the operating margin 20.4%; for six months, operating income would have been $18.9 million and the margin 18.7%. These are management’s adjusted comparisons; the company also reports separate non-GAAP measures with additional adjustments. GAAP operating margin was (7.0)% for the quarter and 4.8% for six months.
Cash flow, balance sheet, and capital
- Cash and cash equivalents were $13.7 million at March 31, 2015, compared with $10.0 million at September 30, 2014. Six-month operating cash flow was $13.1 million, versus $11.6 million a year earlier; investing cash outflow was $4.1 million and financing cash outflow was $5.3 million. Cash increased $3.7 million.
- Total debt was $71.5 million at March 31, 2015, comprising $8.6 million current and $63.0 million long-term debt. Total debt at September 30, 2014 was $70.4 million. Debt includes variable-rate bank financing and notes with stated rates including 10% and 12%.
- Current assets were $30.5 million and current liabilities $46.2 million, a balance-sheet working-capital deficit of approximately $15.7 million. Management separately reported working capital of $1.4 million after excluding the $17.1 million Texas patron tax liability.
- Total assets were $260.5 million and total equity $120.8 million at March 31, 2015. Capital expenditures were $2.9 million for the six months. The company repurchased 192,427 shares for approximately $1.9 million and converted $1.8 million of debt principal and interest into 177,018 shares.
Material changes and transactions
- In January 2015, the company acquired Down in Texas Saloon and its real estate for approximately $6.8 million, funded with cash, seller financing, and bank debt.
- In October 2014, a 51%-owned subsidiary acquired energy-drink distributor Robust Energy for stated consideration of approximately $5.0 million, including 200,000 subsidiary shares. RCI recorded a $0.6 million gain on its earlier investment. Up to 50,000 additional RCI shares may be issued if Robust meets a specified 2015 earnings condition.
- The company recorded a $1.4 million impairment of indefinite-lived intangible assets at its Temptations Cabaret in Lubbock during the first half.
- After quarter-end, on May 4, 2015, a subsidiary acquired The Seville club and its real estate for $8.5 million, financed with bank debt, seller financing, and cash.
Outlook, contingencies, and risks
- Management described the near-term outlook as strong and expected substantial operating cash flow in 2015, but provided no specific revenue or earnings guidance. Bombshells Willowbrook was scheduled to open in fall 2015; the company also said another Bombshells location was under construction.
- The New York settlement agreement makes up to $15 million available to class members and attorneys. Court preliminary approval was pending; the actual payment depends on claimant participation and final court approval. RCI accrued $10.3 million at March 31 and guaranteed its subsidiaries’ settlement obligations. The filing describes an initial payment of approximately $1.8 million and two subsequent annual installments of the same amount, subject to the settlement terms.
- The Texas patron tax liability was approximately $17.1 million. The U.S. Supreme Court denied a further challenge on March 23, 2015. RCI continued accruing the liability and said it had filed and paid patron taxes for the quarter ended March 31 in connection with settlement negotiations. Management believed penalties might be waived and payment made over time if the matter is lost; that outcome is not assured.
- RCI’s former liability insurer, Indemnity Insurance Corporation, was placed into liquidation. The company funded litigation costs and filed claims with the receiver, but stated that recovery is uncertain. Additional claims related to incidents before the policy ended could arise.
- Management cited competition, adult-entertainment regulation, entertainer worker classification, financing availability, key-person dependence, and the ability to execute expansion as risks. The business is seasonal, with historically weaker results from April through September. The filing said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Final court approval, claimant participation, and ultimate cash cost of the New York settlement versus the $10.3 million accrual and stated $15 million maximum.
- Current status and potential payment schedule for the Texas patron tax liability, including the effect of ongoing settlement discussions on liquidity.
- Whether operating cash flow and management’s working-capital assessment remain sufficient given the reported current-liability deficit and debt obligations.
- Performance of the new club and Bombshells locations, Robust’s results and possible share earnout, and the financing and integration of The Seville acquisition.
- How much of reported adjusted EBITDA and adjusted operating performance depends on exclusions for litigation, patron taxes, impairment, and other items; these non-GAAP measures are not substitutes for GAAP results.