RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal second quarter and six months ended March 31, 2018; filed May 10, 2018. RCI operated 43 establishments, principally adult nightclubs and Bombshells restaurants and bars, plus an industry-focused business communications company. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended March 31, 2018 | Year-over-year | Six months ended March 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Revenue | $41.2 | +19.4% | $82.4 | +20.8% |
| Operating income / margin | $8.2 / 20.0% | $7.5 / 21.7% | $17.4 / 21.1% | $13.8 / 20.2% |
| Net income attributable to RCIHH shareholders | $4.7 | $3.8 | $19.0 | $6.7 |
| Diluted EPS | $0.48 | $0.39 | $1.95 | $0.68 |
| Adjusted EBITDA (non-GAAP) | $12.4 | $9.2 | $23.5 | $17.2 |
- Quarter revenue growth reflected new units, same-store sales growth, and a small offset from closures. Quarterly same-store sales rose 5.1% at Nightclubs and 2.7% at Bombshells. For the six months, they rose 6.1% and 4.1%, respectively.
- Cash from operations was $14.1 million for the six months, versus $11.0 million a year earlier. Capital expenditures were $9.0 million; maintenance capex was $1.3 million, producing company-defined free cash flow of $12.8 million.
- Cash was $12.5 million at March 31, up from $9.9 million at September 30, 2017. Working capital, excluding assets held for sale, was negative $1.5 million, improved from negative $10.6 million.
- Debt totaled $128.9 million gross ($127.2 million net of issuance costs); balance-sheet current and long-term debt were $12.3 million and $114.9 million. Debt increased from $124.9 million gross at September 30, 2017. The company reported compliance with all debt covenants.
- Quarterly dividends were $0.03 per share; six-month dividends totaled $0.06 per share. No shares were repurchased in the six-month period.
Material changes and unusual items
- Six-month net income includes a $9.7 million discrete tax benefit from remeasuring deferred tax balances after the Tax Act reduced the federal corporate tax rate. Management estimated a fiscal 2018 effective tax rate of approximately 26.5%; the tax remeasurement remained subject to refinement.
- Other charges included a $1.55 million impairment of a note receivable related to Drink Robust, along with higher lawsuit settlements. In April 2018, RCI reported a settlement that increased its Drink Robust ownership to 98.5%; final acquisition accounting and fair value estimates were pending.
- In December 2017, RCI refinanced approximately $81.2 million of debt into three bank notes. The refinancing extended maturities and removed specified balloon payments previously scheduled for fiscal 2018, 2020, and 2021, but included $543,000 of prepayment penalties and a write-off of debt issuance costs.
- Segment revenue for the six months was $70.7 million for Nightclubs and $11.4 million for Bombshells. Operating income was $25.3 million and $1.9 million, respectively; Bombshells margins were affected by inefficiencies at newly opened units.
Outlook, risks, and contingencies
- Management said the near-term outlook remained strong and expected substantial operating cash flow for the remainder of fiscal 2018. It planned to open two Bombshells during fiscal 2018; Bombshells Pearland opened in April.
- Management noted nightclub seasonality: historically, results are strongest October through March and softer April through September. Growth plans include acquisitions, new openings, Bombshells expansion or franchising, and real-estate investment; expansion may require additional financing.
- Controls and procedures were reported ineffective as of March 31, 2018 because of previously identified material weaknesses in staffing and expertise, complex accounting and estimates, financial reporting controls, and system access/segregation of duties. Remediation was underway, including new accounting staff, an ERP system, monitoring software, and outside consultants.
- Contingencies include a dram-shop judgment against a subsidiary, under appeal, with an estimated possible loss of $0–$5.0 million; a landlord dispute involving a Houston Bombshells; and eight unresolved cases associated with former insurer IIC, from which recovery is uncertain. RCI also disclosed risks tied to adult-business regulation, entertainer classification, competition, cyber security, real estate, and key personnel.
Important facts for investors to verify
- How much of reported six-month earnings growth is attributable to the one-time $9.7 million tax benefit versus ongoing operations.
- Debt service, balloon maturities, and financing needs associated with the growth and construction pipeline.
- Whether internal-control remediation is completed, tested, and determined effective.
- Outcomes of the appealed dram-shop judgment and other litigation, including uncertain IIC recoveries.
- Final accounting and valuation for the Drink Robust transaction and collectability of the remaining note receivable.