RCI Hospitality Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2016. Unless noted otherwise, financial amounts are in millions of dollars. The company operates adult nightclubs and Bombshells restaurants and bars; it reported 43 establishments as of July 31, 2016.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $33.952 | $33.466 | $101.823 | $102.660 |
| Operating income | $6.657 | $14.152 | $19.924 | $17.676 |
| Net income attributable to RCI shareholders | $2.653 | $8.267 | $10.710 | $8.786 |
| Diluted EPS | $0.27 | $0.78 | $1.06 | $0.85 |
| Cash from operating activities | Not provided by quarter | $18.498 | $18.280 | |
| Adjusted EBITDA | $8.642 | $8.105 | $26.479 | $27.440 |
- Quarterly revenue rose 1.5%; nine-month revenue declined 0.8%. For the nine months, beverage sales increased 3.0%, while food and merchandise sales fell 5.5% and service revenue fell 4.7%.
- GAAP operating margin was 19.6% for both 2016 periods; the 2015 quarter’s reported 42.3% margin included an $8.167 million patron-tax settlement gain. Excluding that gain, 2015 quarterly margin was 17.9%. Company-reported non-GAAP operating margin was 20.9% versus 19.2% for the quarter and 21.2% versus 21.5% for the nine months.
- Quarterly GAAP income was sharply lower year over year mainly because the prior-year quarter included the patron-tax gain. For the nine months, reported operating income increased, while adjusted EBITDA declined 3.4%.
- Management attributed softer service revenue to lower VIP and big-ticket spending, though it said service revenue had improved in recent quarters. Bombshells revenue grew to $5.005 million for the quarter and $14.013 million for the nine months; nightclub revenue was $28.336 million and $86.272 million, respectively.
- Nine-month operating cash flow was $18.498 million. Investing used $16.948 million, primarily reflecting $17.576 million of property and equipment additions; financing provided $0.892 million. Cash increased $2.442 million to $10.462 million.
- At June 30, current assets were $17.628 million and current liabilities $26.611 million, or approximately $9.0 million of negative working capital. Total debt was $100.949 million, including $13.992 million current and $86.957 million long-term; management said roughly $6 million of notes maturing in June 2017 were classified as current and expected to be refinanced. Debt was reported up 6.7% from the comparable prior-year period.
- Interest expense was $5.918 million for the nine months, versus $5.032 million. Capital returns included $5.781 million spent repurchasing 606,995 shares and $0.591 million in dividends; the company reported $5.8 million remaining under its repurchase authorization at June 30.
Material changes and unusual items
- The company acquired the Manhattan land and building occupied by Rick’s Cabaret New York for $10.0 million in January 2016, financed with a 5% bank loan. It also drew $2.6 million on a construction loan for a new corporate headquarters.
- Nine-month property and equipment additions were $17.576 million, versus $3.967 million in 2015; the filing identifies $14.336 million as real-estate acquisitions.
- Quarterly taxes included $1.0 million accrued for additional New York State and City taxes. Nine-month tax expense benefited from $2.0 million of IRC 45B FICA credits for prior years; the filing says $1.75 million was recorded in the prior quarter and $0.25 million in the June quarter.
- Prior-year comparisons include unusual items: the $8.167 million patron-tax settlement gain, $10.560 million in lawsuit and other one-time costs, and $1.358 million of impairment. 2016 included $0.741 million in lawsuit and other one-time costs for the nine months.
- Revenue for both years was presented net of sales and other revenue-related taxes following an accounting-policy change. The company reclassified $2.3 million for each quarter and $7.0 million for each nine-month period; it states this was a presentation change.
Outlook, risks and contingencies
- Management described the near-term outlook as strong and expected substantial operating cash flow in 2016, but gave no quantified earnings or revenue guidance. It said cash flows should provide flexibility to meet commitments.
- Nightclub results are seasonal: historically, revenues are lower from April through September and strongest from October through March. Growth plans include organic development, acquisitions, new concepts, and real-estate ownership; additional acquisitions may require debt or equity financing.
- The company reported no established credit lines beyond existing notes and debt, and cautioned that future financing may not be available on reasonable terms. It cited regulatory and legal risks affecting adult entertainment, competition, real-estate conditions, cyber security, and dependence on key personnel.
- The Texas patron-tax settlement requires $10.0 million in installments over 84 months; its discounted balance was $6.4 million at June 30, 2016. The company also reported $3.6 million accrued for the New York wage-and-hour settlement, including $1.8 million in accrued liabilities and $1.8 million in long-term liabilities.
- Other legal uncertainties include claims involving the former insurer IIC, which was liquidated and may provide no reimbursement for claims, and a landlord dispute concerning a Houston Bombshells location. The filing says the effect of the latter is uncertain; ordinary-course matters are not expected by management to have a material adverse effect.
- Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether revenue and VIP spending trends improve, particularly at nightclubs, and whether Bombshells’ growth continues.
- The operating cash flow and debt-service capacity behind management’s outlook, including refinancing of approximately $6 million due in June 2017.
- Returns from the elevated real-estate and capital spending, including the Manhattan property and corporate headquarters project.
- Actual tax-credit benefits and the final cost or outcome of New York tax accruals and material legal matters.
- Comparability of reported GAAP and company-defined non-GAAP results, especially given prior-year settlement gains, litigation costs, and impairment charges.