RCI Hospitality Holdings, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports the quarter ended September 30, 2016; this is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context
RCI operates adult-entertainment nightclubs, Bombshells restaurants and sports bars, and smaller “Other” businesses, including its Media Group. At November 30, 2016, it reported 41 establishments. Fiscal-year segment revenue was $113.9 million from nightclubs, $18.7 million from Bombshells, and $2.2 million from Other.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $134.9 million | $135.4 million |
| Income from operations; operating margin | $20.8 million; 15.5% | $20.9 million; 15.4% |
| Net income attributable to RCIHH; diluted EPS | $11.1 million; $1.10 | $9.3 million; $0.90 |
| Adjusted EBITDA (non-GAAP) | $34.5 million | $34.1 million |
| Operating cash flow | $23.0 million | $16.4 million |
| Free cash flow (company-defined, non-GAAP) | $20.5 million | $14.9 million |
| Capital expenditures | $28.1 million | $19.3 million |
| Cash and cash equivalents at year-end | $11.3 million | $8.0 million |
| Long-term debt, including current portion (selected data) | $105.9 million | $94.3 million |
FY2016 revenue declined 0.4%, with same-location sales down 1.3%; higher alcohol sales, rent income and energy-drink sales partly offset weaker food, service and same-store results. Nightclub segment revenue decreased to $113.9 million from $115.5 million, while Bombshells revenue rose to $18.7 million from $17.6 million. Nightclub operating income increased to $33.2 million; Bombshells operating income declined to $1.3 million from $1.8 million.
GAAP net income was $10.3 million; income attributable to RCIHH was $11.1 million because of losses attributable to noncontrolling interests. The effective tax rate was 20.4%, versus 36.5% in FY2015, with tax credits and deferred-tax effects contributing to the change. FY2016 free cash flow is defined by the company as operating cash flow less maintenance capital expenditures, not total capital expenditures.
At September 30, total assets were $276.5 million and total liabilities were $146.3 million. Gross debt was $106.6 million, before $0.7 million of unamortized issuance costs; $76.2 million of debt was secured by real estate. Management described a $2.7 million working-capital deficit excluding $7.7 million of assets held for sale. The balance sheet reports current assets of $29.4 million and current liabilities of $24.5 million; investors should reconcile these presentations.
FY2016 fourth-quarter revenue was $33.0 million, operating income $0.9 million, and net income attributable to RCIHH $0.4 million, compared with $32.8 million, $3.2 million, and $0.5 million, respectively, in the prior-year quarter.
Changes, unusual items and capital allocation
- Other charges included $4.3 million of impairment charges, versus $1.7 million in FY2015. The FY2016 total included impairment of a property held for sale, nightclub intangible assets, and the remaining Drink Robust investment.
- RCI sold a 31% interest in Drink Robust for a $2.0 million note, retaining 20%; it recorded a $0.6 million gain and an $0.8 million impairment of the retained interest. It also sold two clubs and closed a Bombshells location; the transactions included a $1.1 million club-sale gain, a $0.6 million Bombshells closure loss, and deferred gains.
- Capital expenditures increased to $28.1 million, including $22.2 million for real estate. Cash flow from financing included $32.0 million of debt proceeds, $19.2 million of debt payments, $7.3 million of share repurchases and $0.9 million of dividends.
- The company repurchased 747,081 shares during FY2016 and began quarterly dividends of $0.03 per share in March 2016. At year-end, $4.2 million remained under the repurchase authorization.
- In October 2016, after year-end, the company refinanced $8.0 million of debt by borrowing $9.9 million in unsecured debt at 12%, with monthly payments and a balloon payment at five-year maturity.
- FY2015 results included an $8.2 million gain related to settlement of the Texas patron tax and substantial New York wage-and-hour settlement costs. FY2016 revenue and expense comparisons were recast to report sales and similar taxes net; prior-year revenue was reduced by $9.2 million for FY2015 and $7.7 million for FY2014.
Outlook, risks and contingencies
Management said the near-term outlook remained strong and expected substantial operating cash flow in FY2017, but provided no numerical earnings or revenue guidance. It was developing Bombshells franchising, with a stated target of approximately $4.0 million average unit volume for franchise locations; this is a target, not a forecast of company results. Management cited growth through openings, acquisitions, partnerships and real-estate investment, subject to its capital-allocation discipline and financing availability.
- Key risks include regulation and licensing of adult businesses and alcohol sales, local economic sensitivity, competition, seasonality, and potential changes to entertainer independent-contractor classification.
- RCI reported ongoing civil claims connected to its former insurer, Indemnity Insurance Corporation, which was liquidated. The company is funding defense costs and has no assurance of recovering amounts claimed from the receiver. It also disclosed a Bombshells landlord dispute; the outcome and potential financial effect were uncertain.
- Other exposures include possible future impairment of goodwill, licenses and other assets; cyber and payment-data security; food safety; uninsured liabilities; financing needs and debt maturities; and reliance on CEO Eric Langan.
- Nightclub revenues are typically weaker from April through September and stronger from October through March. The filing cautions that quarterly performance can fluctuate.
The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at September 30, 2016.
Important facts for investors to verify
- Reconcile the working-capital deficit cited in MD&A with the current-asset and current-liability balance-sheet totals.
- Review the causes and valuation assumptions behind the $4.3 million impairment charges and the remaining goodwill and nightclub-license balances.
- Assess the terms, security, maturities and refinancing risk of debt, particularly the post-year-end 12% unsecured borrowing and balloon payments.
- Track same-store sales, Bombshells unit economics and franchise execution against management’s stated target.
- Review developments in the former-insurer claims, landlord dispute, Texas patron-tax payments, and entertainer classification and licensing risks.
- Distinguish GAAP results from company-defined non-GAAP measures, and account for the recast presentation of revenue net of sales and related taxes.