B. Riley Financial, Inc. — Form 10-Q summary
Issuer note: The request identifies BRC Group Holdings, Inc., but the supplied filing is for B. Riley Financial, Inc. (Nasdaq: RILY). This summary reflects the supplied filing, for the quarter ended September 30, 2022; figures are unaudited and in millions of dollars unless stated otherwise.
Business context and reporting period
B. Riley is a diversified financial services and investment company operating across Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments—Communications and Other, and Brands. The filing compares the three and nine months ended September 30, 2022 with the same 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $340.4 | $381.5 | $588.7 | $1,318.5 |
| Operating income (loss) | $103.6 | $96.7 | $(50.5) | $579.9 |
| Net income (loss) | $52.6 | $51.7 | $(93.1) | $383.4 |
| Net income (loss) available to common shareholders | $45.8 | $48.6 | $(108.4) | $375.4 |
| Basic EPS | $1.62 | $1.76 | $(3.86) | $13.75 |
Q3 operating margin was approximately 30.4% (operating income divided by revenue), compared with 25.4% a year earlier. The nine-month operating result was a loss. The nine-month revenue decline primarily reflected $598.0 million of lower trading income and fair-value adjustments, including losses on proprietary investments and loans; lower services and fees and fewer liquidation-related goods sales also contributed. Higher loan and securities-lending interest income partly offset the decline.
- Cash flow: Nine-month operating cash use was $72.8 million, versus $166.7 million in 2021. Investing activities provided $41.7 million, principally reflecting loan repayments and $172.6 million received from a subsidiary trust account, partly offset by loan purchases and acquisitions. Financing activities used $8.8 million. Cash, cash equivalents and restricted cash ended at $233.4 million, down $46.5 million from year-end 2021.
- Balance sheet and debt: Total assets were $5.834 billion and total liabilities $5.078 billion at September 30. Cash and cash equivalents were $231.8 million; securities and other investments owned were $1.239 billion; loans receivable at fair value were $814.7 million. Reported borrowings totaled approximately $2.319 billion: $1.661 billion of senior notes, $558.0 million of term loans, $74.7 million under the revolving facility and $25.1 million of other notes payable.
- Debt cost: Senior notes had a 5.70% weighted-average interest rate. Floating-rate debt rates included 10.00% on the Pathlight loan, 8.10% on the Nomura term loan, 7.64% on the Nomura revolver and 6.29% on the Lingo loan. Nine-month interest expense was $96.8 million, up from $66.0 million; interest paid was $133.4 million.
- Capital and liquidity: Stockholders’ equity attributable to B. Riley was $513.6 million, down from $661.3 million at year-end 2021. Management stated available cash, investments, borrowing capacity and expected operating cash generation should meet working-capital and capital-expenditure needs for at least 12 months. The company reported compliance with the Wells Fargo asset-based facility covenants and substantial excess net capital at its broker-dealer subsidiaries.
Material changes versus the prior comparable period
- Q3 revenue fell 10.8%, while operating income increased 7.0%; common-shareholder income declined 5.7%. Lower Wealth Management and Capital Markets fees and the end of European retail liquidation engagements were partly offset by higher loan interest and acquired communications businesses.
- Nine-month revenue fell 55.4%, and the company moved from $523.5 million of pretax income to a $133.0 million pretax loss. Trading and loan fair-value results shifted from $317.8 million of income to a $280.2 million loss. Management attributed the trading decline largely to lower market values; it reported $267.8 million of realized and unrealized proprietary investment losses and $19.2 million of unrealized loan losses, partly offset by a $6.8 million realized gain on disposal of an equity-method investment.
- Interest income from loans and securities lending rose 104.8% for the nine months to $182.9 million, while interest expense increased 46.6% to $96.8 million.
- Acquisitions and consolidation changed the business mix: the company increased its Lingo ownership from 40% to 80% in May and acquired BullsEye in August; it also acquired FocalPoint in January and Atlantic Coast Fibers in August. These transactions added goodwill, intangibles and operating costs, and were partly debt-financed.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management cited uncertainty from inflation, Federal Reserve actions, possible recession, the war in Ukraine, energy prices, COVID-19 effects, supply-chain disruption and labor costs. It expects UOL and magicJack subscription revenue to continue declining year over year.
- The company recorded an $8.0 million restructuring charge in Q3, primarily for workforce reductions, facility closures, intangible impairments and asset disposals in Wealth Management and Communications and Other.
- Q3 results included $41.9 million of incentive fees associated with the FaZe/BRPM 150 business combination and $9.6 million of related underwriting and advisory fees. Nine-month results also included a $6.8 million gain from remeasuring the prior Lingo investment upon consolidation.
- On October 18, 2022, after quarter-end, a subsidiary acquired Targus in a transaction with approximately $250 million enterprise value, funded with a combination of cash, senior notes, common stock and seller financing.
- Risks include market-value volatility in the proprietary securities and loan portfolios, credit and valuation risk, higher floating-rate borrowing costs, refinancing and covenant requirements, acquisition execution and integration, litigation and regulatory matters, and contingent commitments. The company disclosed a guarantee of up to $110 million relating to Babcock & Wilcox obligations, plus other indemnities. It said pending claims were not expected to materially affect financial position or results, but outcomes cannot be assured.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is B. Riley Financial, Inc., not BRC Group Holdings, Inc.
- Review the composition, liquidity and valuation sensitivity of the $1.239 billion securities portfolio and $814.7 million loan portfolio, including Level 3 fair-value exposures.
- Assess debt service and refinancing capacity given $2.319 billion of reported borrowings, rising floating rates, covenant conditions and dividend payments.
- Evaluate whether acquisitions can deliver the expected growth and integration benefits, while tracking continuing subscription declines at UOL and magicJack.
- Monitor contingent liabilities, including the Babcock & Wilcox guarantee, legal and regulatory proceedings, and the financing and performance of the post-quarter Targus acquisition.