B. Riley Financial, Inc. — 2021 Form 10-K Summary
Registrant clarification: The supplied filing is for B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc. It reports the fiscal year ended December 31, 2021; the supplied text does not provide a clear standalone fourth-quarter income statement.
Business context and reporting period
B. Riley is a diversified financial services company spanning capital markets, wealth management, auction and liquidation, financial consulting, communications, principal investments, and brand licensing. It acquired the remaining interest in National Holdings in February 2021 and acquired mobile virtual network operator Marconi Wireless in October 2021. Segment presentations were recast to reflect organizational changes and the new Wealth Management segment.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $1,740.6 million | $902.7 million |
| Operating income | $700.4 million; 40.2% margin | $344.8 million; 38.2% margin |
| Net income attributable to B. Riley | $445.1 million | $205.1 million |
| Net income available to common shareholders | $437.6 million; diluted EPS $15.09 | $200.4 million; diluted EPS $7.56 |
| Net cash from operating activities | $50.9 million | $57.7 million |
| Net cash used in investing activities | $956.5 million | Net cash provided: $21.8 million |
| Net cash from (used in) financing activities | $1,081.0 million | Net cash used: $80.7 million |
At year-end, unrestricted cash was $278.9 million; securities and other investments at fair value were $1.532 billion; and loans receivable at fair value were $873.2 million. Borrowings were approximately $2.033 billion, including $1.607 billion of senior notes, $346.4 million of term loans, $80.0 million under a revolving facility, and a small balance of other notes payable. The filing states that available cash, investments, credit facilities, and expected operating cash flows should cover working capital and capital needs for at least 12 months from issuance of the financial statements.
Senior-note balances increased from $870.8 million in 2020 to $1.607 billion in 2021; their weighted-average rate declined from 6.95% to 5.69%. Separate from corporate borrowings, securities borrowed and securities loaned were each approximately $2.09 billion at year-end and are part of the securities-lending business.
Material changes versus the prior comparable period
- Revenue rose 92.8%. Services and fees increased $505.9 million, while trading income and fair-value adjustments on loans increased $282.7 million to $386.7 million.
- Capital Markets services and fees increased to $575.3 million, primarily from higher corporate finance, consulting, and investment banking fees. Wealth Management services and fees rose to $374.4 million, mainly reflecting National, acquired in February 2021.
- Auction and Liquidation services and fees fell 68.0% to $20.2 million, primarily because of fewer large retail fee-liquidation engagements. Financial Consulting revenue was broadly stable at $94.3 million.
- SG&A increased 111.5% to $906.2 million, with much of the increase associated with National and higher compensation and consulting costs. Interest expense increased to $92.5 million from $65.2 million.
- Operating margin increased to 40.2% from 38.2%, and net margin to 25.9% from 22.6%. Sale-of-goods gross margin declined to 53.7% from 57.2%.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management describes results as volatile and difficult to predict, in part because investment-banking fees depend on transaction completion and market conditions.
- Management cited continuing COVID-19 uncertainty, rising inflation, possible Federal Reserve rate increases, supply-chain disruption, and labor shortages. It warned these factors could adversely affect markets, clients, financing access, and operating results.
- Trading gains and fair-value adjustments were a major earnings contributor: $376.2 million of realized and unrealized proprietary-investment gains plus $10.5 million of unrealized loan fair-value gains. Loans receivable are measured at fair value, and management estimates are exposed to market and valuation uncertainty.
- Level 3 assets measured at fair value totaled $1.251 billion, or 21.4% of total assets, including $873.2 million of loans receivable and $377.5 million of equity securities. These values rely on significant unobservable inputs.
- Investing cash outflow included $738.9 million of loan purchases and $345.0 million placed in SPAC trust accounts. Financing inflow included substantial note issuance; the company also repurchased $507.3 million of senior notes and paid $347.1 million of common dividends.
- The board increased the stated regular quarterly common dividend from $0.50 to $1.00 per share in October 2021; 2021 distributions also included special dividends. Future dividends remain discretionary and subject to financial condition, cash flows, and debt restrictions.
- The Nomura facilities carry financial covenants, including minimum Operating EBITDA of $135 million and minimum guarantor net asset value of $1.1 billion. The company reported compliance at year-end. It also disclosed a guarantee of up to $110 million related to Babcock & Wilcox cash-collateral obligations, plus other indemnities and financing commitments.
- Legal proceedings, arbitration claims, class actions, and regulatory matters arise in the ordinary course. The company said it did not believe their outcomes were likely to materially affect financial position or results, while noting outcomes remain uncertain.
- The company revised prior-year cash-flow presentation for a nonmaterial consolidation error involving certain variable-interest entities; the revisions principally reclassified/grossed up investing and financing cash flows without changing net cash flow. The audit opinion on the financial statements was unqualified. Management and the auditor reported effective internal control over financial reporting; management excluded National from its assessment while integration continued.
- After year-end, B. Riley acquired FocalPoint Securities on January 19, 2022, for cash, stock, and contingent consideration of up to $175 million. Final purchase-price accounting was not complete when the filing was prepared.
Most important facts for investors to verify
- How much 2021 earnings came from recurring fees versus market-sensitive trading gains and fair-value estimates, and how those Level 3 valuations performed subsequently.
- National’s contribution to revenue, expenses, and earnings, along with integration progress and acquisition-related costs.
- Debt maturities, refinancing needs, covenant headroom, borrowing-base availability, and the distinction between corporate debt and securities-lending balances.
- Cash conversion and liquidity: operating cash flow was $50.9 million despite $450.8 million of consolidated net income, while substantial funds were invested in loans and SPAC trusts.
- Dividend sustainability given the large 2021 common distributions, preferred dividends, debt obligations, and board discretion over future payments.
- Credit and contingent exposures, including loan concentration and valuation, Babcock & Wilcox guarantees, litigation, and other commitments.