B. Riley Financial, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2020. The supplied filing is for B. Riley Financial, Inc. (Nasdaq: RILY), not a registrant identified as BRC Group Holdings, Inc. The company provides capital markets, auction and liquidation, valuation and appraisal, consumer communications, and brand-licensing services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $226.3 million | $180.1 million | $492.5 million | $486.9 million |
| Operating income | $83.5 million | $59.9 million | $93.7 million | $129.1 million |
| Net income | $48.9 million | $34.1 million | $32.2 million | $64.4 million |
| Net income attributable to B. Riley | $48.4 million | $34.3 million | $33.6 million | $64.5 million |
| Net income available to common shareholders | $47.3 million | $34.3 million | $30.3 million | $64.5 million |
| Diluted earnings per common share | $1.75 | $1.21 | $1.14 | $2.37 |
- Q3 revenue increased 25.7%; operating income rose 39.5%, and net income available to common shareholders rose 37.9%. Revenue gains included higher Capital Markets and Auction and Liquidation services, a new Brands contribution, and $22.7 million more goods sales. Trading income and loan fair-value adjustments were lower year over year.
- For the nine months, revenue increased 1.2%, but operating income fell 27.4% and net income available to common shareholders fell 53.0%. Trading and loan fair-value revenue swung from a $71.7 million gain in 2019 to a $36.1 million loss in 2020, including $14.3 million of investment losses and $21.8 million of loan fair-value losses.
- Q3 operating margin was approximately 36.9%, versus 33.2% a year earlier; nine-month operating margin was approximately 19.0%, versus 26.5%. These are calculated from reported operating income and revenue.
- Goods-sale gross margin was 58.5% in Q3 and 56.8% for the nine months. The company acquired title to European retail inventory and operated going-out-of-business sales; related operating costs reduced Auction and Liquidation service margins.
Cash, liquidity and debt
- At September 30, 2020, cash and cash equivalents were $169.7 million and restricted cash was $1.4 million. Securities and other investments were $459.5 million; loans receivable at fair value were $344.3 million. Total assets were $2.30 billion and equity was $400.0 million.
- Nine-month operating cash flow was $86.9 million, compared with $46.2 million in 2019. Investing used $98.5 million and financing provided $77.6 million. Cash, cash equivalents and restricted cash increased $66.3 million to $171.1 million.
- Reported borrowings totaled approximately $922.1 million: $854.9 million of senior notes, $52.5 million term loan, $0.7 million other notes and $13.9 million loan participations sold. Senior notes had a 6.94% weighted-average rate; interest expense was $48.5 million for the nine months, versus $35.1 million.
- The $200 million asset-based credit facility had no balance or outstanding letters of credit at quarter-end; it expires in April 2022. The company reported compliance with its financial covenants under both this facility and the term loan and said available liquidity should cover working capital and capital expenditure needs for at least 12 months from issuance of the statements.
Material changes and notable items
- Capital Markets segment revenue was $316.5 million for the nine months, nearly flat overall year over year, as higher advisory and fee revenue was offset by trading and loan fair-value losses. Auction and Liquidation revenue was $73.1 million; nine-month services and fees declined 24.9%, reflecting fewer engagements and COVID-related delays and stoppages. United Online and magicJack revenue declined, and management expects further year-over-year declines in that segment.
- The company recorded $12.5 million of indefinite-lived tradename impairment in the first half of 2020, attributed to COVID-19’s effects on the Brands segment. It also reported a $1.6 million Q3 restructuring charge, primarily for tradename impairments associated with brand realignment.
- Effective January 1, 2020, the company adopted the credit-loss standard and elected fair-value accounting for previously cost-measured loans. The adoption impact was reported as immaterial, but subsequent fair-value changes flow through earnings. At quarter-end, $446.6 million of financial assets were Level 3 fair value measurements, about 19.4% of total assets.
- The company issued $132.3 million of 6.375% senior notes due 2025 and additional senior notes through at-the-market sales; $148.1 million remained available under a $150 million sales program at September 30. It also issued $36.0 million of preferred stock proceeds during the nine months. Common shares repurchased totaled $38.3 million.
Outlook, risks and contingencies
- Management said the duration and economic effects of COVID-19 remain uncertain and could materially adversely affect results, financial position and cash flows. No earnings or revenue guidance was provided.
- The Board increased the regular quarterly common dividend to $0.375 per share after quarter-end, from $0.30; the filing notes dividends may be reduced or discontinued at the Board’s discretion.
- Related-party and credit exposures warrant attention. The company reported a $164.5 million fair-value last-out loan to Babcock & Wilcox (B&W), further commitments to lend B&W up to $40 million beginning in November 2020, and a limited guaranty related to B&W obligations. It also guaranteed specified Franchise Group obligations up to $50 million plus certain additional amounts. The filing states aggregate maximum exposure on certain FRG and B&W loan guarantees was approximately $205 million and no credit-loss provision was recorded.
- A securities class action involving a subsidiary and Miller Energy offerings was subject to a settlement term sheet signed in July 2020, pending court approval. Management said ordinary-course claims were not expected to materially affect financial position or results, while noting outcomes are uncertain.
- The company reported disclosure controls effective at quarter-end and said remediation of a previously reported material weakness in internal control over financial reporting was completed in Q2 2020.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is B. Riley Financial, Inc., despite the request metadata naming BRC Group Holdings, Inc.
- Review the composition, valuation assumptions and performance of the sizable Level 3 loan and investment portfolio, including the $21.8 million nine-month loan fair-value loss.
- Assess debt service and refinancing needs alongside rising interest expense, outstanding senior notes and continued dividend payments.
- Track B&W and FRG credit, lending and guarantee exposures, including subsequent funding, collateral value and any change in estimated loss exposure.
- Monitor COVID-19 effects on liquidation engagements and brand values, and the ongoing declines in United Online and magicJack revenue.
- Check court approval and final financial impact of the Miller Energy settlement, and any further impairment or legal developments.