B. Riley Financial, Inc. — Q1 2019 Form 10-Q
Entity note: The filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc. Investors should confirm that this is the intended filing. Reporting period: three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Unless otherwise stated, figures below are in millions of dollars.
Business context and reporting period
B. Riley provides capital-markets and investment-banking services, asset disposition and liquidation, valuation and appraisal, and consumer internet and communications services through United Online and magicJack. It reports four segments: Capital Markets; Auction and Liquidation; Valuation and Appraisal; and Principal Investments—United Online and magicJack. The 2019 quarter includes magicJack, acquired in November 2018, while Q1 2018 does not include its results on the same basis.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $142.1 | $95.8 |
| Operating income | $25.0 | $10.6 |
| Income before taxes | $11.1 | $5.8 |
| Net income attributable to B. Riley | $8.0 | $4.5 |
| Basic / diluted EPS | $0.31 / $0.30 | $0.17 / $0.17 |
| Operating cash flow | $8.9 provided | $54.1 used |
| Investing / financing cash flow | $26.5 used / $8.2 provided | $4.3 used / $3.8 provided |
| Cash, cash equivalents and restricted cash | $171.0 | $180.3 at Dec. 31, 2018 |
| Total assets / total equity | $1,918.0 / $263.9 | $1,957.7 / $258.7 at Dec. 31, 2018 |
- Revenue increased 48.4% year over year. Operating margin was approximately 17.6% versus 11.1%; net income attributable to B. Riley was approximately 5.6% of revenue versus 4.7%.
- Services and fees rose 49.1% to $131.9 million. Capital Markets services-and-fees revenue was $76.0 million, up 43.2%; Auction and Liquidation was $20.7 million, up 33.5%; Valuation and Appraisal was $8.6 million, essentially flat; and Principal Investments was $26.6 million, up 133.8%.
- Capital Markets segment income was $13.9 million versus a $0.3 million loss; Auction and Liquidation segment income was $11.5 million versus $8.1 million; Valuation and Appraisal segment income was $1.4 million versus $1.9 million; and Principal Investments segment income was $7.9 million versus $4.9 million.
- Other expense included a $3.8 million loss from equity investments, compared with $0.7 million a year earlier. Interest expense rose to $10.8 million from $4.2 million. The effective income-tax rate was 28.0%, versus 17.0%.
- Operating cash flow improved from a substantial use of cash in the prior-year quarter. The filing attributes Q1 2019 operating cash flow to net income, noncash adjustments, and working-capital movements, including changes in securities-borrowing and lending balances. Investing outflow primarily reflected $20.2 million of loan purchases and $10.6 million of equity investments, partly offset by loan repayments and investment dividends.
- Borrowings totaled approximately $555.4 million at March 31, 2019: $465.0 million of senior notes, $89.1 million net term loan, and $1.2 million of other notes payable. Senior notes carry fixed coupon rates of 6.875%–7.50%; the term loan was at 5.50% and bears floating-rate interest. The company had no balance drawn on its $200 million asset-based facility, with $6.7 million of letters of credit outstanding.
- Fair-value securities and other investments were $288.8 million, and loans receivable totaled $53.4 million. Operating lease liabilities were $65.9 million. Securities borrowed and securities loaned were presented gross, at $827.2 million and $824.8 million, respectively; these are securities-lending balances and should not be treated as ordinary funded debt.
Material changes versus the prior comparable period
- Revenue growth included $17.2 million of magicJack service-and-fee revenue in the quarter, as well as GlassRatner consulting revenue following its 2018 acquisition. Capital Markets also reported a $26.9 million increase in trading gains, partly offset by lower investment-banking and wealth-management revenue.
- Management said UOL revenue continues to decline year over year and expects that trend to continue. The company attributed lower Principal Investments gross margin (70.5% versus 74.7%) partly to magicJack and revenue mix. Auction and Liquidation margin was 69.7% versus 70.5%; Valuation and Appraisal margin was 48.5% versus 50.7%.
- SG&A increased 33.0% to $90.5 million, including higher Capital Markets professional and consulting fees, magicJack costs, and corporate professional fees. Direct service costs increased to $18.5 million from $11.7 million.
- Q1 2019 included $147,000 in restructuring charges, primarily magicJack severance, versus $217,000 in Q1 2018. The company adopted lease accounting Topic 842 on January 1, 2019, recording $67.5 million of lease liabilities and corresponding right-of-use assets; prior periods were not restated.
- National Holdings ownership reached 48.8% at March 31, 2019, with a $22.3 million equity-method carrying value. The company also borrowed an additional $10 million under its term-loan option during the quarter and issued additional senior notes.
Outlook, risks, contingencies and unusual items
- Management stated that cash, investments, facility availability, and expected operating cash flows should be sufficient for working capital and capital expenditures for at least 12 months from issuance of the financial statements. No earnings or revenue guidance was provided.
- The board declared a regular dividend of $0.08 per share and a special dividend of $0.18 per share on May 1, 2019, payable May 29, 2019. The filing says future dividends and repurchases remain at board discretion.
- The Rent-A-Center transaction dispute involved a B. Riley limited guarantee capped at $128.5 million, including a claimed $126.5 million termination fee. After the court ruled the termination valid but did not resolve the fee’s enforceability, the parties signed a settlement on April 25, 2019. B. Riley said it would make no financial contribution to the settlement.
- Other disclosed matters include securities-related litigation and arbitration, magicJack-related claims and appeals, and tax and regulatory inquiries. The company said outcomes and potential liabilities in several matters could not be estimated; it did not believe ordinary-course claims were likely to materially affect financial position or results. A FINRA arbitration seeking $10 million had concluded hearings, with a decision expected.
- Key risks include volatile engagement-driven revenue, financial-market and investment-value changes, valuation and liquidation risks, acquisition integration and UOL decline, access to financing and debt-covenant compliance, interest-rate exposure, and potential legal or regulatory liabilities. The filing reported compliance with the BRPAC term-loan covenants at March 31, 2019. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing names B. Riley Financial, Inc., whereas the request metadata names BRC Group Holdings, Inc.
- Assess how much of revenue and earnings growth is recurring versus attributable to acquisitions, trading gains, and engagement mix; review segment-level performance and the ongoing decline in UOL.
- Review debt terms, variable-rate exposure, maturities, note issuance capacity, term-loan covenants, and the company’s ability to sustain dividends alongside investment and financing needs.
- Evaluate the quality and liquidity of the $288.8 million investment portfolio, including $59.9 million of Level 3 fair-value assets and the $3.8 million quarterly equity-investment loss.
- Track developments in disclosed litigation, tax inquiries, and regulatory matters, including whether any contingency becomes estimable or requires a financial contribution.