Business context and reporting period
This is B. Riley Financial, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 5, 2019. The supplied metadata names “BRC Group Holdings, Inc.” and “2018 Q4,” but the filing identifies B. Riley Financial, Inc. and reports full-year results, with quarterly data included. B. Riley provides capital markets, auction and liquidation, valuation and appraisal, and principal investment services. Its November 2018 acquisition of magicJack expanded its communications businesses.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $423.0 million | $322.2 million |
| Operating income | $45.4 million | $28.8 million |
| Income before taxes | $21.3 million | $20.4 million |
| Net income attributable to B. Riley | $15.5 million; diluted EPS $0.58 | $11.6 million; diluted EPS $0.48 |
| Operating cash flow | $(104.8) million | $(81.8) million |
| Investing cash flow | $(151.4) million | $(17.8) million |
| Financing cash flow | $284.9 million | $134.1 million |
- Revenue increased 31.3%; operating margin rose to 10.7% from 9.0%, while net margin was 3.7% versus 3.6%.
- Capital Markets services-and-fees revenue grew 40.9% to $243.3 million; Auction and Liquidation increased 15.9% to $54.9 million; Valuation and Appraisal increased 16.1% to $38.7 million. Principal Investments revenue was $53.7 million, including $8.8 million of magicJack revenue after acquisition; legacy United Online subscription and advertising revenue declined.
- Capital Markets segment income fell to $10.2 million from $15.9 million, despite higher revenue, reflecting increased expenses and trading results. Auction and Liquidation segment income increased to $27.0 million from $11.2 million; Valuation and Appraisal rose to $11.1 million from $9.7 million. Principal Investments segment income was approximately flat at $19.4 million.
- Fourth-quarter revenue was $102.0 million, but the company recorded an operating loss of $6.5 million, a net loss of $9.0 million, and a diluted loss per share of $0.34. The filing attributes much of the year’s Capital Markets revenue increase to acquisitions and securities lending, while trading gains declined $23.1 million year over year.
- At year-end, cash and cash equivalents were $179.4 million, restricted cash $0.8 million, investments $273.6 million, and loans receivable $38.8 million. Total assets were $1.96 billion, liabilities $1.70 billion, and equity $258.7 million.
- Borrowings were approximately $540.5 million: senior notes, term loan, and other notes. Senior notes carried fixed coupons of 6.875%–7.50%; the $79.2 million term loan bore floating LIBOR plus 2.50%–3.00%. Interest expense rose to $33.4 million from $8.4 million. The asset-based liquidation facility had no outstanding balance at year-end and a stated $200 million limit, subject to lender discretion and conditions.
Material changes versus the prior period
- Revenue growth reflected acquisitions of FBR and Wunderlich contributing for full years, GlassRatner acquired in August, and magicJack acquired November 14, as well as higher securities-lending income. Results are therefore not wholly comparable on an organic basis.
- Net income attributable to the company rose to $15.5 million from $11.6 million, but operating cash use worsened by $23.0 million. Management cited working-capital changes, including increased securities and other investments and securities-borrowing activity.
- Interest expense increased by $25.0 million, principally due to additional senior notes and borrowing costs associated with liquidation engagements. The company issued approximately $259 million of senior notes and borrowed $80 million under the new term loan during 2018.
- Investing cash outflow included $89.2 million for magicJack, $38.8 million to purchase loans receivable, and $16.6 million for equity investments. The company also repurchased and retired approximately $18.7 million of its stock.
- Goodwill increased to $223.4 million, including $106.1 million from magicJack. Management reported no goodwill impairment in its 2018 qualitative assessment; it recorded a $1.1 million tradename impairment related to the Wunderlich rebranding.
Outlook, risks, contingencies and unusual items
- Management expects United Online revenue to continue declining as subscribers migrate from dial-up and DSL to broadband. The filing provides no company-wide numerical earnings or revenue guidance.
- Management said cash, investments, available credit and expected operating cash generation should cover working-capital and capital expenditure needs for at least the next 12 months. This assessment merits attention alongside the company’s negative operating cash flow and debt obligations.
- The most significant disclosed contingency is the Rent-A-Center/Vintage transaction. B. Riley’s joint-and-several guarantee is capped at $128.5 million, including a $126.5 million termination fee. Rent-A-Center demanded payment after purporting to terminate the merger agreement; litigation was pending at the filing date. B. Riley said a loss was reasonably possible and estimated the range at $0–$128.5 million. Separate transaction commitments included approximately $1.1 billion of debt financing and equity funding that the company expected to syndicate; the filing warns syndication could be unsuccessful or on unfavorable terms.
- The company paid $22.7 million of dividends in 2018. The board stated its current intention to pay regular quarterly dividends of $0.08 per share, but may reduce or discontinue them. A $0.08-per-share regular dividend was declared in March 2019.
- Other risks include volatile, transaction-dependent revenues; potential losses on liquidation guarantees, asset purchases and illiquid investments; debt and covenant exposure; competition; regulatory and litigation risks; and technology, cybersecurity, privacy, and VoIP/E911 obligations. magicJack also had unresolved tax inquiries and an IRS examination; potential outcomes were not estimable.
- The auditor issued unqualified opinions on the financial statements and internal control. Management’s control assessment excluded magicJack, acquired late in 2018; its assets and revenue represented 9.5% and 2.2% of consolidated amounts, respectively.
Important facts for investors to verify
- Confirm the registrant identity and reporting period: the filing is for B. Riley Financial, Inc. and the year ended December 31, 2018, not a standalone 2018 Q4 filing.
- Track the outcome and any payment, settlement, or funding obligations in the Rent-A-Center litigation, including the guarantee cap and related financing commitments.
- Reconcile reported earnings with operating cash flow, especially the effects of securities lending, investment balances, and working-capital movements.
- Review debt maturities, variable-rate loan costs, credit-facility availability and covenants, and the company’s ability to fund dividends while servicing debt.
- Assess the sustainability of Capital Markets results and the integration and performance of magicJack, while distinguishing acquired revenue from organic growth and monitoring United Online’s ongoing decline.
- Review fair-value assumptions for investments and loans, potential tax liabilities, and subsequent developments in disclosed litigation and regulatory matters.