B. Riley Financial, Inc. — Form 10-Q Summary
Period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. Amounts below are in millions unless stated otherwise. The request metadata names BRC Group Holdings, Inc., but the filing identifies the registrant as B. Riley Financial, Inc.; verify the intended company.
Business context
B. Riley provides capital markets and investment banking, auction and liquidation, valuation and appraisal, and consumer internet services through United Online. The quarter’s comparisons reflect acquisitions of FBR and Wunderlich in 2017, including their contribution to Capital Markets.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $95.8 | $52.9 |
| Operating income | $10.6 | $10.7 |
| Income before taxes | $5.8 | $10.1 |
| Net income attributable to B. Riley | $4.5 | $14.0 |
| Basic / diluted EPS | $0.17 / $0.17 | $0.73 / $0.71 |
| Operating margin | 11.1% | 20.2% |
- Revenue rose 81%, driven by Capital Markets services and $7.6 million of securities-lending interest income, which followed the FBR acquisition. Operating income was nearly flat; higher SG&A and interest expense, plus a $0.7 million equity-investment loss, reduced pretax income.
- Capital Markets reported a $0.3 million segment loss versus $6.6 million segment income a year earlier, as acquisition-related expenses outweighed the revenue increase. Auction and Liquidation segment income increased to $8.1 million from $1.8 million, primarily reflecting engagement mix and higher margins. United Online revenue declined 14.5% to $11.4 million; segment income was $4.9 million versus $4.2 million.
- Operating cash flow was negative $54.1 million, compared with negative $38.9 million. The filing attributes the cash use principally to changes in operating assets and liabilities, including securities-borrowing and clearing-broker balances. Investing cash flow was negative $4.3 million; financing cash flow was positive $3.8 million.
- Cash and cash equivalents were $74.3 million, with another $23.4 million restricted. Securities and other investments totaled $150.8 million. Total assets were $1.43 billion and total liabilities $1.16 billion.
- Borrowings were approximately $212.8 million, comprising senior notes and $1.9 million of other notes payable. Senior notes carry fixed coupons of 7.25%–7.50%, with maturities in 2021 and 2027. The $200 million asset-based facility had $8.3 million of letters of credit outstanding; the UOL credit facility had no borrowings. Management said available cash, investments, facilities and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months from the financial-statement issuance date.
- Dividend declared for Q1 was $0.16 per share, consisting of regular and special dividends. The board may change or discontinue future dividends.
Changes, outlook and material items
- Services and fees increased 67%, with much of the Capital Markets growth attributable to the acquired FBR and Wunderlich businesses. SG&A increased 182% to $68.1 million, primarily due to Capital Markets acquisition-related payroll, occupancy and administrative costs. Interest expense rose to $4.2 million from $0.8 million, largely due to senior-note issuance.
- The 2017 comparison included a $3.8 million income-tax benefit, including an $8.4 million benefit associated with the UOL tax election. Q1 2018 recorded a $1.0 million tax provision. The company’s accounting for the Tax Act remained provisional; it expected to finalize it by Q4 2018.
- Management expects United Online revenue to continue declining, citing fewer paid subscribers and lower advertising activity as consumers shift away from dial-up internet. The filing provides no consolidated earnings or revenue guidance.
- The pending magicJack acquisition, announced at approximately $143.5 million of consideration, was expected to close in Q3 2018, subject to regulatory approvals and other conditions.
- After quarter-end, a joint venture including the company’s subsidiary was approved to act as exclusive agent for The Bon-Ton Stores’ asset sales. The venture agreed to a $560 million cash purchase price, a $125 million credit bid and $93.8 million for administrative expenses. The going-out-of-business sale began April 19 and was to conclude by August 31, 2018. The company’s subsidiary borrowed $300 million under the Wells Fargo facility and approximately $51 million from GACP II to fund its portion; repayment was expected from sale proceeds. These are material post-quarter developments, not Q1 operating results.
- After quarter-end, the company repurchased and retired 950,000 shares for approximately $17.4 million. It also announced the ability to offer up to $50 million of senior notes through an at-the-market sales arrangement.
- Risks include volatile and short-term engagements, guarantee-based liquidation estimates, investment valuation and liquidity, market and interest-rate changes, financing access and covenant compliance, acquisition integration, and litigation. Management said pending claims were not expected to materially affect financial position or results, but some outcomes could not be estimated. Disclosure controls were deemed effective at a reasonable-assurance level.
Most important facts to verify
- Confirm the intended issuer: the supplied metadata says BRC Group Holdings, Inc., while this filing is for B. Riley Financial, Inc.
- Assess the sustainability of earnings and cash conversion, especially the $54.1 million operating cash outflow and the substantial movement in securities-lending and clearing balances.
- Review acquisition-related costs and contributions, and whether Capital Markets can return to segment profitability.
- Evaluate Bon-Ton sale proceeds, expenses, financing repayment and execution risk; the filing does not provide final outcomes.
- Check senior-note and credit-facility terms, liquidity after the post-quarter transactions, and the company’s ability to service debt and maintain dividends.
- Monitor United Online subscriber and revenue declines, the magicJack transaction’s status, provisional tax accounting, and the disclosed legal claims.