B. Riley Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The supplied filing identifies the registrant as B. Riley Financial, Inc., not BRC Group Holdings, Inc. Dollar amounts below are in millions unless stated otherwise.
Business context
B. Riley provides capital markets and investment banking, auction and liquidation, valuation and appraisal, and United Online consumer Internet services. Its results include acquisitions of FBR and Wunderlich; accordingly, comparisons with 2017 are affected by acquisitions and differing periods of consolidation.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $125.5 | $66.7 | $221.3 | $119.6 |
| Operating income | $28.5 | $2.6 | $39.1 | $13.3 |
| Net income attributable to B. Riley | $17.0 | $3.3 | $21.5 | $17.3 |
| Diluted earnings per share | $0.64 | $0.15 | $0.80 | $0.82 |
| Operating margin | 22.7% | 3.8% | 17.7% | 11.1% |
- Q2 revenue rose 88.2%, while first-half revenue rose 85.1%. The increases were led by Capital Markets, including acquired FBR and Wunderlich operations, and higher securities-lending income. First-half Capital Markets revenue was $138.1 million; Auction and Liquidation, $42.4 million; Valuation and Appraisal, $18.0 million; and United Online, $22.8 million.
- Q2 net income attributable to the company rose substantially from the prior-year quarter. First-half attributable income increased 24%, although diluted EPS declined from $0.82 to $0.80.
- First-half interest expense was $14.6 million, compared with $2.7 million a year earlier. Q2 interest expense was $10.4 million, compared with $1.9 million. Higher debt and liquidation-related borrowing contributed.
- Operating cash flow was negative $208.8 million in the first half, versus negative $82.8 million. Large working-capital uses included advances against customer contracts and receivables; financing activities provided $252.2 million.
- At June 30, cash and cash equivalents were $191.3 million, restricted cash $0.5 million, and securities and other investments $160.5 million. Reported borrowings totaled approximately $491.1 million, including senior notes, the asset-based facility, and other notes payable.
- Total assets were $1.877 billion and total equity $264.3 million. The balance sheet includes $1.014 billion of securities borrowed and $1.012 billion of securities loaned, presented gross and largely matched in the securities-lending business.
Material changes and unusual items
- The Bon-Ton liquidation engagement drove a major increase in advances against customer contracts: $200.0 million at June 30, including $199.2 million outstanding from an initial $407.4 million advance. Management expected repayment from liquidation proceeds. The sale was scheduled to end no later than August 31, 2018.
- The company acquired approximately 30.1% of bebe through conversion of a $16.9 million loan and additional share purchases. The investment generated $4.9 million of Q2 equity income and $4.2 million in the first half; the reported carrying value was $25.0 million.
- Restructuring charges were $1.6 million in Q2 and $1.8 million in the first half, primarily for Capital Markets severance and office consolidation. Prior-year charges were $6.2 million and $6.6 million, respectively.
- First-half taxes were a $6.4 million provision versus a $6.4 million benefit in 2017. The prior-year benefit included an $8.4 million UOL tax election benefit and a $6.0 million insurance-related tax benefit. The company said its accounting for the Tax Act remained provisional and would be finalized by year-end 2018.
- The company repurchased and retired 950,000 shares for approximately $17.3 million. First-half dividends paid were $9.5 million; the filing states a regular quarterly dividend intention of $0.08 per share, with special dividends discretionary.
Outlook, risks and contingencies
- No consolidated earnings or revenue guidance is provided. Management expects United Online revenue to continue declining, citing falling paid subscribers and advertising activity as consumers shift from dial-up service.
- Management stated available cash, investments, credit facilities, and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months. This assessment should be considered alongside substantial negative operating cash flow and financing dependence.
- In June 2018, B. Riley agreed to provide debt and equity support for Vintage Capital’s proposed Rent-A-Center acquisition. The transaction value was approximately $1.365 billion; the financing commitments total approximately $1.1 billion. The company said it expected to syndicate all or a substantial portion, but syndication was not assured; guarantees and other obligations could expose it to additional liability.
- A $50.4 million net related-party note payable to GACP II carried interest at three-month LIBOR plus 9% (11.34% at June 30) and matured September 28, 2018. Repayment was tied to liquidation proceeds.
- The proposed approximately $143.5 million cash acquisition of magicJack remained subject to regulatory approval and other closing conditions; management anticipated closing in the second half of 2018.
- Risks include liquidation-estimate and recovery uncertainty, market and interest-rate exposure, reliance on funding and debt markets, acquisition integration, cybersecurity and privacy matters (including GDPR), and litigation. One liquidation contract accounted for 13.6% of Q2 revenue. The company said pending claims were not expected to materially affect financial position or results, but some claim amounts are substantial and certain impacts cannot be estimated.
Important facts for investors to verify
- Collections and final profitability of the Bon-Ton liquidation, including repayment of the $199.2 million advance and related borrowings.
- Whether the Rent-A-Center transaction closed and whether B. Riley successfully syndicated its financing commitments and limited guarantees.
- Repayment and funding treatment of the GACP II note due September 28, 2018, and subsequent use and availability of the asset-based credit facility.
- Debt-service capacity, cash conversion, and the sustainability of earnings after acquisition-related and equity-investment effects.
- Progress and final terms of the magicJack acquisition, and any material outcomes or accruals from disclosed litigation and regulatory matters.