B. Riley Financial, Inc. — Form 10-Q, quarter ended September 30, 2016
Entity note: The filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc. It covers the third quarter and first nine months of 2016; financial statement figures below are in millions of dollars unless stated otherwise.
Business context
The company provides capital markets, auction and liquidation, and valuation and appraisal services. Following its July 1, 2016 acquisition of United Online, Inc. (UOL), it also operates a Communications segment. UOL was included in consolidated results from the acquisition date, so reported comparisons are not fully like-for-like.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $57.0 | $21.3 | $97.2 | $92.8 |
| Operating income | $15.4 | $3.3 | $17.3 | $23.4 |
| Net income | $8.4 | $2.6 | $9.7 | $14.6 |
| Net income attributable to B. Riley | $8.9 | $1.5 | $9.1 | $12.8 |
| Diluted earnings per share | $0.47 | $0.09 | $0.50 | $0.79 |
- Q3 revenue rose 167.8%, primarily from UOL, Hancock Fabrics liquidation work, and sales of inventory acquired in the MS Mode liquidation. Operating margin increased to 27.1% from 15.4%; reported operating income included $3.6 million of restructuring charges.
- Nine-month revenue increased 4.8%, but operating income fell 26.2% and net income attributable to the company declined 29.1%. Lower Capital Markets results and restructuring and acquisition-related costs weighed on earnings; UOL contributed only from July.
- Q3 segment income included $13.0 million from Auction and Liquidation and $3.4 million from Communications. Capital Markets revenue improved in Q3, but its nine-month revenue declined 24.9% year over year. Management expects Communications revenue to continue declining, reflecting subscriber losses and migration from dial-up services.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $27.9 million, investing cash flow was negative $111.9 million, and financing cash flow was positive $80.4 million. Cash and cash equivalents decreased $3.5 million to $26.5 million.
- Investing cash outflows included $78.2 million added to restricted cash, mainly collateral for the Australian Masters liquidation, and $33.4 million of cash used in the UOL acquisition. Restricted cash totaled $78.3 million at quarter-end and is not freely available.
- Current assets were $148.3 million and current liabilities $112.2 million. Total liabilities were $117.8 million and equity $143.6 million. The company reported no borrowings under its asset-based credit facility at quarter-end, with $0.3 million of standby letters of credit outstanding.
- A $60.8 million participating note payable, classified as current, funded the Masters liquidation partnership. The non-interest-bearing arrangement shares in partnership profits and losses and is repayable upon completion of the sale as defined in the partnership agreement.
- Management said cash, available credit and expected operating cash flow should be sufficient for working capital and capital expenditure needs for at least 12 months. Separately, on November 2, 2016, the company issued $28.75 million of unsecured 7.5% Senior Notes due in 2021, receiving $27.9 million net proceeds.
Material developments, outlook and risks
- The UOL acquisition had approximately $169.4 million of stated aggregate consideration. The preliminary purchase accounting included $18.1 million of goodwill and $33.3 million of customer relationships. The company recorded $3.6 million of restructuring costs, primarily UOL employee termination costs and office consolidation.
- On November 13, the board approved a regular dividend of $0.08 per share and a special dividend of $0.17 per share, both payable in December. Dividends remain subject to board discretion.
- One liquidation engagement represented 24.4% of Q3 revenue and 15.6% of nine-month revenue, highlighting engagement concentration and variability. Management identifies risks including uncertain liquidation recoveries, market volatility, acquisition integration and realization of synergies, and UOL’s declining subscriber base, competition, advertising dependence, regulatory exposure, and reliance on third-party networks.
- Two notable legal matters remain: a former landlord seeks approximately $9.7 million in damages related to an auction; the company is defending the claims and says the financial impact cannot be estimated. Quadre seeks a court determination of fair value for 943,769 UOL shares; the company contests the petition and recorded approximately $10.4 million of acquisition consideration payable plus accrued interest.
- No formal earnings guidance is provided. The filing cautions that interim results are not necessarily indicative of full-year or future performance. Disclosure controls were judged effective at a reasonable assurance level.
Important facts for investors to verify
- How much of reported growth and profitability is sustainable after separating UOL’s partial-period contribution, liquidation engagements, and one-time restructuring and acquisition costs.
- The outcome and timing of the Quadre appraisal petition, the related recorded payable, and the former landlord litigation.
- The status, cash requirements and realized profitability of the Masters and MS Mode liquidation engagements, including restricted collateral and the participating note repayment terms.
- UOL subscriber trends, advertising revenue, customer churn, and whether integration savings can offset the segment’s expected revenue decline.
- Cash-flow presentation: the cash flow statement reports operating cash flow of $27.926 million, while MD&A states $27.928 million; verify the discrepancy against the filed financial statements.