B. Riley Financial, Inc. — Q3 2019 Form 10-Q
Filing identity: The supplied filing is for B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc. It covers the quarter and nine months ended September 30, 2019; financial statements are unaudited. Unless stated otherwise, amounts below are in millions of dollars.
Business context and reporting period
B. Riley provides capital-markets and financial-advisory services, auctions and liquidation services, valuation and appraisal services, and consumer internet and cloud-communications services through United Online and magicJack. It reports four operating segments: Capital Markets; Auction and Liquidation; Valuation and Appraisal; and Principal Investments—United Online and magicJack.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $180.1 | $99.7 | $486.9 | $321.0 |
| Operating income | $59.9 | $12.8 | $129.1 | $51.9 |
| Income before taxes | $48.6 | $4.8 | $91.2 | $33.8 |
| Net income attributable to B. Riley | $34.3 | $2.8 | $64.5 | $24.3 |
| Diluted EPS | $1.21 | $0.10 | $2.37 | $0.91 |
| Operating margin | 33.2% | 12.9% | 26.5% | 16.2% |
Revenue growth reflected higher services and fees, interest income from loans and securities lending, and goods sales. Q3 services and fees rose to $153.4 million from $89.8 million; interest income rose to $25.8 million from $9.8 million. The company reported $37.2 million of Q3 trading gains, compared with a $3.5 million trading loss in Q3 2018. For the first nine months, trading gains were $64.4 million versus $1.4 million. Management said these include realized and unrealized proprietary-account investment results.
Capital Markets was the largest segment, with Q3 revenue of $134.1 million and segment income of $52.4 million. Nine-month segment income rose to $90.7 million from $22.7 million. Q3 revenue also benefited from Auction and Liquidation ($11.3 million, versus $2.5 million) and magicJack’s inclusion for a full comparable quarter; magicJack contributed to the increase in Principal Investments revenue, while United Online revenue declined. Management expects United Online revenue to continue declining year over year.
Operating expenses increased with business activity and acquisitions. Q3 SG&A was $96.6 million, up 34.6%; nine-month SG&A was $274.5 million, up 26.7%. Interest expense was $12.8 million for Q3 and $35.1 million year to date, increasing as debt was issued. The nine-month effective tax rate was 29.4%, versus 24.9% in 2018. Equity investments generated a nine-month loss of $4.0 million, compared with $5.0 million of income a year earlier.
For the nine months, operating cash flow was positive $46.2 million, versus negative $78.9 million in 2018. Investing used $251.4 million, primarily reflecting $350.7 million of loan purchases and $33.4 million of equity investments, partly offset by loan repayments and participations sold. Financing provided $196.2 million, including $244.5 million of senior-note proceeds. Cash, cash equivalents and restricted cash ended at $171.1 million, down $9.2 million from year-end 2018.
At September 30, cash and cash equivalents were $170.6 million; securities and other investments were $326.6 million; and loans receivable were $295.9 million, versus $38.8 million at December 31, 2018. Total assets were $2.107 billion and total equity was $299.4 million. Borrowings were reported by management at $802.7 million, including senior notes, the term loan, other notes and loan participations sold. Balance-sheet senior notes were $701.3 million net of issuance costs, and the term loan was $71.4 million net. The asset-based credit facility had no balance outstanding and no open letters of credit at quarter-end; the company reported compliance with its financial covenants. Management stated liquidity was expected to be sufficient for at least 12 months from issuance of the financial statements.
Material changes, outlook and risks
- Debt and funding: Senior notes increased to $701.3 million from $459.8 million at year-end 2018; weighted-average interest rate was 7.08%. The company issued $100.1 million of 6.75% notes due 2024 and $115.0 million of 6.50% notes due 2026. It said it intended to use a portion of the 2026-note proceeds to retire the $52.2 million 7.50% notes due 2021. A new at-the-market program allowed up to $100 million of senior notes and common stock; all $100 million remained available at quarter-end.
- Subsequent events: After quarter-end, the company completed a majority-interest acquisition of BR Brand Holdings for approximately $116.5 million in cash and issued a warrant for up to 200,000 common shares, subject to vesting terms. It also raised $57.5 million gross from a 6.875% Series A preferred-share offering. Preferred dividends are cumulative; the preferred ranks behind debt and subsidiary liabilities.
- Dividends: Common dividends paid during the first nine months totaled $25.0 million. The board increased the regular quarterly common dividend to $0.175 per share and declared an additional special dividend; future dividends remain at the board’s discretion.
- Risks and contingencies: Management highlighted volatile capital-markets and liquidation revenues, investment valuation and liquidity risk, credit and engagement risks, acquisition execution, reliance on key personnel and systems, and the ability to meet debt obligations and covenants. Level 3 financial assets were $86.4 million, including $35.5 million of loans carried at fair value. The filing describes ongoing litigation and tax examinations; management did not expect ordinary-course claims to materially affect results, but said it could not estimate potential liability in certain matters. A magicJack class action remained unresolved; another magicJack lawsuit was dismissed with prejudice after quarter-end, and a FINRA arbitration claim was dismissed.
- Accounting and controls: Adoption of lease accounting added operating lease liabilities and right-of-use assets; quarter-end lease liabilities were $63.8 million. Management reported disclosure controls effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year or future results.
Important facts for investors to verify
- How much of earnings and revenue growth is repeatable versus driven by proprietary trading gains, including unrealized gains, and how sensitive results are to investment valuations.
- Loan portfolio composition, borrower concentration, credit performance and fair-value assumptions, given the substantial increase in loans receivable and Level 3 exposures.
- Debt service, refinancing needs and covenant headroom, including the planned 2021-note retirement, the remaining ATM capacity and the post-quarter brand acquisition’s funding impact.
- Whether United Online’s expected revenue decline, magicJack integration and recent brand acquisition affect future segment profitability and cash generation.
- Developments in the unresolved litigation and tax examinations, and the board’s capacity and willingness to sustain common and preferred dividends.