B. Riley Financial, Inc. — Form 10-Q, quarter ended June 30, 2019
The supplied filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc. It reports the three and six months ended June 30, 2019; financial statement amounts below are in millions of dollars unless noted. The company operates in Capital Markets, Auction and Liquidation, Valuation and Appraisal, and Principal Investments (United Online and magicJack). magicJack was acquired in November 2018, so the 2019 comparison includes its results while the 2018 reported period does not.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $164.7 | $125.5 | $306.8 | $221.3 |
| Operating income | $44.3 | $28.5 | $69.2 | $39.1 |
| Operating margin | 26.9% | 22.7% | 22.6% | 17.7% |
| Net income attributable to B. Riley | $22.2 | $17.0 | $30.2 | $21.5 |
| Diluted EPS | $0.82 | $0.64 | $1.13 | $0.80 |
| Operating cash flow | Not separately provided for the quarter | $1.4 | $(208.8) |
Q2 revenue rose 31.2% year over year and first-half revenue rose 38.7%. Growth reflected higher Capital Markets and Auction and Liquidation activity and the contribution from magicJack; management also cited GlassRatner, acquired in August 2018, as a source of consulting revenue. magicJack contributed $15.9 million of Q2 and $33.1 million of first-half segment revenue, while United Online revenue declined. Management expects United Online revenue to continue declining year over year.
Operating income increased, but expenses also grew: Q2 operating expenses were $120.4 million versus $97.0 million, and first-half expenses were $237.6 million versus $182.2 million. Net income attributable to the company increased about 30% in Q2 and 40% for the first half. Equity investment results turned to losses: $1.4 million in Q2 and $5.2 million in the first half, versus gains in the prior-year periods. First-half effective tax rate was 29.0%, up from 21.9%.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $55.6 million and restricted cash was $2.6 million, versus $179.4 million and $0.8 million, respectively, at year-end 2018. Total assets were $1,979.0 million and total equity was $277.2 million.
- Cash, cash equivalents and restricted cash decreased $122.0 million in the first half. Operating cash flow was $1.4 million; investing used $227.6 million, primarily reflecting $225.1 million of loan purchases and $25.2 million of equity investments; financing provided $104.1 million, including $123.9 million of senior-note proceeds.
- Reported borrowings totaled approximately $664.6 million: $582.5 million of senior notes, $80.9 million of term-loan carrying value and $1.2 million of other notes. The company issued $100.05 million of 6.75% notes due 2024 in May. The term loan carried a 5.49% rate at quarter-end. The asset-based facility had no outstanding balance and no open letters of credit at June 30; the company reported compliance with its financial covenants.
- The company reported $270.3 million of securities and other investments at fair value and $250.5 million of loans receivable. Securities borrowed and securities loaned were each approximately $760 million and are presented gross; these securities-lending balances are not included in the stated borrowings total.
- Management said cash, investments, available credit and expected operating cash generation should meet working-capital and capital-expenditure needs for at least 12 months from issuance of the statements. The company reported $51.1 million of remaining capacity under its at-the-market senior-note sales agreement.
Material changes, outlook and risks
- Segment income improved in Capital Markets ($24.4 million versus $12.0 million) and Auction and Liquidation ($17.8 million versus $16.3 million) for Q2. Principal Investments segment income was $7.8 million versus $4.7 million, with acquisition-related growth; Valuation and Appraisal segment income declined to $2.7 million from $2.9 million.
- Margins varied by segment. Q2 service gross margin in Auction and Liquidation fell to 61.7% from 74.5%, attributed to engagement mix; Valuation and Appraisal fell to 53.1% from 56.4%, primarily due to payroll costs. Principal Investments margin was 72.9% versus 74.1%.
- First-half restructuring charges were $1.7 million, primarily severance and lease-related costs associated with magicJack. The adoption of lease accounting brought $67.5 million of operating lease liabilities onto the balance sheet at January 1, 2019; lease liabilities were $65.5 million at June 30.
- After quarter-end, the board declared a $0.175 regular and $0.325 special dividend per share, payable in August 2019, and announced an increase in the regular quarterly dividend to $0.175. Future dividends remain at the board’s discretion. The filing provides no earnings or revenue guidance.
- Risks include volatile engagement-driven revenue, market and investment-value fluctuations, credit and execution risks in liquidation engagements, UOL declines, acquisition integration, substantial debt and interest obligations, and availability of financing. Level 3 fair-value assets were $74.5 million, requiring significant unobservable inputs.
- The Rent-A-Center merger dispute was settled with a release of claims, and the company stated it was not required to contribute financially. Other proceedings include magicJack-related litigation and securities claims against a broker-dealer subsidiary; potential losses in certain matters could not be estimated. magicJack also faces tax examinations and possible sales-tax exposure related to changing state economic-nexus rules.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and segment growth is recurring or acquisition-related, and whether United Online’s decline is accelerating.
- Whether operating cash generation can support loan and equity investment activity, dividends and debt service, given the sharp decline in cash balances.
- The performance, credit quality, liquidity and valuation assumptions of the $250.5 million loan portfolio and $74.5 million of Level 3 assets.
- Debt maturities, ongoing note issuance, interest costs, covenant compliance and remaining financing availability; assess the company’s liquidity outlook against these obligations.
- Developments in the unquantified legal and tax contingencies, and the sustainability of the increased regular dividend and special distributions.