B. Riley Financial, Inc. — Form 10-Q summary
Entity note: The supplied filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc. It covers the unaudited quarter and six months ended June 30, 2017; amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
B. Riley provides capital-markets, auction and liquidation, valuation and appraisal, and consumer internet services through United Online (UOL). The results include UOL for the full first half, but include FBR & Co. only from its June 1, 2017 acquisition date. FBR added investment banking and securities-lending activities. The acquisition of Dialectic’s hedge-fund management rights closed in April. The company acquired Wunderlich on July 3, after quarter-end.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $66.7 | $20.3 | $119.6 | $40.2 |
| Operating income | $2.6 | $0.2 | $13.3 | $1.8 |
| Net income attributable to B. Riley | $3.3 | $(0.1) | $17.3 | $0.1 |
| Diluted earnings per share | $0.15 | $(0.01) | $0.82 | $0.01 |
- Q2 operating margin was 3.8% versus 0.9% a year earlier; the company-attributable net margin was 4.9% versus a loss. Six-month operating margin was 11.1% versus 4.6%. Comparisons are substantially affected by acquisitions and other unusual items.
- Revenue growth reflected higher Capital Markets and Auction and Liquidation activity, UOL (not present in the 2016 comparison), and FBR securities-lending income. Six-month revenue increased 197% year over year.
- Cash and cash equivalents were $104.7 at June 30, down from $112.1 at year-end; restricted cash was $5.6. Net securities and other investments, as described by management, were $74.7.
- Operating cash flow was $(82.8) for the first half, compared with $10.3 provided in 2016. Investing activities provided $7.4 and financing activities provided $65.8. Cash decreased $7.4 overall. Operating cash use reflected substantial working-capital movements, including securities-lending balances and receivables/contract advances.
- Reported borrowings were approximately $106.3: $20.2 under the asset-based facility and $86.1 in senior notes. The notes carry 7.5% interest; the 2021 notes mature in October 2021 and the 2027 notes in May 2027. The company also had a $200 facility limit for asset-based borrowing and an unused UOL line of credit, subject to availability, reductions, and covenants.
- Separately, securities borrowed and securities loaned were $909.3 and $912.0, respectively, presented gross and generally collateralized in the securities-lending business; these are not included in the borrowings figure above.
- Total assets were $1,341.4 and total equity $240.1, compared with $264.6 and $150.4, respectively, at December 31, 2016. The increase reflects, among other things, FBR and securities-lending balances.
- Cash dividends were $0.16 per share in Q2 and $0.42 per share for the first half. Management said the board then intended regular quarterly dividends of $0.08 per share, but future dividends remain discretionary.
Material changes versus the prior comparable period
- FBR contributed $11.3 of revenue and a $(9.0) loss from acquisition through June 30; that loss included $3.6 of employment-agreement transaction costs and $6.1 of restructuring charges. The merger issued approximately 4.8 million B. Riley shares.
- Q2 Capital Markets revenue rose to $23.9 from $7.2, including $2.2 of securities-lending income. Auction and Liquidation revenue rose to $21.8 from $5.4, while UOL contributed $13.0. Valuation and Appraisal revenue was $8.0 versus $7.7.
- Auction and Liquidation service gross margin percentage declined to 46.1% in Q2 from 61.3%, and to 38.3% for the first half from 55.2%, primarily reflecting engagement mix. Gross margin dollars increased in both periods.
- First-half SG&A increased to $61.9 from $26.1 and restructuring charges were $6.6 versus none. First-half interest expense also increased to $2.7 from $0.4.
- Common shares outstanding increased from 19.14 million at year-end to 24.38 million at June 30, mainly reflecting acquisition-related issuance. The filing reports 26.42 million shares outstanding on August 4.
Outlook, commentary, risks, and unusual items
- Management stated that cash, investments, available credit facilities, and expected operating cash flows should be sufficient for working capital and capital expenditure needs for at least 12 months from the financial-statement issuance date. No earnings or revenue guidance was provided.
- Management expects UOL revenue to continue declining year over year, citing the long-term shift from dial-up to higher-speed internet. It also described anticipated FBR integration cost savings and synergies; realization and timing are uncertain.
- Unusual results include a $6.0 key-person life-insurance recovery, a $6.25 fair-value adjustment to mandatorily redeemable noncontrolling interests, and an $8.4 tax benefit from electing taxable-business-combination treatment for UOL. The first-half tax benefit was $6.4 overall; reported earnings and effective tax rates therefore include significant nonrecurring tax and valuation effects.
- The $6.6 restructuring charge included severance, accelerated equity-award vesting, and planned office consolidation. Accrued restructuring costs were $3.3 at June 30.
- Risks include volatile transaction-driven revenues, liquidation guarantees and valuation estimates, proprietary-investment liquidity and valuation, dependence on key personnel and systems, acquisition integration and synergy execution, and compliance with credit covenants. The filing also describes litigation and arbitration matters, including a contamination-related claim seeking approximately $10 million and a FINRA claim against Wunderlich Securities seeking $10 million; the company says outcomes are uncertain and intends to defend specified claims. A separate post-quarter claim seeks approximately $8 million plus unspecified punitive damages.
- Revenue standard adoption was planned for January 1, 2018; the company had not completed its impact assessment or selected a transition method. Management noted possible effects on performance-based and multi-obligation contracts.
Important facts for investors to verify
- Confirm the issuer identity: this filing is B. Riley Financial, Inc.; the request metadata names a different company.
- Assess how much reported growth and earnings came from acquisitions, and distinguish recurring performance from the insurance recovery, tax election, fair-value adjustment, and restructuring charges.
- Review the drivers and sustainability of the $(82.8) first-half operating cash flow, including working-capital movements and securities-lending activity.
- Check the terms, availability, covenants, and remaining capacity of the credit facilities, and the cash and debt impact of the July 3 Wunderlich acquisition.
- Monitor UOL subscriber and revenue declines, auction engagement mix and margins, acquisition integration, share dilution, and the status and potential exposure of disclosed legal matters.