B. Riley Financial, Inc. — FY2017 Form 10-K
Filing identity: The request metadata names BRC Group Holdings, Inc., but the supplied filing is for B. Riley Financial, Inc. (NASDAQ: RILY). The filing covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
B. Riley Financial provides capital-markets and wealth-management services, asset disposition and liquidation, valuation and appraisal, and consumer Internet services through United Online (NetZero and Juno). Its four reportable segments are Capital Markets, Auction and Liquidation, Valuation and Appraisal, and Principal Investments—United Online.
Results reflect major acquisitions: FBR closed June 1, 2017, and Wunderlich closed July 3, 2017. United Online was acquired in July 2016, so 2017 includes a full year versus a half year in 2016. The company also acquired rights to manage Dialectic funds in April 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / note |
|---|---|---|---|
| Total revenue | $322.2 | $190.4 | Up 69.3%; acquisitions and securities-lending income contributed materially |
| Operating income | $28.8 | $48.7 | Down 40.8%; operating margin 9.0% versus 25.6% |
| Income before taxes | $20.4 | $47.0 | Lower operating income and higher interest expense |
| Net income attributable to B. Riley | $11.6 | $21.5 | Down 46.3% |
| Diluted earnings per share | $0.48 | $1.17 | Share count also increased with acquisition-related issuance |
| Cash from operating activities | $(81.8) | $80.3 | Large year-over-year reversal, driven principally by changes in operating assets and liabilities |
| Cash from investing activities | $(33.6) | $(36.9) | Included acquisition spending and higher restricted cash |
| Cash from financing activities | $134.1 | $40.4 | Primarily senior-note proceeds, partly offset by repayments and distributions |
FY2017 revenue included $172.7 million of Capital Markets services and fees, $17.0 million of securities-lending interest income, $47.4 million of Auction and Liquidation services and fees, $33.3 million of Valuation and Appraisal services, and $51.4 million of United Online services and fees. Auction and Liquidation revenue fell 23.5%, and segment income declined to $11.2 million from $41.1 million, reflecting the absence of two large 2016 guarantee-based engagements and a different engagement mix. Capital Markets growth largely reflected the FBR and Wunderlich acquisitions. United Online revenue benefited from the full-year contribution but management expects the segment to keep declining over time.
FY2017 selling, general and administrative expense rose to $213.0 million from $82.1 million, reflecting acquired businesses, compensation, and corporate costs. Restructuring charges were $12.4 million, primarily for acquisition integration, severance, accelerated stock vesting, and facility consolidation. Reported 2017 tax expense was $8.5 million (41.6% effective rate); it included a provisional $13.1 million expense from the Tax Cuts and Jobs Act, partly offset by other tax benefits. Diluted EPS was $0.23 in Q4; the company reported a Q4 net loss attributable to shareholders of $6.1 million, including $16.3 million of income-tax expense.
At December 31, 2017, cash and cash equivalents were $132.8 million, restricted cash $19.7 million, and securities and other investments $145.4 million. Total assets were $1.387 billion and total liabilities $1.121 billion; the balance sheet includes large securities-borrowed and securities-loaned balances from the acquired matched-book lending business. Senior notes payable were $203.6 million net of issuance costs, and other notes payable were $2.2 million. The filing states approximately $205.8 million of borrowings outstanding. The $200 million Wells Fargo asset-based facility had no borrowings outstanding, but $18.5 million of letters of credit; the UOL $20 million revolving facility had no borrowings or letters of credit outstanding. The company stated that available cash, investments, credit facilities, and expected operating cash flows should meet requirements for at least 12 months.
Material changes, outlook, risks and unusual items
- Capital Markets services and fees increased to $172.7 million from $39.3 million, substantially reflecting FBR and Wunderlich, acquired during 2017. The FBR and Wunderlich acquisitions were completed for estimated consideration of $73.5 million and $65.1 million, respectively.
- The company issued senior notes carrying coupons of 7.50% due 2021, 7.50% due 2027, and 7.25% due 2027. Interest expense rose to $8.4 million from $2.0 million, excluding the separately presented $12.1 million of securities-lending interest expense.
- Management anticipated completing the approximately $143.5 million cash acquisition of magicJack in the first half of 2018, subject to shareholder, regulatory, and other closing conditions. The filing does not provide quantified operating guidance.
- Management expects United Online revenue to continue declining because paid subscribers are migrating from dial-up and DSL to broadband. Across the company, management cautions that quarterly results are volatile and depend on transaction timing, liquidation engagements, markets, and other factors.
- Key risks include transaction and market volatility; losses on guaranteed or outright-purchase liquidations; valuation and illiquidity risk in proprietary investments; dependence on credit facilities and compliance with debt covenants; integration of acquisitions; competition; regulatory and litigation exposure; and United Online subscriber attrition, advertising performance, and reliance on third-party telecommunications providers.
- Legal matters include claims and arbitrations with potentially substantial stated damages, including claims against broker-dealer subsidiaries and Wunderlich. Management said the claims were not expected to materially affect financial position or results, while noting that the impact of certain matters could not be estimated. A separate auction-related suit seeking approximately $10 million was settled in December 2017 without material financial impact; a major securities-related appeal was affirmed in the company’s favor in January 2018.
- The company paid $0.67 per share in dividends during 2017 and stated its current intention to pay a regular $0.08 quarterly dividend; future dividends remain at the board’s discretion. The auditor issued an unqualified opinion on the financial statements and internal controls. The internal-control assessment excluded FBR and Wunderlich, representing 75.2% of year-end assets and 39.3% of annual revenue.
Most important facts for investors to verify
- Reconcile the large decline in operating cash flow, especially working-capital movements, and assess whether cash generation improves after acquisition integration.
- Review the composition, liquidity, valuation methods, and potential downside of the $145.4 million investment portfolio, including $88.2 million of Level 3 fair-value assets.
- Confirm debt-service capacity and covenant headroom, including note maturities, coupon costs, facility availability, and the $18.5 million of outstanding letters of credit.
- Track acquisition integration, realized synergies, dilution, and the subsequent outcome and funding of the proposed magicJack transaction.
- Monitor United Online subscriber and advertising trends, the continuing decline outlook, and the effect of the Tax Act provisional accounting and remaining legal contingencies.