B. Riley Financial, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2018. The supplied filing identifies the registrant as B. Riley Financial, Inc. and subsidiaries; this differs from the request metadata naming BRC Group Holdings, Inc. Unless otherwise stated, dollar amounts below are in millions.
Business context and reporting period
B. Riley provides investment banking and financial services, auction and liquidation, valuation and appraisal, and United Online consumer internet services. The 2018 results include acquisitions made in 2017 and GlassRatner, acquired July 31, 2018; consequently, year-over-year comparisons are affected by changes in the businesses included.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $99.7 | $92.4 | $321.0 | $212.0 |
| Operating income | $12.8 | $1.4 | $51.9 | $14.6 |
| Income before taxes | $4.8 | $(1.2) | $33.8 | $9.6 |
| Net income attributable to B. Riley | $2.8 | $0.4 | $24.3 | $17.7 |
| Diluted earnings per share | $0.10 | $0.01 | $0.91 | $0.76 |
| Operating margin | 12.9% | 1.5% | 16.2% | 6.9% |
- Nine-month operating cash flow was negative $78.9 million, versus negative $48.8 million in 2017. Investing cash flow was negative $46.5 million; financing cash flow was positive $208.1 million. Cash, cash equivalents and restricted cash increased $81.9 million to $234.4 million.
- At September 30, cash and cash equivalents were $233.9 million; securities and other investments were $222.5 million; and loans receivable were $37.1 million. Total assets were $1.921 billion and total equity was $269.1 million.
- Senior notes payable, net, totaled $455.8 million; other notes payable were $1.7 million. The company reported $457.5 million of total borrowings. Senior notes carry fixed coupons ranging from 6.875% to 7.50%; reported nine-month interest expense was $23.9 million, compared with $5.2 million a year earlier.
- The $200 million asset-based credit facility had been repaid in full for Bon-Ton-related borrowings by September 30; its borrowing limit reverted from $300 million to $200 million. No balance was outstanding on the UOL line of credit. The filing does not provide a single consolidated current ratio or comparable overall liquidity ratio.
Material changes versus prior comparable periods
- Revenue rose 7.8% in Q3 and 51.4% for the first nine months. Nine-month Capital Markets revenue increased 99.2%, driven substantially by the inclusion of FBR and Wunderlich for more of the period, as well as GlassRatner. Securities-lending interest income also increased.
- Q3 operating income improved to $12.8 million from $1.4 million, while nine-month operating income rose to $51.9 million from $14.6 million. Lower restructuring charges contributed to the improvement: $0.4 million in Q3 and $2.2 million year to date, versus $4.9 million and $11.5 million, respectively.
- Nine-month net income attributable to B. Riley rose 37.6% to $24.3 million, but the prior-year period included an $8.4 million tax benefit related to the UOL tax election. The 2018 period had an $8.4 million tax provision.
- Interest expense increased significantly with additional senior-note issuance and transaction-related borrowing. SG&A also rose 63.1% year to date, primarily reflecting acquired businesses and related payroll and operating costs.
- United Online revenue declined 11.3% year to date, with management attributing the trend to fewer paid subscribers and lower advertising impressions. Management expects this segment’s revenue to continue declining year over year.
Outlook, risks, contingencies and unusual items
- Management stated that cash, investments, available credit facilities and expected operating cash flows should be sufficient for working capital and capital expenditures for at least 12 months from issuance of the financial statements. No specific earnings or revenue guidance was provided.
- The company expected its approximately $143.5 million magicJack acquisition to close in Q4 2018, subject to regulatory approvals and other closing conditions.
- B. Riley committed to support Vintage Capital’s proposed Rent-A-Center acquisition through debt financing of approximately $1.1 billion, equity commitments of up to $429 million, and a limited guarantee. These are significant transaction-related commitments; the filing describes the transaction as proposed.
- The Bon-Ton liquidation sale was completed August 31, 2018, but related wind-down and real estate sale activities continued. The filing says the company initially advanced $407.4 million under the agency arrangement; $21.4 million remained recorded as advances against customer contracts at quarter-end.
- The company reported $98.4 million of recurring fair-value assets classified as Level 3, requiring significant unobservable inputs and management judgment. Equity-method income included $7.1 million from bebe for the nine months; B. Riley owned approximately 30.1% of bebe.
- Legal matters include securities-related litigation and FINRA arbitrations, including claims seeking $10 million and approximately $8 million plus unspecified punitive damages. Management did not believe the claims were likely to have a material effect, but outcomes are uncertain. A separate $1.3 million mortgage dispute was settled in September 2018.
- Other disclosed risks include volatile financial markets and revenues, valuation and liquidation-contract estimates, investment liquidity and losses, acquisition integration, access to financing, debt covenant compliance, and changing tax laws. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control during the quarter.
Most important facts for investors to verify
- Confirm the registrant and security being analyzed: the filing is for B. Riley Financial, Inc., not the company named in the request metadata.
- Assess how much reported growth reflects acquired businesses versus organic performance, and whether acquired operations can sustain profitability.
- Review cash-flow quality: operating cash flow was negative despite positive reported earnings, with substantial working-capital movements.
- Evaluate debt service and refinancing exposure, including $455.8 million of senior notes, higher interest expense, and the proposed Rent-A-Center financing commitments and guarantee.
- Track recovery of Bon-Ton advances, performance and valuation of Level 3 investments, and the continued decline in United Online subscribers and revenue.
- Check the status and potential financial effect of magicJack, Rent-A-Center, and the disclosed legal proceedings, and verify whether subsequent events changed the outlook.