B. Riley Financial, Inc. — Q2 2021 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 six months ended June 30, 2021; financial amounts below are in U.S. dollars unless noted.
Business context and reporting period
B. Riley provides investment banking, wealth management, auction and liquidation, financial consulting, principal investment, and brand licensing services. It completed its acquisition of the remaining approximately 55% of National Holdings on February 25, 2021, and realigned its segment reporting. Prior-period segment data was recast.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | 2021: $336.8m; 2020: $266.5m | 2021: $936.9m; 2020: $266.3m |
| Operating income | 2021: $110.1m; 2020: $131.3m | 2021: $483.1m; 2020: $10.2m |
| Net income (loss) | 2021: $75.1m; 2020: $82.5m | 2021: $331.7m; 2020: $(16.7)m |
| Net income (loss) available to common shareholders | 2021: $73.9m; 2020: $82.8m | 2021: $326.8m; 2020: $(17.0)m |
| Diluted EPS | 2021: $2.58; 2020: $3.07 | 2021: $11.39; 2020: $(0.66) |
Approximate operating margin was 32.7% for Q2 2021 versus 49.3% in Q2 2020, and 51.6% for H1 2021 versus 3.8% in H1 2020. These are calculated from reported revenue and operating income.
At June 30, cash and cash equivalents were $297.4m ($298.7m including restricted cash); securities and other investments owned were $1.279bn; and loans receivable at fair value were $270.3m. Reported borrowings totaled approximately $1.475bn, including $1.213bn of senior notes, $257.1m of term loans, $4.4m of loan participations sold, and $0.4m of notes payable. Total liabilities were $3.345bn and equity was $761.7m.
For H1, operating cash flow was $(147.9)m, investing cash flow $(13.7)m, and financing cash flow $356.1m. Cash, cash equivalents, and restricted cash increased $193.9m. Management attributed the operating cash outflow chiefly to a $529.8m unfavorable effect from changes in operating assets and liabilities.
Material changes versus prior comparable periods
- Q2 revenue rose 26.4%, but operating income fell 16.1% and net income attributable to B. Riley fell 9.7%. Services and fees increased $140.5m, substantially offset by an $81.9m decline in trading income and loan fair-value gains, plus higher expenses.
- H1 revenue and earnings improved sharply versus 2020, when trading and loan fair-value results were losses. H1 2021 included $299.6m of trading income and loan fair-value gains, including $289.6m from proprietary investments and $10.0m of loan fair-value gains.
- National contributed materially to Capital Markets and Wealth Management services revenue and expenses. Q2 SG&A increased 87.6% to $199.9m; H1 SG&A more than doubled to $391.3m.
- Auction and Liquidation service-fee revenue declined year over year, which management attributed to fewer large retail fee liquidation engagements. United Online and magicJack revenue also declined; management expects that segment’s revenue to continue declining year over year.
Outlook, risks, contingencies, and unusual items
- Management stated that available cash, investments, credit facilities, and expected operating cash flows should be sufficient for working capital and capital expenditures for at least 12 months. This is management’s assessment, not quantified earnings guidance.
- After quarter-end, the company drew the full $80m Nomura revolving facility and redeemed $122.8m of 7.25% senior notes due 2027 on July 26, 2021. The June 30 balance sheet does not include the subsequent revolver draw or redemption.
- H1 financing included $475.7m of senior-note issuance, a $200m Nomura term loan, and $64.7m of common-stock proceeds. H1 common dividends paid were $181.3m. The company announced a $0.50 regular and $1.50 special common dividend after quarter-end; future dividends remain at the board’s discretion.
- The company recorded a $6.5m gain when National’s PPP loans were forgiven and paid a $3m New York Department of Financial Services cybersecurity fine. No 2021 tradename impairment was recorded; 2020 included $12.5m of impairment charges.
- Fair-value estimates are significant: $588.8m of recurring fair-value assets were Level 3 at June 30, including $270.3m of loans receivable. Management judgment and market conditions could affect these valuations and reported results.
- Contingencies include a guarantee of up to $110m of Babcock & Wilcox obligations, with reimbursement rights and an annual fee, as well as ongoing GPB-related FINRA arbitrations involving acquired National subsidiaries. The company says adverse GPB-related judgments could materially affect it; the ultimate outcome is not clear.
- COVID-19 and financial-market volatility remain risks. The company also notes revenue volatility, credit and valuation risk, acquisition integration, competition, and dependence on financing availability. It reported compliance with its financial covenants at June 30.
Important facts for investors to verify
- Confirm the filing entity: the document identifies B. Riley Financial, Inc., not BRC Group Holdings, Inc.
- Review the sustainability and composition of H1 trading gains and the valuation assumptions for Level 3 securities and loans.
- Assess post-quarter liquidity and debt after the $80m revolver draw, the senior-note redemption, and the company’s substantial dividend payments.
- Track National integration, related expenses, and the performance of Wealth Management and Capital Markets.
- Monitor the Babcock & Wilcox guarantee, GPB-related arbitrations, and other legal or regulatory matters.
- Note that the filing reports effective disclosure controls, but interim results are not necessarily indicative of full-year results; it provides no quantified company-wide earnings forecast.