Filing summary
Registrant identity: The supplied filing is B. Riley Financial, Inc.’s Form 10-Q, not a filing by BRC Group Holdings, Inc. It covers the quarter ended September 30, 2021; the financial statements are unaudited.
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 National Holdings shares on February 25, 2021, and reorganized segment reporting. National’s results are included after the acquisition date.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $381.5 million | $226.3 million | $1,318.5 million | $492.5 million |
| Operating income | $96.7 million | $83.5 million | $579.9 million | $93.7 million |
| Net income attributable to B. Riley | $50.6 million | $48.4 million | $380.9 million | $33.6 million |
| Net income available to common shareholders | $48.6 million | $47.3 million | $375.4 million | $30.3 million |
| Diluted EPS | $1.69 | $1.75 | $13.07 | $1.14 |
- Q3 revenue rose 68.6%; operating income rose 15.9%. Operating margin was approximately 25.4%, versus 36.9% a year earlier. Nine-month operating margin was approximately 44.0%, versus 19.0%.
- Nine-month revenue growth reflected both higher services and fees and a sharp swing in trading income and loan fair-value adjustments: a gain of $317.8 million in 2021 versus a loss of $36.1 million in 2020. The 2021 amount included $309.0 million of realized and unrealized investment gains and $8.8 million of loan fair-value gains.
- Cash flow from operations was negative $166.7 million for the first nine months, compared with positive $87.9 million in 2020. The filing attributes the 2021 outflow mainly to changes in operating assets and liabilities, including clearing balances and securities activity. Investing cash flow was negative $416.7 million; financing cash flow was positive $859.4 million.
- At September 30, cash and cash equivalents were $378.2 million, restricted cash $0.9 million, and securities and other investments owned $1,352.1 million. Total assets were $5.047 billion and total equity was $747.2 million.
- Borrowings totaled approximately $1.696 billion: $1.363 billion of senior notes, $252.9 million of term loans, $80.0 million drawn on the Nomura revolver, and $0.4 million of other notes. Senior notes had a 5.96% weighted-average rate. The company reported compliance with its credit-facility financial covenants.
Material changes versus comparable periods
- National’s acquisition materially increased reported Capital Markets and Wealth Management services and fees; management attributed much of Wealth Management’s growth to National.
- Q3 selling, general and administrative expense increased 151.4% to $244.2 million, reflecting acquisition-related costs, higher payroll and deal expenses, and other increases. Thus, revenue growth translated into more modest growth in Q3 operating and common-shareholder income.
- Auction and Liquidation service-fee revenue fell, primarily because there were fewer large retail fee-liquidation engagements. Management expects United Online and magicJack revenue to continue declining year over year.
- During the nine months, the company issued senior notes and entered into a $200 million secured term loan and an $80 million secured revolving facility, while also redeeming or repurchasing existing notes. Senior-note debt increased from $870.8 million at year-end 2020 to $1.363 billion at September 30, 2021.
- The company disclosed a nonmaterial prior-period error involving consolidation of certain variable-interest entities, principally affecting presentation of trust assets, temporary equity, prior-period equity, and cash flows. Prior-period figures were revised.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, investments, available credit, and expected operating cash flows should be sufficient for working capital and capital expenditures for at least 12 months. No specific earnings or revenue guidance was provided.
- After quarter-end, the company declared a $1.00 regular and $3.00 special common dividend per share, and announced an increase in the regular quarterly dividend from $0.50 to $1.00. The board retains discretion to reduce or discontinue dividends.
- On October 22, 2021, the company redeemed $115.7 million of 6.875% senior notes due 2023 at a 1% premium, plus accrued interest. This occurred after the reporting date.
- The company guaranteed up to $110 million of certain Babcock & Wilcox obligations; the counterparty agreed to reimburse the company if the guarantee is called. It also has a separate indemnity relating to a $30 million project bond and an unused commitment of up to €26.4 million to a European retailer.
- Risks include volatile investment and trading results, credit and valuation risk, market conditions, COVID-19 uncertainty, acquisition integration, liquidity and debt obligations, and litigation. National’s subsidiary faces multiple GPB-related investor arbitrations; the company says outcomes cannot be determined and adverse aggregate judgments could materially affect it. A settlement accrual is recorded for a separate securities class action.
- Fair-value assets included $683.7 million classified as Level 3, including $350.8 million of loans receivable, requiring significant unobservable inputs and judgment. The company also reported a $345 million redeemable noncontrolling interest associated with consolidated SPACs.
Important facts for investors to verify
- Confirm the registrant: the filing is for B. Riley Financial, Inc., despite the request metadata naming BRC Group Holdings, Inc.
- Assess how much earnings growth depends on realized and unrealized proprietary investment gains, and whether those gains are repeatable.
- Review the causes and expected persistence of negative operating cash flow, and compare dividend commitments with cash generation and financing needs.
- Check debt maturities, refinancing activity, covenant headroom, borrowing-base terms, and the impact of the post-quarter note redemption and dividend increase.
- Evaluate Level 3 valuation assumptions, related-party exposures, the B&W guarantee, and the potential range of litigation outcomes, particularly GPB-related claims.