Business context and reporting period
This is B. Riley Financial, Inc.’s Form 10-K for the fiscal year ended December 31, 2022, filed March 15, 2023. The filing covers a diversified financial-services platform with six reportable segments: Capital Markets, Wealth Management, Financial Consulting, Auction and Liquidation, Communications, and Consumer. The filing identifies B. Riley Financial, Inc. as the registrant; this differs from the company name in the request metadata.
During 2022, the company acquired Targus and made other acquisitions, including BullsEye Telecom, FocalPoint Securities, Atlantic Coast Fibers, and a controlling interest in Lingo. It realigned its segment reporting during the fourth quarter. Targus was acquired on October 18, 2022, for approximately $247.5 million in cash, seller financing, senior notes, equity and deferred consideration.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise. Prior-year figures are restated where applicable.
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $1,080.7 | $1,554.7 |
| Operating income | $69.4 | $514.5 |
| Operating margin | 6.4% | 33.1% |
| Net income (loss) attributable to B. Riley | $(159.8) | $445.1 |
| Net income (loss) available to common shareholders | $(167.8) | $437.6 |
| Basic and diluted EPS | $(5.95) | $15.99 basic; $15.09 diluted |
| Cash from operating activities | $6.7 | $50.9 |
| Cash and cash equivalents at year-end | $268.6 | $278.9 |
| Total borrowings at year-end | $2,446.8 | Not stated as a comparable total in the supplied filing text |
Revenue fell 30.5%. The company reported a $202.6 million loss in trading and fair-value adjustments on loans, versus $220.5 million of income in 2021; it also recorded $201.1 million of realized and unrealized investment losses, compared with $166.1 million of gains in 2021. Interest income from loans and securities lending rose 100.0% to $245.4 million, including $83.1 million from securities lending and $162.3 million from loans. Interest expense increased to $141.2 million from $92.5 million.
Sale-of-goods gross margin was 44.7%, compared with 53.7% in 2021. This is a goods-only measure, not the company’s consolidated margin. Year-end assets were $6,111.2 million and total liabilities were $5,426.7 million; reported equity was $505.9 million. Cash, securities and other investments, and loans receivable were $268.6 million, $1,129.3 million, and $701.7 million, respectively.
Cash from investing activities was a net outflow of $32.3 million, and cash from financing activities was a net inflow of $17.6 million. The company reported $2,446.8 million of borrowings, including $1,721.8 million of senior notes, $572.1 million of term loans, $127.7 million drawn on revolving facilities, and $25.3 million of notes payable. It stated that available cash, investments, credit facilities and expected operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months from issuance of the financial statements.
In the fourth quarter of 2022, revenue was $382.1 million, operating income was $10.0 million, net loss was $63.5 million, and loss available to common shareholders was $59.4 million. In the fourth quarter of 2021, revenue was $400.3 million, operating income was $98.7 million, net income was $67.4 million, and income available to common shareholders was $62.2 million.
Material changes versus prior comparable periods
- Capital Markets services and fees declined 47.3% to $292.9 million, mainly reflecting lower corporate-finance, consulting and investment-banking fees.
- Wealth Management services and fees declined 38.4% to $230.7 million. The segment reported a $34.3 million loss, versus $15.9 million of segment income in 2021.
- Communications services and fees rose 157.8% to $228.1 million, primarily reflecting the consolidation of Lingo and acquisitions of BullsEye and Marconi Wireless. The company expects Marconi Wireless, UOL and magicJack subscription revenues to continue declining year over year.
- Sale-of-goods revenue increased 144.4% to $142.3 million, principally reflecting Targus, acquired in October 2022. Targus contributed $77.8 million of revenue and $6.9 million of pretax income from acquisition through year-end.
- Year-end senior notes increased to $1,721.8 million from $1,606.6 million, and term loans and revolving borrowings also increased. Interest expense rose amid additional debt and higher rates on floating-rate borrowings.
- Common dividends paid fell to $119.5 million from $347.1 million. The 2022 regular quarterly dividend was $1.00 per share; the board retains discretion to reduce or stop future dividends.
Outlook, risks and unusual items
- Restatement and controls: The company reclassified dividend income and realized and unrealized investment gains and losses from revenue to other income for 2020, 2021 and interim periods through the first three quarters of 2022. The restatement did not change net income, EPS, balance sheets or cash flows, but prior statements for those periods should no longer be relied upon. Management identified material weaknesses in review controls over acquisition and goodwill valuations, the tax provision, and financial-statement presentation and classification. Management and the auditor concluded internal control over financial reporting was ineffective as of year-end; the auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements. Management expected remediation before the end of 2023.
- Market and valuation exposure: Results are volatile and depend on transaction activity, market prices and valuations of investments and loans. Year-end Level 3 fair-value assets totaled approximately $1.07 billion, including $701.7 million of loans receivable and $368.5 million of equity securities. Actual realizations may differ from estimated fair values.
- Credit concentrations: The company held approximately $406.2 million of Badcock consumer receivables; loans receivable associated with Badcock were reported at $318.1 million at fair value. Collectability depends on consumer payment performance, economic conditions and servicing by Badcock. The company also disclosed prior credit losses related to cryptocurrency-industry borrowers and warned of potential further losses.
- Debt and interest rates: Floating-rate debt and rising rates increase financing costs; the company estimated that a 1% increase in floating rates would have raised 2022 interest expense by $4.2 million. Scheduled borrowings maturities include approximately $262.9 million in 2024, $531.7 million in 2025, and $758.1 million in 2026. Covenants, collateral and restrictions on subsidiary distributions may affect liquidity and flexibility. The company reported compliance with its specified credit-facility covenants at year-end.
- Other risks and contingencies: Risks include economic slowdown and inflation, litigation and regulatory scrutiny, acquisition integration, supply-chain dependence in consumer businesses, declining legacy communications subscriptions, and possible losses on guaranteed or outright-purchase liquidation engagements. The company is involved in ordinary-course legal claims and regulatory matters, but stated it did not believe their outcomes were likely to materially affect financial position or results of operations. It also disclosed a guarantee of up to $100 million for Babcock & Wilcox obligations at year-end.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management described macroeconomic and market conditions as uncertain, including inflation, interest-rate actions, recession risk, the continuing effects of COVID-19 and geopolitical instability. The stated intention to pay regular common dividends of $1.00 per share quarterly is subject to board discretion and financial conditions.
Important facts for investors to verify
- Review the restated statements and the specific control weaknesses, remediation progress, and subsequent filings reporting whether controls became effective.
- Assess the composition, valuation assumptions and subsequent performance of Level 3 investments and loans, especially Badcock-related receivables.
- Reconcile debt balances, floating-rate exposure, maturity needs, covenant headroom and available liquidity; confirm the status of the company’s stated 12-month liquidity expectation.
- Evaluate whether the recent acquisitions, particularly Targus, Lingo and BullsEye, generate cash flow sufficient to support integration costs and debt service.
- Compare future segment results with the 2022 declines in Capital Markets and Wealth Management, and monitor Communications subscription trends and Consumer margins.
- Verify the sustainability of common and preferred dividends against operating cash flow, debt obligations and the board’s discretion.