B. Riley Financial, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The supplied filing identifies B. Riley Financial, Inc. (Nasdaq: RILY) as the registrant; the request metadata’s company name differs.
Business context
B. Riley provides investment banking, capital markets, wealth management, auction and liquidation, financial consulting, principal investment, communications, and brand-licensing services. It reports five segments: Capital Markets, Auction and Liquidation, Financial Consulting, Principal Investments—United Online and magicJack, and Brands. Segment reporting was realigned in the fourth quarter, with prior periods recast.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $902.7 million | $652.1 million | +38.4% |
| Operating income | $344.8 million | $166.7 million | +106.9% |
| Net income attributable to B. Riley | $205.1 million | $81.6 million | +151.4% |
| Net income available to common shareholders | $200.4 million | $81.3 million | +146.4% |
| Diluted EPS | $7.56 | $2.95 | Increased |
| Operating cash flow | $57.7 million | $(27.2) million | Turned positive |
Operating margin was 38.2%, versus 25.6% in 2019; net income margin was 22.6%, versus 12.6%. The filing reports $98.6 million of interest paid. Free cash flow is not explicitly reported; investing cash flow was $(128.4) million, including $207.5 million of loan purchases and $2.0 million of property, equipment, and intangible purchases.
Revenue drivers and material changes
- Services and fees rose 44.9% to $667.1 million. Capital Markets services and fees increased 55.7% to $412.2 million, principally reflecting higher corporate finance, consulting, and investment banking fees.
- Auction and Liquidation revenue rose to $88.8 million from $22.5 million, helped by more fee-based retail liquidations and sales of acquired inventory. Its segment income was $25.8 million, compared with a $25.5 million segment loss in 2019, which included a loss-making liquidation contract.
- Financial Consulting revenue increased 20.1% to $91.6 million. Brands revenue increased to $16.5 million from $4.1 million, reflecting the 2019 acquisition of a majority interest in BR Brands.
- Principal Investments—United Online and magicJack revenue fell 13.9% to $87.1 million. Management expects this segment’s revenue to continue declining, primarily due to UOL subscriber and legacy access-service declines.
- Trading income and loan fair-value adjustments were $104.0 million, slightly below 2019. This included $126.1 million of realized and unrealized proprietary trading gains, partly offset by $22.0 million of unrealized loan losses. Interest income from loans and securities lending rose 32.7% to $102.5 million.
Liquidity, debt, and capital
- Year-end cash and cash equivalents were $103.6 million, with $1.2 million restricted. Securities and other investments were $777.3 million; loans receivable at fair value were $390.7 million.
- Borrowings totaled approximately $1.000 billion: $870.8 million of senior notes, $74.2 million of term loans, $38.0 million of notes payable, and $17.3 million of loan participations sold. Senior notes had a 6.95% weighted-average rate. Total liabilities were $2.124 billion; equity was $539.0 million.
- Operating cash flow was positive, while investing activities used $128.4 million and financing activities provided $69.5 million. Cash was nearly unchanged year over year.
- Management said cash, investments, available credit facilities, and expected operating cash flow should cover working-capital and capital needs for at least 12 months. The $200 million asset-based liquidation facility had no outstanding balance or letters of credit at year-end; the $74.2 million term loan and senior notes remained outstanding.
- Common dividends paid were $38.8 million. The board subsequently announced a $0.50 regular quarterly dividend and a $3.00 special dividend, subject to the stated payment terms. The board may change or discontinue dividends.
Outlook, risks, contingencies, and unusual items
- COVID-19 caused temporary delays and stoppages in some liquidation engagements. Management said the pandemic’s ultimate effects on operations, markets, liquidity, and cash flows remained uncertain. The company recorded a $12.5 million impairment of Brands indefinite-lived tradenames, attributed to pandemic-related economic impacts.
- Key risks include volatile, transaction-dependent revenue; market and investment valuation swings; credit exposure and illiquid principal investments; guarantee and outright-purchase risks in liquidations; competition; regulatory and litigation exposure; cybersecurity; and leverage. The filing notes $539.981 million of assets measured using Level 3 inputs, including $390.7 million of loans receivable at fair value.
- Off-balance-sheet exposures include a limited guarantee related to a Franchise Group lender of up to $50 million, Babcock & Wilcox lending commitments and guarantees, and other commitments. A post-year-end commitment to finance Franchise Group’s Pet Supplies Plus acquisition was up to $400 million, comprising $100 million secured and $300 million unsecured financing. The company reported maximum credit exposure of approximately $195 million for certain FRG and B&W guarantees and recorded no credit-loss provision for them at year-end.
- After year-end, the company issued $230 million of 6.0% notes due 2028, completed the National Holdings acquisition, and announced its intention to redeem $128.2 million of 7.50% notes due 2027. National had approximately 900 registered representatives and more than $30 billion in assets under management, according to the filing.
- The company disclosed ordinary-course litigation and regulatory matters, including a securities class action settlement accrual; management did not expect pending claims to materially affect financial position or results. Related-party investments and financing—including a $176.2 million fair value loan to B&W—also merit attention.
- Control disclosures require reconciliation: management said disclosure controls and procedures were not effective at the reasonable-assurance level as of year-end, while management and the auditor reported effective internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and ICFR.
Most important facts to verify
- Check the original quarterly financial data: the supplied text reports fourth-quarter diluted EPS of $57.35 and diluted weighted-average shares of 2,966,501, figures that appear inconsistent with full-year diluted EPS of $7.56 and the annual share data. Confirm against the filed XBRL and financial statements.
- Assess the sustainability and composition of 2020 earnings, particularly proprietary trading gains, fair-value loan losses, transaction-related Capital Markets revenue, and the large year-over-year earnings increase.
- Review valuation assumptions, collateral, concentration, and repayment prospects for Level 3 investments and related-party loans; these involve significant unobservable inputs.
- Reconcile the $1.0 billion of borrowings and contractual maturities with contingent commitments, guarantees, post-year-end financing, and the planned note redemption; assess liquidity under stressed markets.
- Confirm National Holdings acquisition economics and integration, the status and ultimate exposure of FRG and B&W commitments, and the remediation and implications of the disclosure-controls finding.