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Focus Financial Partners Reports Second Quarter 2022 Results Revenue Diversification, Variable Expense Base and Global Scale Drive Excellent Financial Performance in Volatile Markets

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New York, 08/04/2022 / 07:01, EST/EDT - EQS Newswire - Focus Financial Partners


NEW YORK, NY / ACCESSWIRE / August 4, 2022 / Focus Financial Partners Inc. (NASDAQ:FOCS) ("Focus Inc.", "Focus", the "Company", "we", "us" or "our"), a leading partnership of independent, fiduciary wealth management firms, today reported results for its second quarter ended June 30, 2022.

Second Quarter 2022 Highlights

  • Total revenues of $539.2 million, 26.8% growth year over year

  • Organic revenue growth(1) rate of 15.0% year over year

  • GAAP net income of $49.3 million

  • GAAP basic and diluted net income per share attributable to common shareholders of $0.51 and $0.50, respectively

  • Adjusted Net Income Excluding Tax Adjustments(2) of $81.7 million and Tax Adjustments(3) of $16.0 million

  • Adjusted Net Income Excluding Tax Adjustments Per Share(2) of $0.99 and Tax Adjustments(3) Per Share(2) of $0.19

  • Net Leverage Ratio(4) of 3.90x

  • 14 transactions closed or announced year to date, including 3 new partner firms and 11 mergers on behalf of partner firms

  • Please see footnote 2 under "How We Evaluate Our Business" later in this press release.

  • Non-GAAP financial measures. Please see "Reconciliation of Non-GAAP Financial Measures" later in this press release for a reconciliation and more information on these measures.

  • Please see footnote 6 under "How We Evaluate Our Business" later in this press release.

  • Please see footnote 7 under "How We Evaluate Our Business" later in this press release.

"The results we announced today for the 2022 second quarter were outstanding, highlighting the resiliency of our business despite the macro backdrop," said Rudy Adolf, Founder, CEO and Chairman of Focus. "Our partners are demonstrating their ability to handle difficult market conditions and our business is weathering the challenging environment well. Our diverse revenue stream, variable cost structure, and the scale of our global partnership of 87 firms mitigate our market sensitivity. With 14 transactions year to date and a strong pipeline going into the second half of the year, we continue to expect that 2022 will be one of our best years for M&A. Times like these position our partner firms well for strong growth in the future. We believe that the growth opportunities during and particularly after significant market volatility, combined with the operating leverage on our business, will lead to our sustained outperformance once conditions stabilize."

"We are very pleased with the strength of our financial performance this past quarter," said Jim Shanahan, Chief Financial Officer. "Although the markets were exceptionally volatile, our 2022 second quarter results were again above the top end of our guidance and the resilience of our revenue performance is notable. We have continued to deploy capital in an extremely disciplined, measured way, particularly given the heightened risks created by the broader macro environment. We are executing well and navigating this storm. As a result, we expect to be well-positioned to benefit from the growth opportunity once macro conditions improve and deliver incremental value to our shareholders."

Second Quarter 2022 Financial Highlights

Total revenues were $539.2 million, 26.8%, or $113.9 million higher than the 2021 second quarter. The primary driver of this increase was revenue growth from our existing partner firms of approximately $64.0 million. The majority of this increase was driven by higher wealth management fees, which included the effect of mergers completed by our partner firms. The balance of the increase of $49.9 million was attributable to revenues from new partner firms acquired during the last twelve months. Our year-over-year organic revenue growth rate(1) was 15.0%, above our expected 11% to 14% range for the quarter.

An estimated 76.7%, or $413.8 million, of total revenues in the quarter were correlated to the financial markets. Of this amount, 67.2%, or $278.2 million, were generated from advance billings generally based on market levels in the 2022 first quarter. The remaining 23.3%, or $125.4 million, were not correlated to the markets. These revenues typically consist of family office type services, tax advice and fixed fees for investment advice, primarily for high and ultra-high net worth clients.

GAAP net income was $49.3 million compared to $5.2 million in the prior year quarter. GAAP basic and diluted net income per share attributable to common shareholders were $0.51 and $0.50, respectively, as compared to $0.04 for both basic and diluted net income per share in the prior year quarter.

Adjusted EBITDA(2) was $137.0 million, 27.1%, or $29.2 million, higher than the prior year period. Our Adjusted EBITDA margin(3) was 25.4%, above our outlook of approximately 24.5% to 25.0% for the quarter reflecting lower compensation expense.

Adjusted Net Income Excluding Tax Adjustments(2) was $81.7 million, and Tax Adjustments(4) were $16.0 million. Adjusted Net Income Excluding Tax Adjustments Per Share(2) was $0.99, up 17.9% compared to the prior year period, and Tax Adjustments Per Share(2) were $0.19, up 35.7% compared to the prior year period.

  • Please see footnote 2 under "How We Evaluate Our Business" later in this press release.

  • Non-GAAP financial measures. Please see "Reconciliation of Non-GAAP Financial Measures" later in this press release for a reconciliation and more information on these measures.

  • Calculated as Adjusted EBITDA divided by Revenues.

  • Please see footnote 6 under "How We Evaluate Our Business" later in this press release.

Balance Sheet and Liquidity

As of June 30, 2022, cash and cash equivalents were $221.0 million and debt outstanding under our credit facilities was approximately $2.5 billion, which included $100.0 million outstanding under our First Lien Revolver. In April 2022, we extended the maturity date of our First Lien Revolver to June 2024.

Our Net Leverage Ratio(1) as of June 30, 2022 was 3.90x. We remain committed to maintaining our Net Leverage Ratio(1) between 3.5x to 4.5x and believe this is the appropriate range for our business given our highly acquisitive nature.

As of June 30, 2022, $850 million, or 34.1%, of the debt outstanding under our credit facilities had LIBOR swapped from a floating rate to a fixed weighted average interest rate of 62 basis points plus a spread of 200 basis points. The residual amount of approximately $1.6 billion, primarily consisting of our First Lien Term Loan, remains at floating rates, with $792.4 million of this amount at an interest rate of LIBOR subject to a 50 basis point floor plus 250 basis points spread, and $752.6 million of this amount at an interest rate of LIBOR plus 200 basis points spread with no LIBOR floor. We have typically used 30-day LIBOR on our term loans.

Our net cash provided by operating activities for the trailing four quarters ended June 30, 2022 was $291.3 million compared to $298.9 million for the comparable period ended June 30, 2021. Our Cash Flow Available for Capital Allocation(2) for the trailing four quarters ended June 30, 2022 was $323.2 million compared to $266.0 million for the comparable period ended June 30, 2021. This 21.5% increase reflected the earnings growth of our partner firms and the addition of new partner firms. In the 2022 second quarter, we paid $33.3 million in cash earn-out obligations and $6.2 million of required amortization under our First Lien Term Loan.

  • Please see footnote 7 under "How We Evaluate Our Business" later in this press release.

  • Non-GAAP financial measure. See ‘‘Reconciliation of Non-GAAP Financial Measures-Cash Flow Available for Capital Allocation" later in this press release.

Teleconference, Webcast and Presentation Information

Founder, CEO and Chairman, Rudy Adolf, and Chief Financial Officer, Jim Shanahan, will host a conference call today, August 4, 2022 at 8:30 a.m. Eastern Time to discuss the Company's 2022 second quarter results and outlook. The call can be accessed by dialing +1-877-407-0989 (callers inside the U.S.) or +1-201-389-0921 (callers outside the U.S.).

A live, listen-only webcast, together with a slide presentation titled "Second Quarter 2022 Earnings Release Supplement" dated August 4, 2022 will be available under Events in the Investor Relations section of the Company's website, www.focusfinancialpartners.com. A webcast replay of the call will be available shortly after the event at the same address. Registration for the call will begin 15 minutes prior to the start of the call, using the following link.

About Focus Financial Partners Inc.

Focus Financial Partners Inc. is a leading partnership of independent, fiduciary wealth management firms. Focus provides access to best practices, resources, and continuity planning for its partner firms who serve individuals, families, employers and institutions with comprehensive wealth management services. Focus partner firms maintain their operational independence, while they benefit from the synergies, scale, economics and best practices offered by Focus to achieve their business objectives.

Cautionary Note Concerning Forward-Looking Statements

The foregoing information contains certain forward-looking statements that reflect the Company's current views with respect to certain current and future events and financial performance. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company's operations and business environment, including the impact and duration of the outbreak of Covid-19 and the conflict in Ukraine, which may cause the Company's actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Any forward-looking statements in this release are based upon information available to the Company on the date of this release. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company's financial results may be found in the Company's annual report on Form 10-K for the year ended December 31, 2021 filed and our other filings with the Securities and Exchange Commission.

Investor and Media Contacts

Tina Madon
Senior Vice President
Head of Investor Relations & Corporate Communications
Tel: (646) 813-2909
tmadon@focuspartners.com

Charlie Arestia
Vice President
Investor Relations & Corporate Communications
Tel: (646) 560-3999
carestia@focuspartners.com

How We Evaluate Our Business

We focus on several key financial metrics in evaluating the success of our business, the success of our partner firms and our resulting financial position and operating performance. Key metrics for the three and six months ended June 30, 2021 and 2022 include the following:

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2022

2021

2022

(dollars in thousands, except per share data)

Revenue Metrics:

Revenues

$

425,355

$

539,211

$

819,530

$

1,075,778

Revenue growth (1) from prior period

35.8

%

26.8

%

26.0

%

31.3

%

Organic revenue growth (2) from prior period

28.8

%

15.0

%

20.2

%

18.6

%

Management Fees Metrics (operating expense):

Management fees

$

116,205

$

136,802

$

218,277

$

274,641

Management fees growth (3) from prior period

50.9

%

17.7

%

35.8

%

25.8

%

Organic management fees growth (4)

from prior period

43.4

%

8.4

%

29.0

%

14.5

%

Net Income Metrics:

Net income

$

5,174

$

49,318

$

7,656

$

88,400

Net income growth from prior period

55.5

%

*

(79.5

)%

*

Income per share of Class A common stock:

Basic

$

0.04

$

0.51

$

0.04

$

0.95

Diluted

$

0.04

$

0.50

$

0.04

$

0.95

Income per share of Class A common stock

growth from prior period:

Basic

(20.0

)%

*

(91.7

)%

*

Diluted

33.3

%

*

(91.7

)%

*

Adjusted EBITDA Metrics:

Adjusted EBITDA (5)

$

107,789

$

137,021

$

208,784

$

272,101

Adjusted EBITDA growth (5) from prior period

44.2

%

27.1

%

36.7

%

30.3

%

Adjusted Net Income Excluding Tax Adjustments Metrics:

Adjusted Net Income Excluding Tax Adjustments (5)

$

67,800

$

81,679

$

131,249

$

164,752

Adjusted Net Income Excluding Tax Adjustments

growth (5) from prior period

50.3

%

20.5

%

44.8

%

25.5

%

Tax Adjustments

Tax Adjustments (5)(6)

$

11,038

$

15,977

$

21,530

$

30,790

Tax Adjustments growth from prior period (5)(6)

20.3

%

44.7

%

18.9

%

43.0

%

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2022

2021

2022

(dollars in thousands, except per share data)

Adjusted Net Income Excluding Tax Adjustments Per Share and Tax Adjustments Per Share Metrics:





Adjusted Net Income Excluding Tax Adjustments

Per Share (5)

$

0.84

$

0.99

$

1.62

$

2.01

Tax Adjustments Per Share (5)(6)

$

0.14

$

0.19

$

0.27

$

0.37

Adjusted Net Income Excluding Tax Adjustments

Per Share growth (5) from prior period

42.4

%

17.9

%

36.1

%

24.1

%

Tax Adjustments Per Share growth from

prior period (5)(6)

16.7

%

35.7

%

12.5

%

37.0

%

Adjusted Shares Outstanding

Adjusted Shares Outstanding (5)

81,076,423

82,312,683

81,020,580

82,123,532

Other Metrics:

Net Leverage Ratio (7) at period end

3.54

x

3.90

x

3.54

x

3.90

x

Acquired Base Earnings (8)

$

10,300

$

11,450

$

10,963

$

11,450

Number of partner firms at period end (9)

74

85

74

85

* Not meaningful

  • Represents period-over-period growth in our GAAP revenue.

  • Organic revenue growth represents the period-over-period growth in revenue related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms, including Connectus, and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented. We believe these growth statistics are useful in that they present full-period revenue growth of partner firms on a "same store" basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods.

  • The terms of our management agreements entitle the management companies to management fees typically consisting of all Earnings Before Partner Compensation ("EBPC") in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Management fees growth represents the period-over-period growth in GAAP management fees earned by management companies. While an expense, we believe that growth in management fees reflect the strength of the partnership.

  • Organic management fees growth represents the period-over-period growth in management fees earned by management companies related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented. We believe that these growth statistics are useful in that they present full-period growth of management fees on a "same store" basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods.

  • For additional information regarding Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments, Adjusted Net Income Excluding Tax Adjustments Per Share, Tax Adjustments, Tax Adjustments Per Share and Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share to the most directly comparable GAAP financial measure, please read "-Adjusted EBITDA" and "-Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share."

  • Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis. As of June 30, 2022, estimated Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% income tax rate for the next 12 months is $63.2 million.

  • Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in the Credit Facility), and means the ratio of amounts outstanding under the First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility).

  • The terms of our management agreements entitle the management companies to management fees typically consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings is equal to our preferred position in Base Earnings or comparable measures. We are entitled to receive these earnings notwithstanding any earnings that we are entitled to receive in excess of Target Earnings. Base Earnings may change in future periods for various business or contractual matters. For example, from time to time when a partner firm consummates an acquisition, the management agreement among the partner firm, the management company and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected post acquisition earnings of the partner firm.

  • Represents the number of partner firms on the last day of the period presented.

Unaudited Condensed Consolidated Financial Statements

FOCUS FINANCIAL PARTNERS INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)

For the three months ended

For the six months ended

June 30,

June 30,

2021

2022

2021

2022

REVENUES:

Wealth management fees

$

404,970

$

517,421

$

779,815

$

1,032,600

Other

20,385

21,790

39,715

43,178

Total revenues

425,355

539,211

819,530

1,075,778

OPERATING EXPENSES:

Compensation and related expenses

139,045

178,131

280,088

359,931

Management fees

116,205

136,802

218,277

274,641

Selling, general and administrative

69,018

94,771

132,844

183,421

Intangible amortization

44,003

64,649

86,986

124,925

Non-cash changes in fair value of estimated

contingent consideration

34,062

(42,757

)

59,998

(51,742

)

Depreciation and other amortization

3,606

3,805

7,213

7,438

Total operating expenses

405,939

435,401

785,406

898,614

INCOME FROM OPERATIONS

19,416

103,810

34,124

177,164

OTHER INCOME (EXPENSE):

Interest income

57

17

104

20

Interest expense

(10,829

)

(19,892

)

(21,350

)

(37,508

)

Amortization of debt financing costs

(902

)

(949

)

(1,754

)

(2,050

)

Other expense-net

(534

)

(1,451

)

(531

)

(1,487

)

Income from equity method investments

140

11

423

106

Total other expense-net

(12,068

)

(22,264

)

(23,108

)

(40,919

)

INCOME BEFORE INCOME TAX

7,348

81,546

11,016

136,245

INCOME TAX EXPENSE

2,174

32,228

3,360

47,845

NET INCOME

5,174

49,318

7,656

88,400

Non-controlling interest

(3,197

)

(16,235

)

(5,423

)

(26,215

)

NET INCOME ATTRIBUTABLE TO

COMMON SHAREHOLDERS

$

1,977

$

33,083

$

2,233

$

62,185

Income per share of Class A

common stock:

Basic

$

0.04

$

0.51

$

0.04

$

0.95

Diluted

$

0.04

$

0.50

$

0.04

$

0.95

Weighted average shares of Class A

common stock outstanding:

Basic

55,710,666

65,389,642

53,965,045

65,360,667

Diluted

56,162,822

65,596,377

54,418,520

65,682,081

FOCUS FINANCIAL PARTNERS INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

December 31,

June 30,

2021

2022

ASSETS

Cash and cash equivalents

$

310,684

$

221,049

Accounts receivable less allowances of $3,255 at 2021 and $4,201 at 2022

198,827

206,909

Prepaid expenses and other assets

123,826

165,711

Fixed assets-net

47,199

46,856

Operating lease assets

249,850

254,853

Debt financing costs-net

4,254

4,169

Deferred tax assets-net

267,332

236,040

Goodwill

1,925,315

2,050,297

Other intangible assets-net

1,581,719

1,624,878

TOTAL ASSETS

$

4,709,006

$

4,810,762

LIABILITIES AND EQUITY

LIABILITIES

Accounts payable

$

11,580

$

16,228

Accrued expenses

72,572

91,885

Due to affiliates

105,722

53,905

Deferred revenue

10,932

10,117

Contingent consideration and other liabilities

468,284

370,775

Deferred tax liabilities

31,973

35,682

Operating lease liabilities

277,324

283,852

Borrowings under credit facilities (stated value of $2,407,302 and

$2,494,954 at December 31, 2021 and June 30, 2022, respectively)

2,393,669

2,482,697

Tax receivable agreements obligations

219,542

216,765

TOTAL LIABILITIES

3,591,598

3,561,906

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized;

65,320,124 and 65,442,389 shares issued and outstanding at

December 31, 2021 and June 30, 2022, respectively

653

654

Class B common stock, par value $0.01, 500,000,000 shares authorized;

11,439,019 and 12,034,104 shares issued and outstanding at

December 31, 2021 and June 30, 2022, respectively

114

120

Additional paid-in capital

841,753

910,222

Retained earnings

24,995

87,180

Accumulated other comprehensive income

3,029

15,859

Total shareholders' equity

870,544

1,014,035

Non-controlling interest

246,864

234,821

Total equity

1,117,408

1,248,856

TOTAL LIABILITIES AND EQUITY

$

4,709,006

$

4,810,762

FOCUS FINANCIAL PARTNERS INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

For the six months ended

June 30,

2021

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

7,656

$

88,400

Adjustments to reconcile net income to net cash provided by operating

activities-net of effect of acquisitions:

Intangible amortization

86,986

124,925

Depreciation and other amortization

7,213

7,438

Amortization of debt financing costs

1,754

2,050

Non-cash equity compensation expense

18,631

14,210

Non-cash changes in fair value of estimated contingent consideration

59,998

(51,742

)

Income from equity method investments

(423

)

(106

)

Distributions received from equity method investments

403

776

Deferred taxes and other non-cash items

1,425

29,576

Changes in cash resulting from changes in operating assets and liabilities:

Accounts receivable

(10,038

)

(9,398

)

Prepaid expenses and other assets

(14,450

)

(9,776

)

Accounts payable

(527

)

4,778

Accrued expenses

16,883

21,446

Due to affiliates

(9,765

)

(51,962

)

Contingent consideration and other liabilities

(13,986

)

(40,201

)

Deferred revenue

200

(1,122

)

Net cash provided by operating activities

151,960

129,292

CASH FLOWS FROM INVESTING ACTIVITIES:

Cash paid for acquisitions and contingent consideration-net of cash acquired

(82,106

)

(252,056

)

Purchase of fixed assets

(4,318

)

(6,429

)

Investment and other, net

(19,132

)

(5,232

)

Net cash used in investing activities

(105,556

)

(263,717

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under credit facilities

524,375

100,000

Repayments of borrowings under credit facilities

(413,347

)

(12,348

)

Proceeds from issuance of common stock, net

25,767

-

Payments in connection with unit redemption, net

(25,767

)

-

Payments in connection with tax receivable agreements

(4,423

)

(3,856

)

Contingent consideration paid

(57,030

)

(21,397

)

Payments of debt financing costs

(2,700

)

(1,111

)

Proceeds from exercise of stock options

4,017

422

Distributions for unitholders

(19,108

)

(15,956

)

Other

(39

)

375

Net cash provided by financing activities

31,745

46,129

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

(26

)

(1,339

)

CHANGE IN CASH AND CASH EQUIVALENTS

78,123

(89,635

)

CASH AND CASH EQUIVALENTS:

Beginning of period

65,858

310,684

End of period

$

143,981

$

221,049

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income excluding interest income, interest expense, income tax expense, amortization of debt financing costs, intangible amortization and impairments, if any, depreciation and other amortization, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, other expense-net, and secondary offering expenses, if any. We believe that Adjusted EBITDA, viewed in addition to and not in lieu of, our reported GAAP results, provides additional useful information to investors regarding our performance and overall results of operations for various reasons, including the following:

  • non-cash equity grants made to employees or non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock-based compensation expense is not a key measure of our operating performance;

  • contingent consideration or earn outs can vary substantially from company to company and depending upon each company's growth metrics and accounting assumption methods; the non-cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and

  • amortization expenses can vary substantially from company to company and from period to period depending upon each company's financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance.

We use Adjusted EBITDA:

  • as a measure of operating performance;

  • for planning purposes, including the preparation of budgets and forecasts;

  • to allocate resources to enhance the financial performance of our business;

  • to evaluate the effectiveness of our business strategies; and

  • as a consideration in determining compensation for certain employees.

Adjusted EBITDA does not purport to be an alternative to net income or cash flows from operating activities. The term Adjusted EBITDA is not defined under GAAP, and Adjusted EBITDA is not a measure of net income, operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

  • Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;

  • Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and

  • Adjusted EBITDA does not reflect the interest expense on our debt or the cash requirements necessary to service interest or principal payments.

In addition, Adjusted EBITDA can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by also relying on the GAAP results and using Adjusted EBITDA as supplemental information.

Set forth below is a reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2021 and 2022:

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2022

2021

2022

(in thousands)

Net income

$

5,174

$

49,318

$

7,656

$

88,400

Interest income

(57

)

(17

)

(104

)

(20

)

Interest expense

10,829

19,892

21,350

37,508

Income tax expense

2,174

32,228

3,360

47,845

Amortization of debt financing costs

902

949

1,754

2,050

Intangible amortization

44,003

64,649

86,986

124,925

Depreciation and other amortization

3,606

3,805

7,213

7,438

Non-cash equity compensation expense

6,275

7,503

18,631

14,210

Non-cash changes in fair value of estimated

contingent consideration

34,062

(42,757

)

59,998

(51,742

)

Other expense-net

534

1,451

531

1,487

Secondary offering expenses

287

-

1,409

-

Adjusted EBITDA

$

107,789

$

137,021

$

208,784

$

272,101

Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share

We analyze our performance using Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share. Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are non‑GAAP measures. We define Adjusted Net Income Excluding Tax Adjustments as net income excluding income tax expense, amortization of debt financing costs, intangible amortization and impairments, if any, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration and secondary offering expenses, if any. The calculation of Adjusted Net Income Excluding Tax Adjustments also includes adjustments to reflect a pro forma 27% income tax rate reflecting the estimated U.S. federal, state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business.

Adjusted Net Income Excluding Tax Adjustments Per Share is calculated by dividing Adjusted Net Income Excluding Tax Adjustments by the Adjusted Shares Outstanding. Adjusted Shares Outstanding includes: (i) the weighted average shares of Class A common stock outstanding during the periods, (ii) the weighted average incremental shares of Class A common stock related to stock options and restricted stock units outstanding during the periods, (iii) the weighted average number of Focus LLC common units outstanding during the periods (assuming that 100% of such Focus LLC common units, including contingently issuable Focus LLC common units, if any, have been exchanged for Class A common stock), (iv) the weighted average number of Focus LLC restricted common units outstanding during the periods (assuming that 100% of such Focus LLC restricted common units have been exchanged for Class A common stock) and (v) the weighted average number of common unit equivalents of Focus LLC vested and unvested incentive units outstanding during the periods based on the closing price of our Class A common stock on the last trading day of the periods (assuming that 100% of such Focus LLC common units have been exchanged for Class A common stock).

We believe that Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide additional useful information to investors regarding our performance and overall results of operations for various reasons, including the following:

  • non‑cash equity grants made to employees or non‑employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock‑based compensation expense is not a key measure of our operating performance;

  • contingent consideration or earn outs can vary substantially from company to company and depending upon each company's growth metrics and accounting assumption methods; the non‑cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and

  • amortization expenses can vary substantially from company to company and from period to period depending upon each company's financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance.

Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not purport to be an alternative to net income or cash flows from operating activities. The terms Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not defined under GAAP, and Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not a measure of net income, operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

  • Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;

  • Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share do not reflect changes in, or cash requirements for, working capital needs; and

  • Other companies in the financial services industry may calculate Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share differently than we do, limiting its usefulness as a comparative measure.

In addition, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and use Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share as supplemental information.

Tax Adjustments and Tax Adjustments Per Share

Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis.

Tax Adjustments Per Share is calculated by dividing Tax Adjustments by the Adjusted Shares Outstanding.

Set forth below is a reconciliation of net income to Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share for the three and six months ended June 30, 2021 and 2022:

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2022

2021

2022

(dollars in thousands, except per share data)

Net income

$

5,174

$

49,318

$

7,656

$

88,400

Income tax expense

2,174

32,228

3,360

47,845

Amortization of debt financing costs

902

949

1,754

2,050

Intangible amortization

44,003

64,649

86,986

124,925

Non-cash equity compensation expense

6,275

7,503

18,631

14,210

Non-cash changes in fair value of estimated

contingent consideration

34,062

(42,757

)

59,998

(51,742

)

Secondary offering expenses (1)

287

-

1,409

-

Subtotal

92,877

111,890

179,794

225,688

Pro forma income tax expense (27%) (2)

(25,077

)

(30,211

)

(48,545

)

(60,936

)

Adjusted Net Income Excluding Tax Adjustments

$

67,800

$

81,679

$

131,249

$

164,752

Tax Adjustments (3)

$

11,038

$

15,977

$

21,530

$

30,790

Adjusted Net Income Excluding Tax Adjustments Per Share

$

0.84

$

0.99

$

1.62

$

2.01

Tax Adjustments Per Share (3)

$

0.14

$

0.19

$

0.27

$

0.37

Adjusted Shares Outstanding

81,076,423

82,312,683

81,020,580

82,123,532

Calculation of Adjusted Shares Outstanding:

Weighted average shares of Class A common

stock outstanding-basic (4)

55,710,666

65,389,642

53,965,045

65,360,667

Adjustments:

Weighted average incremental shares of

Class A common stock related to stock

options and restricted stock units (5)

452,156

206,735

453,475

321,414

Weighted average Focus LLC common units

outstanding (6)

16,537,585

12,175,282

18,121,604

11,900,077

Weighted average Focus LLC restricted

common units outstanding (7)

71,374

193,625

71,374

193,625

Weighted average common unit equivalent of

Focus LLC incentive units outstanding (8)

8,304,642

4,347,399

8,409,082

4,347,749

Adjusted Shares Outstanding

81,076,423

82,312,683

81,020,580

82,123,532

  • Relates to offering expenses associated with the March 2021 and June 2021 secondary offerings.

  • The pro forma income tax rate of 27% reflects the estimated U.S. federal, state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business.

  • Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired intangible assets with the step-up in tax basis. As of June 30, 2022, estimated Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% income tax rate for the next 12 months is $63.2 million.

  • Represents our GAAP weighted average Class A common stock outstanding-basic.

  • Represents the incremental shares related to stock options and restricted stock units as calculated under the treasury stock method.

  • Assumes that 100% of the Focus LLC common units, including contingently issuable Focus LLC common units, if any, were exchanged for Class A common stock.

  • Assumes that 100% of the Focus LLC restricted common units were exchanged for Class A common stock.

  • Assumes that 100% of the vested and unvested Focus LLC incentive units were converted into Focus LLC common units based on the closing price of our Class A common stock at the end of the respective period and such Focus LLC common units were exchanged for Class A common stock.

Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation

To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP liquidity measures on a trailing 4-quarter basis to analyze cash flows generated from our operations. We consider Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation to be liquidity measures that provide useful information to investors about the amount of cash generated by the business and are two factors in evaluating the amount of cash available to pay contingent consideration, make strategic acquisitions and repay outstanding borrowings. Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation do not represent our residual cash flow available for discretionary expenditures as they do not deduct our mandatory debt service requirements and other non-discretionary expenditures. We define Adjusted Free Cash Flow as net cash provided by operating activities, less purchase of fixed assets, distributions for Focus LLC unitholders and payments under tax receivable agreements (if any). We define Cash Flow Available for Capital Allocation as Adjusted Free Cash Flow plus the portion of contingent consideration paid which is classified as operating cash flows under GAAP. The balance of such contingent consideration is classified as investing and financing cash flows under GAAP; therefore, we add back the amount included in operating cash flows so that the full amount of contingent consideration payments is treated consistently. Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation are not defined under GAAP and should not be considered as alternatives to net cash from operating, investing or financing activities. In addition, Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation can differ significantly from company to company.

Set forth below is a reconciliation of net cash provided by operating activities to Adjusted Free Cash Flow and Cash Flow Available for Capital Allocation for the trailing 4-quarters ended June 30, 2021 and 2022:

Trailing 4-Quarters Ended

June 30,

2021

2022

(in thousands)

Net cash provided by operating activities

$

298,943

$

291,250

Purchase of fixed assets

(17,720

)

(13,129

)

Distributions for unitholders

(33,922

)

(29,159

)

Payments under tax receivable agreements

(4,423

)

(3,856

)

Adjusted Free Cash Flow

$

242,878

$

245,106

Portion of contingent consideration paid included in operating activities (1)

23,081

78,105

Cash Flow Available for Capital Allocation (2)

$

265,959

$

323,211

  • A portion of contingent consideration paid is classified as operating cash outflows in accordance with GAAP, with the balance reflected in investing and financing cash outflows. Contingent consideration paid classified as operating cash outflows for each of the trailing 4-quarters ended June 30, 2021 was $3.8 million, $2.4 million, $5.3 million and $11.6 million, respectively, totaling $23.1 million for the trailing 4-quarters ended June 30, 2021. Contingent consideration paid classified as operating cash outflows for each of the trailing 4-quarters ended June 30, 2022 was $20.4 million, $16.4 million, $23.1 million and $18.2 million, respectively, totaling $78.1 million for the trailing 4-quarters ended June 30, 2022.

  • Cash Flow Available for Capital Allocation excludes all contingent consideration that was included in either operating, investing or financing activities of our consolidated statements of cash flows.

Supplemental Information

Economic Ownership
The following table provides supplemental information regarding the economic ownership of Focus Financial Partners, LLC as of June 30, 2022:

June 30, 2022

Economic Ownership of Focus Financial Partners, LLC Interests:

Interest

%

Focus Financial Partners Inc.

65,442,389

79.8

%

Non-Controlling Interests (1)

16,575,128

20.2

%

Total

82,017,517

100.0

%

  • Includes 4,347,399 Focus LLC common units issuable upon conversion of the outstanding 16,202,274 vested and unvested incentive units (assuming vesting of the unvested incentive units and a June 30, 2022 period end value of the Focus LLC common units equal to $34.06) and includes 193,625 Focus LLC restricted common units.

Class A and Class B Common Stock Outstanding

The following table provides supplemental information regarding the Company's Class A and Class B common stock:

Number of Shares Outstanding at
June 30, 2022

Number of Shares Outstanding at
August 1, 2022

Class A

65,442,389

65,448,434

Class B

12,034,104

12,035,266

Incentive Units

The following table provides supplemental information regarding the outstanding Focus LLC vested and unvested Incentive Units ("IUs") at June 30, 2022. The vested IUs in future periods can be exchanged into shares of Class A common stock (after conversion into a number of Focus LLC common units that takes into account the then-current value of common units and such IUs aggregate hurdle amount), and therefore, the Company calculates the Class A common stock equivalent of such IUs for purposes of calculating per share data. The period-end share price of the Company's Class A common stock is used to calculate the intrinsic value of the outstanding Focus LLC IUs in order to calculate a Focus LLC common unit equivalent of the Focus LLC IUs.

Hurdle
Rates

Number
Outstanding

$

1.42

421

$

5.50

798

$

6.00

386

$

7.00

1,081

$

9.00

708,107

$

11.00

813,001

$

12.00

513,043

$

13.00

540,000

$

14.00

10,098

$

16.00

45,191

$

17.00

20,000

$

19.00

527,928

$

21.00

3,045,236

$

22.00

821,417

$

23.00

524,828

$

26.26

12,500

$

27.00

12,484

$

27.90

1,929,424

$

28.50

1,440,230

$

30.48

30,000

$

33.00

3,617,500

$

36.64

30,000

$

43.07

60,000

$

43.50

30,000

$

44.71

806,324

$

58.50

662,277

16,202,274

SOURCE: Focus Financial Partners Inc.



08/04/2022 EQS Newswire / EQS Group AG



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