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Focus Financial Partners Reports Second Quarter 2020 Results

Thursday, 06 August 2020 07:00 AM

Focus Financial Partners

Topic:
Earnings

Performance Exceeds Expectations Demonstrating Resiliency of Business Model

NEW YORK, NY / ACCESSWIRE / August 6, 2020 / 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, 2020.

Second Quarter 2020 Highlights

  • Total revenues of $313.1 million, 3.8% growth year over year
  • Organic revenue growth(1) rate essentially flat year over year
  • GAAP net income of $3.3 million, 7.3% growth year over year
  • GAAP basic and diluted net income per share attributable to common shareholders of $0.05 and $0.03, respectively
  • Adjusted Net Income(2) of $54.3 million, 31.7% growth year over year
  • Adjusted Net Income Per Share(2) of $0.71, 29.1% growth year over year
  • Net cash provided by operating activities for the trailing 4-quarters ended June 30, 2020 was $203.9 million, 64.5% higher than the prior year period
  • LTM Cash Flow Available For Capital Allocation(2) for the trailing 4-quarters ended June 30, 2020 was $192.4 million, 65.0% higher than the prior year period
  • Repaid $200 million drawn under First Lien Revolver in March 2020 as market liquidity stabilized
  • Net Leverage Ratio(3) of 3.85x
  • Reaffirmed Net Leverage Ratio(3) target range of 3.5x - 4.5x

(1) Please see footnote 2 under "How We Evaluate Our Business" later in this press release.
(2) 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.
(3) Please see footnote 6 under "How We Evaluate Our Business" later in this press release.

"Our 2020 second quarter results exceeded the high end of our expectations and are a powerful affirmation of the resiliency of our business," said Rudy Adolf, Founder, CEO and Chairman. "Our business is weathering the volatile markets well. Our partner firms are doing an outstanding job of helping their clients navigate the ongoing uncertainty. The crisis has made clear the value of holistic and highly personalized service, especially for ultra-high and high net worth clients. Our partner firms are well suited to this, which is reflected in the referrals they are seeing. We anticipate that the flight to quality of advice will accelerate further and be a catalyst for industry growth above historical levels in the next several years. I am confident that we will benefit disproportionately."

"Our second quarter results were a testament to the strength of our business," said Jim Shanahan, Chief Financial Officer. "We needed a market crisis to demonstrate the performance of our model under pressure. Our Q2 financial performance exceeded the high end of our estimated range. Our net leverage ratio declined to 3.85x during the quarter, and we again reaffirmed our targeted range of 3.5x to 4.5x. Although Covid-19 uncertainty persisted throughout the quarter, our partner firms continued to deliver excellent service to their clients and manage their businesses well, while simultaneously positioning themselves for future growth. We believe the opportunity set post-crisis will be substantial."

Second Quarter 2020 Financial Highlights

Total revenues were $313.1 million, 3.8%, or $11.6 million higher than the 2019 second quarter. The majority of this growth was the result of new partner firms added during the twelve months ended June 30, 2020. Our year over year organic revenue growth rate(1) was essentially flat for the quarter, compared to 18.0% in the prior year quarter and substantially higher than the expected decrease of (5%) to (7%).

An estimated 72.3%, or $226.4 million, of total revenues in the quarter were correlated to the financial markets. Of this amount, 67.0%, or $151.7 million, were generated from advance billings primarily based on financial market levels in the 2020 first quarter. The remaining 27.7%, or $86.7 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. In excess of 95% of total revenues were fee-based and recurring.

GAAP net income was $3.3 million compared to GAAP net income of $3.1 million in the prior year quarter. GAAP basic and diluted net income per share attributable to common shareholders was $0.05 and $0.03, respectively, compared to $0.02 for both basic and diluted in the prior year quarter.

Adjusted EBITDA(2) was $74.8 million, 18.7%, or $11.8 million, higher than the prior year period, and our Adjusted EBITDA margin(3) was 23.9%, well ahead of our outlook of 22% for the quarter. The higher than estimated margin was primarily due to our revenue outperformance and lower than expected SG&A costs as a result of the Covid-19 pandemic.

Adjusted Net Income(2) was $54.3 million, an increase of 31.7%, or $13.1 million over the prior year quarter. Adjusted Net Income Per Share(2) was $0.71 per share, $0.16, or 29.1% higher year over year.

(1) Please see footnote 2 under "How We Evaluate Our Business" later in this press release.
(2) 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.
(3) Calculated as Adjusted EBITDA divided by Revenues.

2020 Year-to-Date Financial Highlights

Total revenues were $650.2 million, 15.8%, or $88.7 million higher than the first six months of 2019. The primary driver of this increase was revenue growth from our existing partner firms of approximately $63.1 million. The majority of this growth was driven by higher wealth management fees, which includes the effect of mergers completed by our partner firms in the twelve months ended June 30, 2020, as well as a full period of revenues recognized during the first six months of 2020 for partner firms that were acquired in the first six months of 2019. The balance of the increase of $25.6 million was due to revenues from new partner firms acquired over the twelve months ended June 30, 2020. Our year over year organic revenue growth rate(1) for the year-to-date period was 9.8%, 1.2 percentage points lower than the 11.0% rate in the prior year period.

GAAP net income was $37.3 million compared to GAAP net income of $0.3 million in the prior year period. GAAP basic and diluted net income per share attributable to common shareholders was $0.48 compared to $(0.05) for both basic and diluted in the prior year period.

Adjusted EBITDA(2) was $152.8 million, 30.1%, or $35.3 million, higher than the prior year period. Our Adjusted EBITDA margin(3) was 23.5%, 2.6 percentage points higher than the prior year period primarily reflecting lower levels of SG&A expenses relative to revenue during the Covid-19 pandemic.

Adjusted Net Income(2) was $108.7 million, an increase of 41.3%, or $31.8 million over the prior year period. Adjusted Net Income Per Share(2) was $1.43 per share, $0.40, or 38.8% higher year-over-year.

(1) Please see footnote 2 under "How We Evaluate Our Business" later in this press release.
(2) 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.
(3) Calculated as Adjusted EBITDA divided by Revenues.

Balance Sheet and Liquidity

As of June 30, 2020, cash and cash equivalents were $35.3 million and debt outstanding under the Company's credit facilities was approximately $1.3 billion. In the second quarter, we repaid the $200 million we borrowed under our First Lien Revolver ("Revolver") in March to enhance our liquidity position at the initial onset of the Covid-19 pandemic. We had no immediate need for the cash and liquidity, and the financial markets have since stabilized.

Of our total debt outstanding as of June 30, 2020, approximately $1.13 billion were borrowings under our Term Loan and $160.0 million were borrowings under our Revolver. Our Net Leverage Ratio(1) at June 30, 2020 was 3.85x, within our target range of 3.5x to 4.5x. We remain committed to maintaining our Net Leverage Ratio at 3.5x to 4.5x and believe this is the appropriate range for our business given our highly acquisitive nature.

Our net cash provided by operating activities for the trailing four quarters ended June 30, 2020 increased 64.5% to $203.9 million from $124.0 million for the comparable period ended June 30, 2019. Our Cash Flow Available for Capital Allocation(2) for the trailing four quarters ended June 30, 2020 increased 65.0% to $192.4 million from $116.6 million for the comparable period ended June 30, 2019. These increases reflect the earnings growth of our partner firms, the addition of new partner firms during the trailing four quarter period and the increase in our Adjusted EBITDA margin. In the 2020 second quarter, we paid $30.9 million of earn-out obligations and $2.9 million of required amortization under our Term Loan.

We took advantage of historically low interest rates during the second quarter to further reduce the variable interest rate exposure on our outstanding borrowings. Following the floating to fixed interest rate swap agreement we entered into in March 2020, which effectively fixed the variable interest rate applicable to $400 million of our Term Loan to 2.713% (inclusive of the 2.0% LIBOR spread), in April 2020, we entered into two additional interest rate swap agreements. These effectively fixed the variable interest rate applicable to an additional $450 million of the total borrowings under our Term Loan to approximately 2.53% (inclusive of the 2.0% LIBOR spread) over 4 years.

As of June 30, 2020, $850 million, or approximately 75%, of our Term Loan had been swapped from a floating rate to a weighted average fixed rate of 2.62%. The residual amount of approximately $283.4 million under the Term Loan as well as all Revolver borrowings remain at floating rates.

(1) Please see footnote 6 under "How We Evaluate Our Business" later in this press release.
(2) 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 6, 2020 at 8:30 a.m. Eastern Time to discuss the Company's 2020 second quarter results and outlook. The call can be accessed by dialing +1-877-407-0989 (inside the U.S.) or +1-201-389-0921 (outside the U.S.).

A live, listen-only webcast, together with a slide presentation titled "2020 Second Quarter Earnings Release Supplement" dated August 6, 2020 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 20 minutes prior to the start of the call, using the following link.

https://hd.choruscall.com/InComm/?callme=true&passcode=13698868&h=true&info=company&r=true&B=6

About Focus Financial Partners Inc.

Focus Financial Partners 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, 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, 2019 and quarterly report on Form 10-Q for the quarter ended June 30, 2020 filed and our other filings with the Securities and Exchange Commission.

Investor and Media Contact

Tina Madon
Head of Investor Relations & Corporate Communications
Tel: (646) 813-2909
[email protected]

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, 2019 and 2020 include the following:

 
  Three Months Ended     Six Months Ended  
 
  June 30,     June 30,  
 
  2019     2020     2019     2020  
 
  (dollars in thousands, except per share data)  
Revenue Metrics:
                       
Revenues
  $ 301,545     $ 313,109     $ 561,469     $ 650,163  
Revenue growth (1) from prior period
    30.3 %     3.8 %     31.3 %     15.8 %
Organic revenue growth (2) from prior period
    18.0 %     (0.3 )%     11.0 %     9.8 %
 
                               
Management Fees Metrics (operating expense):
                               
Management fees
  $ 79,252     $ 76,987     $ 136,258     $ 160,680  
Management fees growth (3) from prior period
    30.9 %     (2.9 )%     27.5 %     17.9 %
Organic management fees growth (4)
                               
from prior period
    16.5 %     (8.2 )%     6.6 %     9.7 %
 
                               
Net income (loss) metrics:
                               
Net income
  $ 3,102     $ 3,328     $ 274     $ 37,347  
Net income growth from prior period
    140.5 %     7.3 %     101.4 %     *  
Income (loss) per share of Class A common stock:
                               
Basic
  $ 0.02     $ 0.05     $ (0.05 )   $ 0.48  
Diluted
  $ 0.02     $ 0.03     $ (0.05 )   $ 0.48  
Income (loss) per share of Class A common stock
                               
change from prior period:
                               
Basic
    N/A       150.0 %     N/A     $ *  
Diluted
    N/A       50.0 %     N/A     $ *  
 
                               
Adjusted EBITDA Metrics:
                               
Adjusted EBITDA (5)
  $ 62,953     $ 74,756     $ 117,467     $ 152,776  
Adjusted EBITDA growth (5) from prior period
    21.3 %     18.7 %     22.2 %     30.1 %
 
                               
Adjusted Net Income Metrics:
                               
Adjusted Net Income (5)
  $ 41,232     $ 54,293     $ 76,946     $ 108,743  
Adjusted Net Income growth (5) from prior period
    42.1 %     31.7 %     41.3 %     41.3 %
 
                               
Adjusted Net Income Per Share Metrics:
                               
Adjusted Net Income Per Share (5)
  $ 0.55     $ 0.71     $ 1.03     $ 1.43  
Adjusted Net Income Per Share growth (5)
                               
from prior period
    37.5 %     29.1 %     35.5 %     38.8 %
Adjusted Shares Outstanding (5)
    74,444,102       76,239,848       74,422,405       76,256,932  
 
                               
Other Metrics:
                               
Net Leverage Ratio (6) at period end
    4.05 x     3.85 x     4.05 x     3.85 x
Acquired Base Earnings (7)
  $ 6,725     $ 1,045     $ 18,638     $ 4,235  
Number of partner firms at period end (8)
    62       65       62       65  
 
                               

* Not meaningful

(1) Represents period-over-period growth in our GAAP revenue.
(2) 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 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.
(3) 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.
(4) 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.
(5) For additional information regarding Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Share and Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Share and Adjusted Shares Outstanding to the most directly comparable GAAP financial measure, please read "Reconciliation of Non-GAAP Financial Measures-Adjusted EBITDA" and "Reconciliation of Non-GAAP Financial Measures -Adjusted Net Income and Adjusted Net Income Per Share."
(6) 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).
(7) 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 retained cumulative preferred position in Base Earnings. 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.
(8) Represents the number of partner firms on the last day of the period presented. The number includes new partner firms acquired during the period reduced by any partner firms that merged with existing partner firms prior to the last day of the period.

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,  
 
  2019     2020     2019     2020  
REVENUES:
                       
Wealth management fees
  $ 283,296     $ 295,119     $ 526,380     $ 613,722  
Other
    18,249       17,990       35,089       36,441  
Total revenues
    301,545       313,109       561,469       650,163  
OPERATING EXPENSES:
                               
Compensation and related expenses
    105,531       113,914       206,979       231,758  
Management fees
    79,252       76,987       136,258       160,680  
Selling, general and administrative
    59,736       52,752       111,993       115,347  
Management contract buyout
    -       -       1,428       -  
Intangible amortization
    31,221       36,012       59,962       71,735  
Non-cash changes in fair value of estimated
                               
contingent consideration
    3,847       16,472       11,261       (14,901 )
Depreciation and other amortization
    2,425       3,029       4,738       6,011  
Total operating expenses
    282,012       299,166       532,619       570,630  
INCOME FROM OPERATIONS
    19,533       13,943       28,850       79,533  
OTHER INCOME (EXPENSE):
                               
Interest income
    339       66       536       351  
Interest expense
    (14,424 )     (10,057 )     (27,283 )     (23,643 )
Amortization of debt financing costs
    (782 )     (709 )     (1,564 )     (1,491 )
Loss on extinguishment of borrowings
    -       -       -       (6,094 )
Other (expense) income-net
    (468 )     70       (704 )     682  
Income from equity method investments
    329       52       643       116  
Total other expense-net
    (15,006 )     (10,578 )     (28,372 )     (30,079 )
INCOME BEFORE INCOME TAX
    4,527       3,365       478       49,454  
INCOME TAX EXPENSE
    1,425       37       204       12,107  
NET INCOME
    3,102       3,328       274       37,347  
Non-controlling interest
    (2,306 )     (919 )     (2,420 )     (14,542 )
NET INCOME (LOSS) ATTRIBUTABLE TO
                               
COMMON SHAREHOLDERS
  $ 796     $ 2,409     $ (2,146 )   $ 22,805  
Income (loss) per share of Class A
                               
common stock:
                               
Basic
  $ 0.02     $ 0.05     $ (0.05 )   $ 0.48  
Diluted
  $ 0.02     $ 0.03     $ (0.05 )   $ 0.48  
Weighted average shares of Class A
                               
common stock outstanding:
                               
Basic
    46,696,200       47,847,756       46,455,238       47,642,156  
Diluted
    46,721,559       73,418,108       46,455,238       47,651,057  
                                 

FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated balance sheets
(in thousands, except share and per share amounts)

 
  December 31,     June 30,  
 
  2019     2020  
ASSETS
           
Cash and cash equivalents
  $ 65,178     $ 35,329  
Accounts receivable less allowances of $684 at 2019 and $997 at 2020
    129,337       147,592  
Prepaid expenses and other assets
    58,581       55,802  
Fixed assets-net
    41,634       41,660  
Operating lease assets
    180,114       202,548  
Debt financing costs-net
    9,645       8,297  
Deferred tax assets-net
    75,453       76,209  
Goodwill
    1,090,231       1,121,153  
Other intangible assets-net
    1,003,456       972,506  
TOTAL ASSETS
  $ 2,653,629     $ 2,661,096  
LIABILITIES AND EQUITY
               
LIABILITIES
               
Accounts payable
  $ 8,077     $ 7,438  
Accrued expenses
    41,442       50,345  
Due to affiliates
    58,600       27,173  
Deferred revenue
    7,839       8,077  
Other liabilities
    215,878       170,760  
Operating lease liabilities
    196,425       221,339  
Borrowings under credit facilities (stated value of $1,279,188 and
               
$1,293,405 at December 31, 2019 and June 30, 2020, respectively)
    1,272,999       1,292,831  
Tax receivable agreements obligations
    48,399       51,923  
TOTAL LIABILITIES
    1,849,659       1,829,886  
EQUITY
               
Class A common stock, par value $0.01, 500,000,000 shares authorized;
               
47,421,315 and 48,091,707 shares issued and outstanding at
               
December 31, 2019 and June 30, 2020, respectively
    474       481  
Class B common stock, par value $0.01, 500,000,000 shares authorized;
               
22,075,749 and 21,496,103 shares issued and outstanding at
               
December 31, 2019 and June 30, 2020, respectively
    221       215  
Additional paid-in capital
    498,186       503,209  
Retained earnings (deficit)
    (13,462 )     9,343  
Accumulated other comprehensive loss
    (1,299 )     (8,516 )
Total shareholders' equity
    484,120       504,732  
Non-controlling interest
    319,850       326,478  
Total equity
    803,970       831,210  
TOTAL LIABILITIES AND EQUITY
  $ 2,653,629     $ 2,661,096  
 
               

FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of cash flows
(in thousands)

 
  For the six months ended  
 
  June 30,  
 
  2019     2020  
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 274     $ 37,347  
Adjustments to reconcile net income to net cash provided by operating
               
activities-net of effect of acquisitions:
               
Intangible amortization
    59,962       71,735  
Depreciation and other amortization
    4,738       6,011  
Amortization of debt financing costs
    1,564       1,491  
Non-cash equity compensation expense
    9,099       10,282  
Non-cash changes in fair value of estimated contingent consideration
    11,261       (14,901 )
Income from equity method investments
    (643 )     (116 )
Distributions received from equity method investments
    618       52  
Deferred taxes and other non-cash items
    843       3,333  
Loss on extinguishment of borrowings
    -       6,094  
Changes in cash resulting from changes in operating assets and liabilities:
               
Accounts receivable
    (18,219 )     (15,905 )
Prepaid expenses and other assets
    3,220       2,780  
Accounts payable
    389       (981 )
Accrued expenses
    25,166       7,600  
Due to affiliates
    (16,518 )     (31,225 )
Other liabilities
    (24,848 )     (18,406 )
Deferred revenue
    (1,688 )     (813 )
Net cash provided by operating activities
    55,218       64,378  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Cash paid for acquisitions and contingent consideration-net of cash acquired
    (289,101 )     (59,000 )
Purchase of fixed assets
    (10,060 )     (5,947 )
Net cash used in investing activities
    (299,161 )     (64,947 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings under credit facilities
    370,000       285,000  
Repayments of borrowings under credit facilities
    (94,014 )     (270,783 )
Contingent consideration paid
    (16,293 )     (34,992 )
Payments of debt financing costs
    -       (634 )
Proceeds from exercise of stock options
    796       167  
Payments on finance lease obligations
    (94 )     (59 )
Distributions for unitholders
    (11,734 )     (7,643 )
Net cash provided by (used in) financing activities
    248,661       (28,944 )
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    13       (336 )
CHANGE IN CASH AND CASH EQUIVALENTS
    4,731       (29,849 )
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    33,213       65,178  
End of period
  $ 37,944     $ 35,329  
 
               

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income (loss) excluding interest income, interest expense, income tax expense (benefit), 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, loss on extinguishment of borrowings, other expense/income, net, management contract buyout and other one-time transaction 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; and
  • to evaluate the effectiveness of our business strategies.

Adjusted EBITDA does not purport to be an alternative to net income (loss) 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 (loss), 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 relying also 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, 2019 and 2020:

 
  Three Months Ended     Six Months Ended  
 
  June 30,     June 30,  
 
  2019     2020     2019     2020  
 
  (in thousands)  
Net income
  $ 3,102     $ 3,328     $ 274     $ 37,347  
Interest income
    (339 )     (66 )     (536 )     (351 )
Interest expense
    14,424       10,057       27,283       23,643  
Income tax expense
    1,425       37       204       12,107  
Amortization of debt financing costs
    782       709       1,564       1,491  
Intangible amortization
    31,221       36,012       59,962       71,735  
Depreciation and other amortization
    2,425       3,029       4,738       6,011  
Non-cash equity compensation expense
    5,178       5,248       9,099       10,282  
Non-cash changes in fair value of estimated
                               
contingent consideration
    3,847       16,472       11,261       (14,901 )
Loss on extinguishment of borrowings
    -       -       -       6,094  
Other expense (income), net
    468       (70 )     704       (682 )
Management contract buyout
    -       -       1,428       -  
Other one-time transaction expenses
    420       -       1,486       -  
Adjusted EBITDA
  $ 62,953     $ 74,756     $ 117,467     $ 152,776  
 
                               

Adjusted Net Income and Adjusted Net Income Per Share

We analyze our performance using Adjusted Net Income and Adjusted Net Income Per Share. Adjusted Net Income and Adjusted Net Income Per Share are non-GAAP measures. We define Adjusted Net Income as net income (loss) excluding income tax expense (benefit), 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, loss on extinguishment of borrowings, management contract buyout, if any, and other one-time transaction expenses. The calculation of Adjusted Net Income also includes adjustments to reflect (i) a pro forma 27% income tax rate assuming all earnings of Focus LLC were recognized by Focus Inc. and no earnings were attributable to non-controlling interests and (ii) tax adjustments from intangible asset related income tax benefits from acquisitions based on a pro forma 27% tax rate.

Adjusted Net Income Per Share is calculated by dividing Adjusted Net Income 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 unvested Class A common stock and restricted stock units, if any, 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 have been exchanged for Class A common stock) and (iv) 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 and Adjusted Net Income 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 and Adjusted Net Income Per Share do not purport to be an alternative to net income (loss) or cash flows from operating activities. The terms Adjusted Net Income and Adjusted Net Income Per Share are not defined under GAAP, and Adjusted Net Income and Adjusted Net Income Per Share are not a measure of net income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;
  • Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share differently than we do, limiting its usefulness as a comparative measure.

In addition, Adjusted Net Income and Adjusted Net Income 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 and Adjusted Net Income Per Share as supplemental information.

Set forth below is a reconciliation of net income to Adjusted Net Income and Adjusted Net Income Per Share for the three and six months ended June 30, 2019 and 2020:

 
  Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
  2019     2020     2019     2020  
 
  (dollars in thousands, except per share data)  
Net income
  $ 3,102     $ 3,328     $ 274     $ 37,347  
Income tax expense
    1,425       37       204       12,107  
Amortization of debt financing costs
    782       709       1,564       1,491  
Intangible amortization
    31,221       36,012       59,962       71,735  
Non-cash equity compensation expense
    5,178       5,248       9,099       10,282  
Non-cash changes in fair value of estimated
                               
contingent consideration
    3,847       16,472       11,261       (14,901 )
Loss on extinguishment of borrowings
    -       -       -       6,094  
Management contract buyout
    -       -       1,428       -  
Other one-time transaction expenses(1)
    420       -       1,486       -  
Subtotal
    45,975       61,806       85,278       124,155  
Pro forma income tax expense (27%)(2)
    (12,413 )     (16,688 )     (23,025 )     (33,522 )
Tax Adjustments(2)
    7,670       9,175       14,693       18,110  
Adjusted Net Income
  $ 41,232     $ 54,293     $ 76,946     $ 108,743  
Adjusted Shares Outstanding
    74,444,102       76,239,848       74,422,405       76,256,932  
Adjusted Net Income Per Share
  $ 0.55     $ 0.71     $ 1.03     $ 1.43  
Calculation of Adjusted Shares Outstanding:
                               
Weighted average shares of Class A common
                               
stock outstanding-basic(3)
    46,696,200       47,847,756       46,455,238       47,642,156  
Adjustments:
                               
Weighted average incremental shares of Class A
                               
common stock related to stock options and
                               
unvested Class A common stock and restricted
                               
stock units(4)
    25,359       13,184       16,607       8,901  
Weighted average Focus LLC common units
                               
outstanding(5)
    22,488,713       21,672,585       22,635,388       21,846,354  
Weighted average common unit equivalent of
                               
Focus LLC incentive units outstanding(6)
    5,233,830       6,706,323       5,315,172       6,759,521  
Adjusted Shares Outstanding
    74,444,102       76,239,848       74,422,405       76,256,932  
 
                               

(1) During the three months ended June 30, 2019 relates to transaction expenses of $420 associated with the acquisition of Loring Ward, which were recorded in selling, general and administrative expenses. During the six months ended June 30, 2019 relates to (a) Loring Ward severance cash compensation of $280, which was recorded in compensation and related expenses and (b) transaction expenses of $1,206 associated with the acquisition of Loring Ward, which were recorded in selling, general and administrative expenses.
(2) As of June 30, 2020, estimated tax adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% tax rate for the next 12 months is $36,479.
(3) Represents our GAAP weighted average Class A common stock outstanding-basic.
(4) The incremental shares for the six months ended June 30, 2019 related to unvested Class A common stock as calculated using the treasury stock method were not included in the calculation of the GAAP weighted average shares of Class A common stock-diluted for the six months ended June 30, 2019 as the result would have been antidilutive.
(5) Assumes that 100% of the Focus LLC common units were exchanged for Class A common stock.
(6) 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 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, 2019 and 2020:

 
  Trailing 4-Quarters Ended  
 
  June 30,  
 
  2019     2020  
 
  (in thousands)  
Net cash provided by operating activities
  $ 123,985     $ 203,934  
Purchase of fixed assets
    (14,737 )     (21,359 )
Distributions for unitholders
    (13,972 )     (16,550 )
Payments under tax receivable agreements
    -       -  
Adjusted Free Cash Flow
  $ 95,276     $ 166,025  
Portion of contingent consideration paid included in operating activities (1)
    21,328       26,353  
Cash Flow Available for Capital Allocation (2)
  $ 116,604     $ 192,378  
 
               

(1) 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, 2019 was $4.6 million, $3.6 million, $9.1 million and $4.0 million, respectively, totaling $21.3 million for the trailing 4-quarters ended June 30, 2019. Contingent consideration paid classified as operating cash outflows for each of the trailing 4-quarters ended June 30, 2020 was $0.8 million, $0.8 million, $8.4 million and $16.4 million, respectively, totaling $26.4 million for the trailing 4-quarters ended June 30, 2020.
(2) 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, 2020:

 
  June 30, 2020  
Economic Ownership of Focus Financial Partners, LLC Interests:
  Interest     %  
Focus Financial Partners Inc. (1)
    48,091,707       63.0 %
Non-Controlling Interests (2)
    28,186,773       37.0 %
Total
    76,278,480       100.0 %
 
               

(1) Includes 52,459 unvested common units.
(2) Includes 6,690,670 Focus LLC common units issuable upon conversion of the outstanding 19,334,928 vested and unvested incentive units (assuming vesting of the unvested incentive units and a June 30, 2020 period end value of the Focus LLC common units equal to $33.05).

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:

 
  Q2 2020 Weighted Average Outstanding     Number of Shares Outstanding at
June 30, 2020
    Number of Shares Outstanding at
August 3, 2020
 
Class A
    47,847,756       48,091,707       48,105,684  
Class B
    21,672,585       21,496,103       21,496,103  

Incentive Units

The following table provides supplemental information regarding the outstanding Focus LLC vested and unvested Incentive Units ("IUs") at June 30, 2020. 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 Adjusted Net Income Per Share. 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.

Focus Financial Partners, LLC Incentive Units by Hurdle at June 30, 2020

  Hurdle
Rates
    Number
Outstanding
 
  $ 1.42       175,421  
  $ 5.50       97,798  
  $ 6.00       56,702  
  $ 7.00       482,545  
  $ 9.00       1,984,779  
  $ 11.00       1,055,941  
  $ 12.00       520,000  
  $ 13.00       831,416  
  $ 14.00       30,205  
  $ 16.00       168,552  
  $ 17.00       44,009  
  $ 19.00       865,633  
  $ 21.00       3,893,000  
  $ 22.00       1,202,369  
  $ 23.00       524,828  
  $ 26.26       25,000  
  $ 27.00       29,484  
  $ 27.90       2,051,131  
  $ 28.50       1,596,115  
  $ 33.00       3,670,000  
  $ 36.64       30,000  
            19,334,928  
               

SOURCE: Focus Financial Partners Inc.

Topic:
Earnings
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