Excellent Partner Firm Results and Record M&A Activity Drive Strong Financial Performance
NEW YORK, NY / ACCESSWIRE / February 17, 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 fourth quarter and full year ended December 31, 2021.
Fourth Quarter 2021 Highlights
Full Year 2021 Highlights
"We had an outstanding year in 2021, reinforcing our clear leadership in the independent wealth management sector," said Rudy Adolf, Founder, CEO and Chairman of Focus. "We generated excellent financial performance, exceeding our expectations on all measures, with revenues and Adjusted Net Income Excluding Tax Adjustments reaching new highs. We continue to attract some of the highest quality firms in this industry and we ended the year with 84 partner firms in 4 countries around the world. Our pace of M&A was exceptionally strong in 2021 and we closed a record of 38 transactions. Equally important, we took advantage of our scale and reach to substantially expand our value-added services last year, further enhancing our unique value proposition. Our 2022 momentum is excellent, and I am excited about our outlook, both near and long term."
"We delivered another strong quarter in Q4 and an excellent year in 2021, reflecting not only our ability to capitalize on the large and growing market opportunity but also our consistent financial discipline as our business has grown," said Jim Shanahan, Chief Financial Officer. "We continued to be careful stewards of our capital, investing in firms that are industry leaders with attractive growth profiles. These are hallmarks of the way in which we manage and grow our business, which we believe will generate substantial value for our shareholders in the years to come. We believe our growth trajectory is one of the most compelling in the financial services sector, reinforced by our new 2025 growth targets: approximately $4 billion in revenue, $1.1 billion in Adjusted EBITDA(1), and a 28% Adjusted EBITDA margin(2). We are optimistic about our strategy for growth and our financial outlook."
Fourth Quarter 2021 Financial Highlights
Total revenues were $523.9 million, 38.0%, or $144.2 million higher than the 2020 fourth quarter. The primary driver of this increase was revenue growth from our existing partner firms of approximately $111.6 million. The majority of this increase was driven by higher wealth management fees, which included the effect of mergers completed by our partner firms, as well as a full period of revenues recognized during the fourth quarter of 2021 for partner firms that were acquired during the fourth quarter of 2020. The balance of the increase of $32.6 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 26.6%, above our expected 17% to 20% range for the quarter.
An estimated 76.8%, or $402.5 million, of total revenues in the quarter were correlated to the financial markets. Of this amount, 64.4%, or $259.1 million, were generated from advance billings generally based on market levels in the 2021 third quarter. The remaining 23.2%, or $121.4 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 $14.9 million compared to $7.7 million in the prior year quarter. GAAP basic and diluted net income per share attributable to common shareholders were both $0.12, as compared to $0.07 for both basic and diluted net income per share in the prior year quarter.
Adjusted EBITDA(2) was $129.0 million, 42.2%, or $38.3 million, higher than the prior year period, and our Adjusted EBITDA margin(3) was 24.6%, in line with our outlook of approximately 25% for the quarter.
Adjusted Net Income Excluding Tax Adjustments(2) was $78.9 million, and Tax Adjustments were $13.4 million. Adjusted Net Income Excluding Tax Adjustments Per Share(2) was $0.94, up 30.6% compared to the prior year period, and Tax Adjustments Per Share(2) were $0.16, up 33.3% compared to the prior year period.
2021 Full Year Financial Highlights
Total revenues were $1.8 billion, 32.1%, or $436.6 million higher than the prior year. The primary driver of this increase was revenue growth from our existing partner firms of approximately $382.3 million. The majority of this increase was driven by higher wealth management fees, which includes the effect of mergers completed by our partner firms, as well as a full period of revenues recognized during 2021 for partner firms that were acquired in 2020. The balance of the increase of $54.3 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 24.0%.
GAAP net income was $24.4 million compared to $49.0 million in the prior year. GAAP basic and diluted net income per share attributable to common shareholders were both $0.18, as compared to $0.58 and $0.57 for basic and diluted net income per share, respectively, in the prior year.
Adjusted EBITDA(2) was $451.3 million, 40.3%, or $129.5 million, higher than the prior year, and our Adjusted EBITDA margin(3) was 25.1%.
Adjusted Net Income Excluding Tax Adjustments(2) was $278.7 million and Tax Adjustments were $46.8 million. Adjusted Net Income Excluding Tax Adjustments Per Share(2) was $3.36, up 36.6% compared to the prior year, and Tax Adjustments Per Share(2) were $0.56, up 19.1% compared to the prior year.
Balance Sheet and Liquidity
As of December 31, 2021, cash and cash equivalents were $310.7 million and debt outstanding under our credit facilities was approximately $2.4 billion, all of which were borrowings under our First Lien Term Loan. These amounts included $796.4 million outstanding under the new $800 million tranche to our First Lien Term Loan that closed on July 1, 2021 and included the $150 million that we drew down in the 2021 fourth quarter under the delayed draw feature of this new Term Loan tranche. The drawn proceeds have been and will continue to be used to fund M&A transactions over the next few quarters. There were no outstanding borrowings under our First Lien Revolver.
Our Net Leverage Ratio(1) as of December 31, 2021 was 3.85x. 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 December 31, 2021, $850 million, or 35.3%, of our First Lien Term Loan had been swapped from a floating rate to a weighted average fixed rate of 2.6% (inclusive of the 200 basis point spread). The residual amount of approximately $1.6 billion under our First Lien Term Loan remains at floating rates, with $796.4 million of this amount subject to a 50 basis point LIBOR floor.
Our net cash provided by operating activities for the trailing four quarters ended December 31, 2021 increased 48.5% to $313.9 million from $211.4 million for the comparable period ended December 31, 2020. Our Cash Flow Available for Capital Allocation(2) for the trailing four quarters ended December 31, 2021 increased 59.6% to $319.9 million from $200.5 million for the comparable period ended December 31, 2020. These increases reflect the earnings growth of our partner firms, the addition of new partner firms and the 1.5 percentage points increase in our Adjusted EBITDA margin. In the 2021 fourth quarter, we paid $27.5 million in cash earn-out obligations and $6.2 million of required amortization under our First Lien Term Loan.
Teleconference, Webcast and Presentation Information
Founder, CEO and Chairman, Rudy Adolf, and Chief Financial Officer, Jim Shanahan, will host a conference call today, February 17, 2022 at 8:30 a.m. Eastern Time to discuss the Company's 2021 fourth quarter and full year 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 "Fourth Quarter & Full Year 2021 Earnings Release Supplement" dated February 17, 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, 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 twelve months ended December 31, 2020 and 2021 include the following:
Three Months Ended | Twelve Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Revenue Metrics: | ||||||||||||||||
Revenues | $ | 379,673 | $ | 523,886 | $ | 1,361,319 | $ | 1,797,951 | ||||||||
Revenue growth (1) from prior period | 11.6 | % | 38.0 | % | 11.7 | % | 32.1 | % | ||||||||
Organic revenue growth (2) from prior period | 7.3 | % | 26.6 | % | 7.0 | % | 24.0 | % | ||||||||
Management Fees Metrics (operating expense): | ||||||||||||||||
Management fees | $ | 102,381 | $ | 145,990 | $ | 349,475 | $ | 491,433 | ||||||||
Management fees growth (3) from prior period | 17.2 | % | 42.6 | % | 14.7 | % | 40.6 | % | ||||||||
Organic management fees growth (4) | ||||||||||||||||
from prior period | 10.0 | % | 30.8 | % | 7.8 | % | 32.1 | % | ||||||||
Net Income Metrics: | ||||||||||||||||
Net income | $ | 7,674 | $ | 14,935 | $ | 48,965 | $ | 24,440 | ||||||||
Net income growth from prior period | * | 94.6 | % | * | (50.1 | )% | ||||||||||
Income per share of Class A common stock: | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.12 | $ | 0.58 | $ | 0.18 | ||||||||
Diluted | $ | 0.07 | $ | 0.12 | $ | 0.57 | $ | 0.18 | ||||||||
Income per share of Class A common stock growth from prior period: | ||||||||||||||||
Basic | * | 71.4 | % | * | (69.0 | )% | ||||||||||
Diluted | * | 71.4 | % | * | (68.4 | )% | ||||||||||
Adjusted EBITDA Metrics: | ||||||||||||||||
Adjusted EBITDA (5) | $ | 90,700 | $ | 129,000 | $ | 321,763 | $ | 451,296 | ||||||||
Adjusted EBITDA growth (5) from prior period | 9.3 | % | 42.2 | % | 19.2 | % | 40.3 | % | ||||||||
Adjusted Net Income Excluding Tax Adjustments Metrics: | ||||||||||||||||
Adjusted Net Income Excluding Tax Adjustments (5) | $ | 56,991 | $ | 78,911 | $ | 195,562 | $ | 278,681 | ||||||||
Adjusted Net Income Excluding | ||||||||||||||||
Tax Adjustments growth (5) from prior period | 20.7 | % | 38.5 | % | 33.3 | % | 42.5 | % | ||||||||
Tax Adjustments | ||||||||||||||||
Tax Adjustments (5)(6) | $ | 9,856 | $ | 13,440 | $ | 37,254 | $ | 46,805 | ||||||||
Tax Adjustments growth from prior period (5)(6) | 12.5 | % | 36.4 | % | 16.9 | % | 25.6 | % | ||||||||
Three Months Ended | Twelve Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(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) | $ | 0.72 | $ | 0.94 | $ | 2.46 | $ | 3.36 | ||||||||
Tax Adjustments Per Share (5)(6) | $ | 0.12 | $ | 0.16 | $ | 0.47 | $ | 0.56 | ||||||||
Adjusted Net Income Excluding Tax Adjustments | ||||||||||||||||
Per Share growth (5) from prior period | 14.3 | % | 30.6 | % | 25.5 | % | 36.6 | % | ||||||||
Tax Adjustments Per Share growth | ||||||||||||||||
from prior period (5)(6) | 0.0 | % | 33.3 | % | 11.9 | % | 19.1 | % | ||||||||
Adjusted Shares Outstanding | ||||||||||||||||
Adjusted Shares Outstanding (5) | 79,584,887 | 83,575,753 | 79,397,568 | 82,893,928 | ||||||||||||
Other Metrics: | ||||||||||||||||
Net Leverage Ratio (7) at period end | 3.89 | x | 3.85 | x | 3.89 | x | 3.85 | x | ||||||||
Acquired Base Earnings (8) | $ | 17,886 | $ | 49,487 | $ | 22,121 | $ | 71,400 | ||||||||
Number of partner firms at period end (9) | 71 | 84 | 71 | 84 | ||||||||||||
* Not meaningful
Condensed Consolidated Financial Statements
FOCUS FINANCIAL PARTNERS INC.
Condensed consolidated statements of operations
(in thousands, except share and per share amounts)
For the three months ended | For the twelve months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
REVENUES: | ||||||||||||||||
Wealth management fees | $ | 360,603 | $ | 503,583 | $ | 1,286,130 | $ | 1,717,365 | ||||||||
Other | 19,070 | 20,303 | 75,189 | 80,586 | ||||||||||||
Total revenues | 379,673 | 523,886 | 1,361,319 | 1,797,951 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Compensation and related expenses | 129,748 | 166,784 | 476,208 | 591,121 | ||||||||||||
Management fees | 102,381 | 145,990 | 349,475 | 491,433 | ||||||||||||
Selling, general and administrative | 63,593 | 89,155 | 236,377 | 297,636 | ||||||||||||
Intangible amortization | 39,024 | 54,807 | 147,783 | 187,848 | ||||||||||||
Non-cash changes in fair value of estimated | ||||||||||||||||
contingent consideration | 19,818 | 16,175 | 19,197 | 112,416 | ||||||||||||
Depreciation and other amortization | 3,320 | 3,790 | 12,451 | 14,625 | ||||||||||||
Total operating expenses | 357,884 | 476,701 | 1,241,491 | 1,695,079 | ||||||||||||
INCOME FROM OPERATIONS | 21,789 | 47,185 | 119,828 | 102,872 | ||||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||
Interest income | 41 | 112 | 453 | 422 | ||||||||||||
Interest expense | (9,112 | ) | (17,108 | ) | (41,658 | ) | (55,001 | ) | ||||||||
Amortization of debt financing costs | (709 | ) | (1,102 | ) | (2,909 | ) | (3,958 | ) | ||||||||
Loss on extinguishment of borrowings | - | - | (6,094 | ) | - | |||||||||||
Other expense-net | (239 | ) | (118 | ) | (214 | ) | (337 | ) | ||||||||
Income from equity method investments | 52 | 10 | 219 | 524 | ||||||||||||
Total other expense-net | (9,967 | ) | (18,206 | ) | (50,203 | ) | (58,350 | ) | ||||||||
INCOME BEFORE INCOME TAX | 11,822 | 28,979 | 69,625 | 44,522 | ||||||||||||
INCOME TAX EXPENSE | 4,148 | 14,044 | 20,660 | 20,082 | ||||||||||||
NET INCOME | 7,674 | 14,935 | 48,965 | 24,440 | ||||||||||||
Non-controlling interest | (4,076 | ) | (7,405 | ) | (20,920 | ) | (14,028 | ) | ||||||||
NET INCOME ATTRIBUTABLE TO | ||||||||||||||||
COMMON SHAREHOLDERS | $ | 3,598 | $ | 7,530 | $ | 28,045 | $ | 10,412 | ||||||||
Income per share of Class A | ||||||||||||||||
common stock: | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.12 | $ | 0.58 | $ | 0.18 | ||||||||
Diluted | $ | 0.07 | $ | 0.12 | $ | 0.57 | $ | 0.18 | ||||||||
Weighted average shares of Class A | ||||||||||||||||
common stock outstanding: | ||||||||||||||||
Basic | 50,723,913 | 61,290,333 | 48,678,584 | 57,317,477 | ||||||||||||
Diluted | 51,051,481 | 61,939,734 | 48,796,613 | 57,831,151 |
FOCUS FINANCIAL PARTNERS INC.
Condensed consolidated balance sheets
(in thousands, except share and per share amounts)
December 31, | December 31, | |||||||
2020 | 2021 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 65,858 | $ | 310,684 | ||||
Accounts receivable less allowances of $2,178 at 2020 and $3,255 at 2021 | 169,220 | 198,827 | ||||||
Prepaid expenses and other assets | 65,581 | 123,826 | ||||||
Fixed assets-net | 49,209 | 47,199 | ||||||
Operating lease assets | 229,748 | 249,850 | ||||||
Debt financing costs-net | 6,950 | 4,254 | ||||||
Deferred tax assets-net | 107,289 | 267,332 | ||||||
Goodwill | 1,255,559 | 1,925,315 | ||||||
Other intangible assets-net | 1,113,467 | 1,581,719 | ||||||
TOTAL ASSETS | $ | 3,062,881 | $ | 4,709,006 | ||||
LIABILITIES AND EQUITY | ||||||||
LIABILITIES | ||||||||
Accounts payable | $ | 9,634 | $ | 11,580 | ||||
Accrued expenses | 53,862 | 72,572 | ||||||
Due to affiliates | 66,428 | 105,722 | ||||||
Deferred revenue | 9,190 | 10,932 | ||||||
Contingent consideration and other liabilities | 196,176 | 468,284 | ||||||
Deferred tax liabilities | 26,735 | 31,973 | ||||||
Operating lease liabilities | 253,295 | 277,324 | ||||||
Borrowings under credit facilities (stated value of $1,507,622 and $2,407,302 | ||||||||
at December 31, 2020 and December 31, 2021, respectively) | 1,507,119 | 2,393,669 | ||||||
Tax receivable agreements obligations | 81,563 | 219,542 | ||||||
TOTAL LIABILITIES | 2,204,002 | 3,591,598 | ||||||
EQUITY | ||||||||
Class A common stock, par value $0.01, 500,000,000 shares authorized; | ||||||||
51,158,712 and 65,320,124 shares issued and outstanding at | ||||||||
December 31, 2020 and December 31, 2021, respectively | 512 | 653 | ||||||
Class B common stock, par value $0.01, 500,000,000 shares authorized; | ||||||||
20,661,595 and 11,439,019 shares issued and outstanding at | ||||||||
December 31, 2020 and December 31, 2021, respectively | 207 | 114 | ||||||
Additional paid-in capital | 526,664 | 841,753 | ||||||
Retained earnings | 14,583 | 24,995 | ||||||
Accumulated other comprehensive income (loss) | (2,167 | ) | 3,029 | |||||
Total shareholders' equity | 539,799 | 870,544 | ||||||
Non-controlling interest | 319,080 | 246,864 | ||||||
Total equity | 858,879 | 1,117,408 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 3,062,881 | $ | 4,709,006 | ||||
FOCUS FINANCIAL PARTNERS INC.
Condensed consolidated statements of cash flows
(in thousands)
For the twelve months ended | ||||||||
December 31, | ||||||||
2020 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 48,965 | $ | 24,440 | ||||
Adjustments to reconcile net income to net cash provided by operating | ||||||||
activities-net of effect of acquisitions: | ||||||||
Intangible amortization | 147,783 | 187,848 | ||||||
Depreciation and other amortization | 12,451 | 14,625 | ||||||
Amortization of debt financing costs | 2,909 | 3,958 | ||||||
Non-cash equity compensation expense | 22,285 | 31,602 | ||||||
Non-cash changes in fair value of estimated contingent consideration | 19,197 | 112,416 | ||||||
Income from equity method investments | (219 | ) | (524 | ) | ||||
Distributions received from equity method investments | 231 | 1,143 | ||||||
Deferred taxes and other non-cash items | 2,618 | (8,568 | ) | |||||
Loss on extinguishment of borrowings | 6,094 | - | ||||||
Changes in cash resulting from changes in operating assets and liabilities: | ||||||||
Accounts receivable | (37,913 | ) | (32,006 | ) | ||||
Prepaid expenses and other assets | 74 | 2,103 | ||||||
Accounts payable | 606 | 486 | ||||||
Accrued expenses | 10,876 | 14,444 | ||||||
Due to affiliates | 7,650 | 38,831 | ||||||
Contingent consideration and other liabilities | (29,683 | ) | (77,423 | ) | ||||
Deferred revenue | (2,563 | ) | 543 | |||||
Net cash provided by operating activities | 211,361 | 313,918 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash paid for acquisitions and contingent consideration-net of cash acquired | (348,674 | ) | (979,062 | ) | ||||
Purchase of fixed assets | (19,349 | ) | (11,018 | ) | ||||
Investment and other | (4,950 | ) | (17,232 | ) | ||||
Net cash used in investing activities | (372,973 | ) | (1,007,312 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings under credit facilities | 555,000 | 1,318,375 | ||||||
Repayments of borrowings under credit facilities | (326,566 | ) | (425,320 | ) | ||||
Proceeds from issuance of common stock, net | - | 219,636 | ||||||
Payments in connection with unit redemption, net | - | (57,735 | ) | |||||
Payments in connection with tax receivable agreements | - | (4,423 | ) | |||||
Contingent consideration paid | (49,891 | ) | (78,092 | ) | ||||
Payments of debt financing costs | (634 | ) | (8,282 | ) | ||||
Proceeds from exercise of stock options | 6,912 | 8,350 | ||||||
Equity awards withholding | (386 | ) | (1,343 | ) | ||||
Payments on finance lease obligations | (147 | ) | (58 | ) | ||||
Distributions for unitholders | (22,457 | ) | (32,311 | ) | ||||
Net cash provided by financing activities | 161,831 | 938,797 | ||||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 461 | (577 | ) | |||||
CHANGE IN CASH AND CASH EQUIVALENTS | 680 | 244,826 | ||||||
CASH AND CASH EQUIVALENTS: | ||||||||
Beginning of period | 65,178 | 65,858 | ||||||
End of period | $ | 65,858 | $ | 310,684 | ||||
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, loss on extinguishment of borrowings, 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:
We use Adjusted EBITDA:
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:
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 twelve months ended December 31, 2020 and 2021:
Three Months Ended | Twelve Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 7,674 | $ | 14,935 | $ | 48,965 | $ | 24,440 | ||||||||
Interest income | (41 | ) | (112 | ) | (453 | ) | (422 | ) | ||||||||
Interest expense | 9,112 | 17,108 | 41,658 | 55,001 | ||||||||||||
Income tax expense | 4,148 | 14,044 | 20,660 | 20,082 | ||||||||||||
Amortization of debt financing costs | 709 | 1,102 | 2,909 | 3,958 | ||||||||||||
Intangible amortization | 39,024 | 54,807 | 147,783 | 187,848 | ||||||||||||
Depreciation and other amortization | 3,320 | 3,790 | 12,451 | 14,625 | ||||||||||||
Non-cash equity compensation expense | 6,697 | 7,033 | 22,285 | 31,602 | ||||||||||||
Non-cash changes in fair value of estimated | ||||||||||||||||
contingent consideration | 19,818 | 16,175 | 19,197 | 112,416 | ||||||||||||
Loss on extinguishment of borrowings | - | - | 6,094 | - | ||||||||||||
Other expense, net | 239 | 118 | 214 | 337 | ||||||||||||
Secondary offering expenses (1) | - | - | - | 1,409 | ||||||||||||
Adjusted EBITDA | $ | 90,700 | $ | 129,000 | $ | 321,763 | $ | 451,296 | ||||||||
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, loss on extinguishment of borrowings 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 outstanding during the periods, (iii) the weighted average incremental shares of Class A common stock related to unvested Class A common stock outstanding during the periods, (iv) the weighted average incremental shares of Class A common stock related to restricted stock units outstanding during the periods, (v) 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), (vi) 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 (vii) 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:
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:
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 twelve months ended December 31, 2020 and 2021:
Three Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||
Net income | $ | 7,674 | $ | 14,935 | $ | 48,965 | $ | 24,440 | ||||||||
Income tax expense | 4,148 | 14,044 | 20,660 | 20,082 | ||||||||||||
Amortization of debt financing costs | 709 | 1,102 | 2,909 | 3,958 | ||||||||||||
Intangible amortization | 39,024 | 54,807 | 147,783 | 187,848 | ||||||||||||
Non-cash equity compensation expense | 6,697 | 7,033 | 22,285 | 31,602 | ||||||||||||
Non-cash changes in fair value of estimated | ||||||||||||||||
contingent consideration | 19,818 | 16,175 | 19,197 | 112,416 | ||||||||||||
Loss on extinguishment of borrowings | - | - | 6,094 | - | ||||||||||||
Secondary offering expenses (1) | - | - | - | 1,409 | ||||||||||||
Subtotal | 78,070 | 108,096 | 267,893 | 381,755 | ||||||||||||
Pro forma income tax expense (27%) (2) | (21,079 | ) | (29,185 | ) | (72,331 | ) | (103,074 | ) | ||||||||
Adjusted Net Income Excluding Tax Adjustments | $ | 56,991 | $ | 78,911 | $ | 195,562 | $ | 278,681 | ||||||||
Tax Adjustments (3) | $ | 9,856 | $ | 13,440 | $ | 37,254 | $ | 46,805 | ||||||||
Adjusted Net Income Excluding Tax Adjustments Per Share | $ | 0.72 | $ | 0.94 | $ | 2.46 | $ | 3.36 | ||||||||
Tax Adjustments Per Share (3) | $ | 0.12 | $ | 0.16 | $ | 0.47 | $ | 0.56 | ||||||||
Adjusted Shares Outstanding | 79,584,887 | 83,575,753 | 79,397,568 | 82,893,928 | ||||||||||||
Calculation of Adjusted Shares Outstanding: | ||||||||||||||||
Weighted average shares of Class A common | ||||||||||||||||
stock outstanding-basic (4) | 50,723,913 | 61,290,333 | 48,678,584 | 57,317,477 | ||||||||||||
Adjustments: | ||||||||||||||||
Weighted average incremental shares of Class A | ||||||||||||||||
common stock related to stock options, | ||||||||||||||||
unvested Class A common stock and | ||||||||||||||||
restricted stock units (5) | 327,568 | 649,401 | 118,029 | 513,674 | ||||||||||||
Weighted average Focus LLC common units | ||||||||||||||||
outstanding (6) | 20,814,064 | 12,046,461 | 21,461,080 | 15,200,900 | ||||||||||||
Weighted average Focus LLC restricted common | ||||||||||||||||
units outstanding (7) | 19,912 | 81,726 | 5,005 | 73,983 | ||||||||||||
Weighted average common unit equivalent of | ||||||||||||||||
Focus LLC incentive units outstanding (8) | 7,699,430 | 9,507,832 | 9,134,870 | 9,787,894 | ||||||||||||
Adjusted Shares Outstanding | 79,584,887 | 83,575,753 | 79,397,568 | 82,893,928 | ||||||||||||
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 December 31, 2020 and 2021:
Trailing 4-Quarters Ended | ||||||||
December 31, | ||||||||
2020 | 2021 | |||||||
(in thousands) | ||||||||
Net cash provided by operating activities | $ | 211,361 | $ | 313,918 | ||||
Purchase of fixed assets | (19,349 | ) | (11,018 | ) | ||||
Distributions for unitholders | (22,457 | ) | (32,311 | ) | ||||
Payments under tax receivable agreements | - | (4,423 | ) | |||||
Adjusted Free Cash Flow | $ | 169,555 | $ | 266,166 | ||||
Portion of contingent consideration paid included in operating activities (1) | 30,913 | 53,735 | ||||||
Cash Flow Available for Capital Allocation (2) | $ | 200,468 | $ | 319,901 | ||||
Supplemental Information
Economic Ownership
The following table provides supplemental information regarding the economic ownership of Focus Financial Partners, LLC as of December 31, 2021:
December 31, 2021 | ||||||||
Economic Ownership of Focus Financial Partners, LLC Interests: | Interest | % | ||||||
Focus Financial Partners Inc. | 65,320,124 | 76.0 | % | |||||
Non-Controlling Interests (1) | 20,629,433 | 24.0 | % | |||||
Total | 85,949,557 | 100.0 | % | |||||
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 December 31, 2021 | Number of Shares Outstanding at February 14, 2022 | |||||||
Class A | 65,320,124 | 65,320,124 | ||||||
Class B | 11,439,019 | 11,626,814 |
Incentive Units
The following table provides supplemental information regarding the outstanding Focus LLC vested and unvested Incentive Units ("IUs") at December 31, 2021. 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 | 16,734 | |||||
$ | 27.90 | 1,929,424 | |||||
$ | 28.50 | 1,440,230 | |||||
$ | 30.48 | 30,000 | |||||
$ | 33.00 | 3,617,500 | |||||
$ | 36.64 | 30,000 | |||||
$ | 43.50 | 30,000 | |||||
$ | 44.71 | 806,324 | |||||
$ | 58.50 | 662,277 | |||||
16,146,524 | |||||||
SOURCE: Focus Financial Partners Inc.