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Focus Financial Partners Reports Second Quarter 2020 Results

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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
tmadon@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, 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.



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