Ryan Specialty (RYAN) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's discussion, and market risk disclosures Financial Statements (Unaudited) Ryan Specialty Holdings, Inc.'s unaudited consolidated financial statements for Q2 2022 show $70.1 million net income and detailed financial positions Consolidated Financial Statements The consolidated financial statements reflect significant year-over-year growth in revenue and net income, with total assets reaching $6.44 billion by June 30, 2022 Consolidated Statements of Income Highlights (in thousands) | | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $491,292 | $390,012 | $878,182 | $701,470 | | Operating income | $105,528 | $92,262 | $148,915 | $132,105 | | Net income | $70,120 | $63,407 | $88,196 | $59,606 | | Net income attributable to Ryan Specialty | $24,501 | $63,407 | $31,412 | $57,156 | Consolidated Balance Sheet Highlights (in thousands) | | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $3,955,440 | $3,011,007 | | Total assets | $6,442,417 | $5,458,708 | | Total current liabilities | $3,347,339 | $2,918,141 | | Total liabilities | $5,740,903 | $4,863,931 | | Total stockholders' equity | $701,514 | $594,777 | Consolidated Statements of Cash Flows Highlights (in thousands) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash flows provided by operating activities | $164,711 | $107,715 | | Cash flows used for investing activities | $(6,790) | $(155) | | Cash flows provided by (used in) financing activities | $379,757 | $(19,421) | Notes to the Consolidated Financial Statements (Unaudited) Notes detail accounting policies, revenue disaggregation, debt structure including a $400 million senior secured note, and a $293.8 million Tax Receivable Agreement liability Revenue from Contracts with Customers by Specialty (in thousands) | Specialty | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Wholesale Brokerage | $574,051 | $447,083 | | Binding Authority | $122,744 | $108,641 | | Underwriting Management | $180,113 | $145,466 | | Total Net commissions and fees | $876,908 | $701,190 | - The restructuring plan initiated in 2020 was fully actioned by June 30, 2022, incurring cumulative costs of $30.9 million against an expected range of $30.0-$35.0 million, and is expected to generate annual savings of $25.0 million[61] - In February 2022, the LLC issued $400.0 million of 4.38% senior secured notes due 2030. As of June 30, 2022, total debt was approximately $1.98 billion[69][73] Tax Receivable Agreement (TRA) Liabilities (in thousands) | | Exchange Tax Attributes | Pre-IPO M&A Tax Attributes | TRA Payment Tax Attributes | Total TRA Liabilities | | :--- | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2021 | $136,704 | $83,389 | $52,007 | $272,100 | | Exchange of LLC Common Units | $9,897 | $1,435 | $3,159 | $14,491 | | Remeasurement - change in state rate | $2,884 | $1,759 | $2,530 | $7,173 | | Balance at June 30, 2022 | $149,485 | $86,583 | $57,696 | $293,764 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2022 performance, highlighting 26.0% total revenue growth, 22.3% organic growth, and strong liquidity with $866.7 million cash Results of Operations Q2 2022 total revenue grew 26.0% to $491.3 million, driven by organic growth and acquisitions, with net income increasing to $70.1 million Q2 2022 vs Q2 2021 Revenue by Specialty (in thousands) | Specialty | Q2 2022 | Q2 2021 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Wholesale Brokerage | $329,225 | $255,959 | $73,266 | 28.6% | | Binding Authorities | $59,751 | $53,596 | $6,155 | 11.5% | | Underwriting Management | $101,251 | $80,291 | $20,960 | 26.1% | | Total | $490,227 | $389,846 | $100,381 | 25.7% | - Compensation and benefits expense for Q2 2022 increased by $73.3 million (30.9%) year-over-year, primarily driven by a $33.9 million increase in commissions, a $14.1 million increase from IPO-related compensation expense, and growth in headcount[228][229] - General and administrative expense for Q2 2022 increased by $17.8 million (58.0%) year-over-year, mainly due to a $7.8 million increase in travel and entertainment, $2.4 million in higher insurance costs as a public company, and $2.0 million in restructuring costs[231] Non-GAAP Financial Measures and Key Performance Indicators Non-GAAP metrics for Q2 2022 show 22.3% organic revenue growth, $166.1 million Adjusted EBITDAC, and $106.4 million Adjusted Net Income Organic Revenue Growth Rate Reconciliation | | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Total revenue growth rate (GAAP) | 26.0% | 25.2% | | Less: Mergers and acquisitions | (2.8%) | (3.1%) | | Change in other | (0.9%) | (0.8%) | | Organic revenue growth rate (Non-GAAP) | 22.3% | 21.3% | Adjusted EBITDAC Reconciliation (in thousands) | | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net income | $70,120 | $63,407 | | Interest expense, net | 24,846 | 18,986 | | Income tax expense | 11,168 | 2,332 | | Depreciation | 1,229 | 1,222 | | Amortization | 26,233 | 27,319 | | Change in contingent consideration | (251) | 1,723 | | EBITDAC | $133,345 | $114,989 | | Adjustments (Acquisition, Restructuring, Equity-comp, etc.) | 32,730 | 25,498 | | Adjusted EBITDAC | $166,075 | $140,487 | Adjusted Net Income Reconciliation (in thousands) | | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net income | $70,120 | $63,407 | | Adjustments (Amortization, Equity-comp, Restructuring, etc.) | 73,053 | 59,626 | | Adjusted income before income taxes | $143,173 | $123,033 | | Adjusted tax expense | (36,724) | (30,758) | | Adjusted net income | $106,449 | $92,275 | Liquidity and Capital Resources The company maintains strong liquidity with $866.7 million cash, supported by credit facilities and a $293.8 million estimated TRA liability - Primary sources of liquidity are cash from operations, a $600 million Revolving Credit Facility, a $1.65 billion Term Loan, and $400 million Senior Secured Notes[289][294][296] - As of June 30, 2022, the company had $866.6 million in cash and cash equivalents and $811.0 million in cash held in a fiduciary capacity[292] - The company expects future payments under the Tax Receivable Agreement (TRA) to total $293.8 million in aggregate based on transactions as of June 30, 2022[301] All Risks Long-Term Incentive Plan Future Cash Outflows (in thousands) | Period | Projected Future Cash Outflows | | :--- | :--- | | 2022 | $106,618 | | 2023 | $0 | | 2024 | $0 | | 2025 | $0 | | Thereafter | $0 | Quantitative and Qualitative Disclosure About Market Risk Market risk is primarily from interest rates, mitigated by a $1.0 billion interest rate cap on its variable-rate term loan, with foreign currency risk being immaterial - Foreign currency risk is considered immaterial, with approximately 3% of revenues for the six months ended June 30, 2022, generated from activities in the UK, Europe, and Canada[322] - To manage interest rate risk on its $1.62 billion variable-rate Term Loan, the company entered into an interest rate cap agreement on April 7, 2022. The cap has a $1.0 billion notional amount, a 2.75% strike rate, and terminates on December 31, 2025[325][326] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective at a reasonable assurance level[330] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[332] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other material information Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not presently a party to any litigation the outcome of which, if determined adversely, would individually or taken together have a material adverse effect on its business, operating results, cash flows or financial condition[334] Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021[335] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None Other Information On August 9, 2022, the company amended its Tax Receivable Agreement (TRA) to limit elective termination and scope of payment obligations - On August 9, 2022, the Company amended and restated the Tax Receivable Agreement to limit its ability to electively terminate the agreement and to limit the reference property giving rise to payment obligations[339]