Ryan Specialty (RYAN) - 2023 Q3 - Quarterly Report

FORM 10-Q Filing Information Details the Form 10-Q filing, registrant information, and common shares outstanding Registrant Details Provides registrant's name, jurisdiction, address, and securities registered, including filing status and shares outstanding - Registrant: RYAN SPECIALTY HOLDINGS, INC., incorporated in Delaware, with principal executive offices in Chicago, IL[2] - Class A Common Stock (RYAN) is registered on The New York Stock Exchange (NYSE)[3] - The registrant is a Large accelerated filer and had 260.3 million shares of common stock outstanding on October 31, 2023 (118.3 million Class A, 142.0 million Class B)[4][5] Forward-Looking Statements Discusses forward-looking statements, highlighting inherent risks and uncertainties that could impact future results Nature of Forward-Looking Statements and Risks Defines forward-looking statements and enumerates various substantial risks and uncertainties that could materially alter actual outcomes - Forward-looking statements are subject to substantial risks and uncertainties, including those related to management, security, client relationships, market conditions, and regulatory environment[9][10][12] Commonly Used Defined Terms Defines key terminology used in the Form 10-Q for consistent understanding of company and industry-specific terms Key Terminology Provides definitions for key company and industry-specific terms to ensure clarity and consistent understanding throughout the report - Defines key terms such as "Company," "Adjusted Term SOFR," "Admitted," "E&S," "LLC," "IPO," "MGA," "MGU," "TRA," "Wholesale Brokerage," and "Underwriting Management" to facilitate understanding of the report[16][17] PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements including income, comprehensive income, balance sheet, cash flow, and equity, with explanatory notes Consolidated Statements of Income (Loss) (Unaudited) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue | $501,938 | $411,996 | $1,544,686 | $1,290,178 | | Operating income | $69,817 | $61,344 | $262,744 | $210,259 | | Income before income taxes | $40,530 | $32,690 | $178,749 | $127,551 | | Net income | $15,703 | $29,279 | $135,977 | $117,475 | | Net income (loss) attributable to Ryan Specialty Holdings, Inc. | $(5,047) | $11,745 | $38,191 | $43,157 | | Basic EPS | $(0.04) | $0.11 | $0.34 | $0.40 | | Diluted EPS | $(0.04) | $0.09 | $0.34 | $0.37 | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $15,703 | $29,279 | $135,977 | $117,475 | | Net income (loss) attributable to Ryan Specialty Holdings, Inc. | $(5,047) | $11,745 | $38,191 | $43,157 | | Total other comprehensive income (loss), net of tax | $(289) | $5,626 | $2,201 | $2,653 | | Comprehensive income (loss) attributable to Ryan Specialty Holdings, Inc. | $(5,336) | $17,371 | $40,392 | $45,810 | Consolidated Balance Sheets (Unaudited) | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total current assets | $3,586,424 | $3,894,067 | | Total non-current assets | $2,839,438 | $2,489,676 | | TOTAL ASSETS | $6,425,862 | $6,383,743 | | Total current liabilities | $2,981,837 | $3,134,369 | | Total non-current liabilities | $2,502,784 | $2,431,562 | | TOTAL LIABILITIES | $5,484,621 | $5,565,931 | | Total stockholders' equity attributable to Ryan Specialty Holdings, Inc. | $542,978 | $478,405 | | Non-controlling interests | $398,263 | $339,407 | | Total stockholders' equity | $941,241 | $817,812 | Consolidated Statements of Cash Flows (Unaudited) | Metric (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Cash flows from operating activities | $250,335 | $150,984 | | Cash flows used for investing activities | $(381,934) | $(11,689) | | Cash flows (used for) provided by financing activities | $(31,958) | $260,335 | | Net change in cash, cash equivalents, and cash held in a fiduciary capacity | $(164,385) | $398,356 | | Cash, cash equivalents, and cash held in a fiduciary capacity—Ending balance | $1,603,000 | $1,538,017 | Consolidated Statements of Stockholders' Equity (Unaudited) - Total stockholders' equity increased from $817.8 million at January 1, 2023, to $941.2 million at September 30, 2023, driven by net income, equity-based compensation, and LLC equity exchanges, partially offset by tax distributions and other comprehensive losses[31] - Non-controlling interests increased from $339.4 million at January 1, 2023, to $398.3 million at September 30, 2023, reflecting their share of net income and equity-based compensation, partially offset by tax distributions and exchanges[31] Notes to the Consolidated Financial Statements (Unaudited) Offers detailed explanations and disclosures for the unaudited financial statements, covering operations, accounting policies, and specific financial items Note 1. Basis of Presentation - Ryan Specialty Holdings, Inc. is a service provider of specialty products and solutions for insurance brokers, agents, and carriers, operating through one segment and not taking on underwriting risk (except for an equity method investment)[34] - The Company consolidates the financial results of New LLC and LLC, holding 45.4% ownership of outstanding LLC Common Units as of September 30, 2023, and is the primary beneficiary of the LLC, a variable interest entity[36][40] Note 2. Revenue from Contracts with Customers | Specialty (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Wholesale Brokerage | $308,872 | $267,222 | $976,338 | $841,273 | | Binding Authority | $69,245 | $55,607 | $208,547 | $178,351 | | Underwriting Management | $109,228 | $84,722 | $322,993 | $264,835 | | Total Net commissions and fees | $487,345 | $407,551 | $1,507,878 | $1,284,459 | - Contract assets, primarily from volume-based commissions, decreased from $13.0 million at December 31, 2022, to $7.9 million at September 30, 2023. Contract liabilities (deferred revenue) increased from $1.4 million to $7.4 million over the same period[45] Note 3. Mergers and Acquisitions - In 2023, the Company completed acquisitions of Griffin Underwriting Services ($115.5 million cash), ACE Benefit Partners, Inc. and Point6 Healthcare, LLC (aggregate $46.8 million cash + $2.3 million contingent consideration), and Socius Insurance Services ($253.5 million cash + $5.8 million contingent consideration + $2.7 million Class A common stock)[46][47][48] Acquired Assets/Liabilities (in thousands) | Acquired Assets/Liabilities (in thousands) | Total (Nine Months Ended Sep 30, 2023) | | :--------------------------------------- | :------------------------------------- | | Total assets acquired | $566,327 | | Total liabilities assumed | $139,649 | | Net assets acquired | $426,678 | - The aggregate maximum contingent consideration related to acquisitions was $92.0 million as of September 30, 2023[53] Note 4. Restructuring - The ACCELERATE 2025 program, initiated in February 2023, is expected to incur total restructuring costs of approximately $90.0 million through December 31, 2024, and generate annual savings of approximately $50.0 million in 2025[54] Restructuring Expense (in thousands) | Restructuring Expense (in thousands) | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--------------------------------- | :------------------------------ | :----------------------------- | | Operations and technology optimization | $10,824 | $18,529 | | Compensation and benefits | $5,109 | $6,709 | | Asset impairment and other termination costs | $544 | $11,057 | | Total | $16,477 | $36,295 | Note 5. Receivables and Other Current Assets Receivables (in thousands) | Receivables (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Commissions and fees receivable – net | $238,827 | $231,423 | Allowance for Expected Credit Losses (in thousands) | Allowance for Expected Credit Losses (in thousands) | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :------------------------------------------------ | :------------------------------ | :----------------------------- | | Beginning of period | $2,089 | $1,980 | | Write-offs | $(441) | $(1,342) | | Increase in provision | $869 | $1,879 | | End of period | $2,517 | $2,517 | Note 6. Leases Lease Costs (in thousands) | Lease Costs (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease costs | $8,687 | $7,734 | $26,339 | $23,344 | | Lease costs – net | $8,728 | $7,773 | $26,535 | $23,487 | - Weighted average remaining operating lease term is 8.3 years as of September 30, 2023, with a weighted average discount rate of 5.1%[61] Note 7. Debt Debt (in thousands) | Debt (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------ | :----------- | :----------- | | Term debt | $1,566,232 | $1,571,818 | | Senior secured notes | $396,096 | $399,791 | | Total debt | $1,981,061 | $1,982,487 | | Long-term debt | $1,945,495 | $1,951,900 | - The Term Loan had $1,600.5 million principal outstanding as of September 30, 2023, with an interest rate of 3.00% plus Adjusted Term SOFR (subject to a 75 basis point floor)[63][260] - The Revolving Credit Facility has a borrowing capacity of $600.0 million, with no amounts drawn as of September 30, 2023[64] Note 8. Stockholders' Equity - As of September 30, 2023, the Company owned 45.4% of the economic interests in the LLC, with non-controlling interest holders owning 54.6%[73] - Class A common stock has one vote per share, while Class B common stock initially has 10 votes per share but no dividend or liquidation rights. Class X and Preferred stock had no shares outstanding[69][71][72] Note 9. Equity-Based Compensation - The Company grants various equity-based awards under the Omnibus Plan, including Restricted Stock, Restricted Common Units, RSUs, Stock Options, and Class C Incentive Units, with diverse vesting schedules (e.g., pro rata over 5 years, 10% in years 3-9 and 30% in year 10, or one-third in years 3, 4, and 5)[75][79][81][82][86][87][89][90][94][95] Equity-Based Compensation Expense (in thousands) | Equity-Based Compensation Expense (in thousands) | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | | Total equity-based compensation expense | $17,608 | $54,136 | $61,100 | - Total unrecognized equity-based compensation expense was $167.4 million as of September 30, 2023, with weighted-average remaining expense periods ranging from 0.5 to 5.6 years across different award types[99] Note 10. Earnings (Loss) Per Share EPS (Class A Common Stock) | EPS (Class A Common Stock) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | $(0.04) | $0.11 | $0.34 | $0.40 | | Diluted | $(0.04) | $0.09 | $0.34 | $0.37 | - For the three months ended September 30, 2023, 141.7 million non-controlling interest LLC Common Units and 98.7 thousand vested Class C Incentive Units were excluded from diluted EPS calculation as their effect would have been antidilutive[102] Note 11. Derivatives - The Company uses an interest rate cap agreement (notional amount $1,000.0 million, 2.75% strike, terminates December 31, 2025) to manage Term Loan interest rate exposure[104] Interest Rate Cap (in thousands) | Interest Rate Cap (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------- | :----------- | :----------- | | Fair value | $46,845 | $45,860 | | Accumulated other comprehensive income | $27,700 | $22,200 | - For the nine months ended September 30, 2023, $16.4 million related to payments received from the interest rate cap was reclassified into earnings as an offset to interest expense[106] Note 12. Variable Interest Entities - The Company consolidates the LLC as a Variable Interest Entity (VIE) under ASC 810, with its financial position, performance, and cash flows effectively representing those of the LLC[107] - Cash and cash equivalents, Tax Receivable Agreement liabilities, and Deferred tax assets are primarily attributable solely to Ryan Specialty Holdings, Inc., not the LLC[107] Note 13. Fair Value Measurements - The fair value of the interest rate cap is classified as Level 2, while contingent consideration obligations are classified as Level 3, requiring unobservable inputs and Monte Carlo simulations for valuation[112][113] Fair Value (in thousands) | Fair Value (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Interest rate cap (Level 2) | $46,845 | $45,860 | | Contingent consideration (Level 3) | $36,018 | $29,251 | Note 14. Commitments and Contingencies - The Company faces ordinary course E&O exposure, with insurance coverage up to $100.0 million in excess of a $5.0 million per claim retention (increased from $2.5 million as of June 1, 2023)[118][119] - Loss contingencies for outstanding E&O matters were $5.9 million as of September 30, 2023, down from $26.1 million at December 31, 2022[119] - A specific unusual circumstance involving mis-underwritten policies resulted in an estimated loss contingency of $0.2 million and a probable recovery of $22.6 million from E&O insurance carriers as of September 30, 2023[120] Note 15. Related Parties - The Company holds a 47% interest in Ryan Investment Holdings, LLC (RIH), which in turn has a 50% non-controlling interest in Geneva Re Partners, LLC (GRP), a Bermuda-regulated reinsurance company[123] - Ryan Re, a subsidiary, provides underwriting and administrative services to Geneva Re, earning a service fee of 115% of administrative costs. Revenue from Geneva Re was $1.1 million for the nine months ended September 30, 2023[127] - The Company charters executive jets from Executive Jet Management (EJM), with Mr. Ryan indirectly owning aircraft leased to EJM. The Company receives a discount when chartering Mr. Ryan's aircraft[129] Note 16. Income Taxes - The Company is subject to federal, state, and local income taxes on its allocable share of LLC's net taxable income, while the LLC is taxed as a partnership[130] - The effective tax rate for the three and nine months ended September 30, 2023, was 61.26% and 23.92% respectively, significantly impacted by a $20.7 million non-cash deferred income tax expense from a Common Control Reorganization (CCR) related to the Socius acquisition[131][133] TRA Liabilities (in thousands) | TRA Liabilities (in thousands) | Dec 31, 2022 | Sep 30, 2023 | | :----------------------------- | :----------- | :----------- | | Balance | $295,347 | $359,074 | Note 17. Supplemental Cash Flow Information Cash Paid For (in thousands) | Cash Paid For (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------- | :----------------------------- | :----------------------------- | | Interest | $116,620 | $62,796 | | Income taxes | $9,812 | $8,089 | Non-Cash Investing and Financing Activities (in thousands) | Non-Cash Investing and Financing Activities (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------------- | :----------------------------- | :----------------------------- | | Tax Receivable Agreement liabilities | $63,249 | $23,089 | Note 18. Subsequent Events - On October 29, 2023, the Company entered into a definitive agreement to acquire AccuRisk Holdings, LLC, a medical stop loss MGU, with the acquisition expected to close in Q4 2023[142] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of financial performance, condition, liquidity, and cash flows, including business overview, key drivers, and accounting policies Overview - Ryan Specialty is a service provider of specialty products and solutions for insurance brokers, agents, and carriers, offering distribution, underwriting, product development, administration, and risk management services[146] - A significant majority of premiums are placed in the Excess & Surplus (E&S) market, including Lloyd's of London, which offers greater flexibility in terms, conditions, and rates compared to the Admitted market[147] Significant Events and Transactions Highlights corporate structure, the ACCELERATE 2025 program's progress and financial impact, and recent acquisition activities Corporate Structure - Ryan Specialty Holdings, Inc. is a holding company that operates and controls the business of the LLC through New LLC, consolidating its financial results. The LLC is taxed as a partnership, passing taxable income/loss to its members[149] ACCELERATE 2025 Program - The ACCELERATE 2025 program, initiated in Q1 2023, aims for continued growth, innovation, and sustainable productivity improvements, with expected cumulative one-time charges of approximately $90.0 million through 2024 and annual savings of $50.0 million in 2025[150][152] - For the nine months ended September 30, 2023, the Company incurred $36.3 million in restructuring costs, with $22.9 million in general and administrative expenses and the remainder workforce-related[153] Acquisitions - In July 2023, the Company acquired ACE Benefit Partners, Inc., Point6 Healthcare, LLC, and Socius Insurance Services[154][155] - Post-period, on October 29, 2023, the Company entered into an agreement to acquire AccuRisk Holdings, LLC, expected to close in Q4 2023[155] Key Factors Affecting Our Performance - Key performance drivers include pursuing strategic acquisitions, deepening relationships with retail broker trading partners, building the National Binding Authority Specialty, investing in operations and growth, generating commissions regardless of E&S market state, managing macroeconomic conditions, and leveraging E&S market growth[157][158][159][161][162][163][164] - The E&S market growth is driven by complex, high-hazard risks, but growth may not be linear due to shifts between E&S and non-E&S markets, as seen with public company D&O policies[164][165] Components of Results of Operations Details the company's revenue streams and expense categories, providing context for understanding operational performance Revenue - Net commissions and fees are the primary revenue source, derived from Wholesale Brokerage, Binding Authority, and Underwriting Management Specialties, including supplemental and contingent commissions based on underwriting results or volume[167][170][171] - Fiduciary investment income is interest earned on insurance premiums and surplus lines taxes held in a fiduciary capacity[172] Expenses - Compensation and benefits is the largest expense, comprising salaries, incentives, benefits, and equity-based compensation, influenced by competitive markets for human capital[173] - General and administrative expenses include travel, office, professional fees, and other operational costs, generally scaling with employee count and business size[174] - Amortization primarily relates to intangible assets from acquisitions (customer relationships, trade names, software). Interest expense, net, includes debt interest, interest rate cap amortization, contingent consideration imputed interest, and deferred debt issuance costs, offset by interest income[175][176] Results of Operations Compares financial results for the three and nine months ended September 30, 2023 and 2022, detailing revenue, expenses, and net income changes Comparison of the Three Months Ended September 30, 2023 and 2022 Details financial performance for the three months ended September 30, 2023, versus 2022, focusing on revenue and expense changes Revenue | Revenue (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :--------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net commissions and fees | $487,345 | $407,551 | $79,794 | 19.6% | | Fiduciary investment income | $14,593 | $4,445 | $10,148 | NM | | Total revenue | $501,938 | $411,996 | $89,942 | 21.8% | - Organic revenue growth contributed $60.6 million (14.9%) to the increase in Net commissions and fees, driven by a growing E&S market, new business wins, and strong property portfolio performance. Acquisitions contributed $17.8 million (4.4%)[190] Expenses | Expense (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :--------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Compensation and benefits | $329,212 | $274,108 | $55,104 | 20.1% | | General and administrative | $69,288 | $48,991 | $20,297 | 41.4% | | Amortization | $29,572 | $25,667 | $3,905 | 15.2% | | Interest expense, net | $31,491 | $28,864 | $2,627 | 9.1% | | Income tax expense | $24,827 | $3,411 | $21,416 | NM | | Net income | $15,703 | $29,279 | $(13,576) | (46.4)% | - Compensation and benefits increased due to 496 additional employees and ACCELERATE 2025 restructuring expenses, partially offset by decreases in acquisition-related and IPO-related long-term incentive compensation[193] - General and administrative expenses rose due to acquisition-related expenses, ACCELERATE 2025 restructuring, professional services, and increased travel and entertainment[195] - Income tax expense significantly increased by $21.4 million, primarily due to a $20.7 million non-cash deferred income tax expense from the Common Control Reorganization (CCR) following the Socius acquisition[201] Comparison of the Nine Months Ended September 30, 2023 and 2022 Details financial performance for the nine months ended September 30, 2023, versus 2022, focusing on revenue and expense changes Revenue | Revenue (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :--------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Net commissions and fees | $1,507,878 | $1,284,459 | $223,419 | 17.4% | | Fiduciary investment income | $36,808 | $5,719 | $31,089 | NM | | Total revenue | $1,544,686 | $1,290,178 | $254,508 | 19.7% | - Organic revenue growth accounted for $189.6 million (14.8%) of the increase in Net commissions and fees, driven by E&S market growth, new business, and property portfolio strength. Acquisitions contributed $29.9 million (2.3%)[203][210] Expenses | Expense (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :--------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Compensation and benefits | $989,294 | $858,439 | $130,855 | 15.2% | | General and administrative | $202,595 | $139,851 | $62,744 | 44.9% | | Amortization | $79,125 | $78,563 | $562 | 0.7% | | Interest expense, net | $89,840 | $75,462 | $14,378 | 19.1% | | Income tax expense | $42,772 | $10,076 | $32,696 | NM | | Net income | $135,977 | $117,475 | $18,502 | 15.7% | - Compensation and benefits increased by $130.9 million, driven by 496 additional employees and $12.7 million in ACCELERATE 2025 restructuring expenses, partially offset by lower acquisition-related and IPO-related long-term incentive compensation[211] - General and administrative expenses increased by $62.7 million, primarily due to $18.8 million in ACCELERATE 2025 restructuring expenses, increased travel and entertainment, professional services, and acquisition-related expenses[213] - Income tax expense increased by $32.7 million, largely due to a $20.7 million non-cash deferred income tax expense from the Common Control Reorganization (CCR) in Q3 2023[219] Non-GAAP Financial Measures and Key Performance Indicators Defines and reconciles non-GAAP financial measures and key performance indicators used for assessing company performance Organic Revenue Growth Rate - Organic revenue growth rate adjusts total revenue growth for recent acquisitions, contingent commissions, fiduciary investment income, and foreign exchange impacts[222] Metric (in percentages) | Metric (in percentages) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue growth rate (GAAP) | 21.8% | 16.8% | 19.7% | 22.4% | | Organic revenue growth rate (Non-GAAP) | 14.7% | 13.7% | 14.7% | 18.7% | Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio - Adjusted compensation and benefits expense excludes equity-based compensation, acquisition and restructuring related compensation, and other non-recurring items[227] Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Compensation and benefits expense | $329,212 | $274,108 | $989,294 | $858,439 | | Adjusted compensation and benefits expense | $296,400 | $247,095 | $911,925 | $769,253 | | Compensation and benefits expense ratio | 65.6% | 66.5% | 64.0% | 66.5% | | Adjusted compensation and benefits expense ratio | 59.1% | 60.0% | 59.0% | 59.6% | Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio - Adjusted general and administrative expense excludes acquisition and restructuring related G&A expenses, and other non-recurring items[230] Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | General and administrative expense | $69,288 | $48,991 | $202,595 | $139,851 | | Adjusted general and administrative expense | $58,559 | $48,084 | $166,606 | $130,774 | | General and administrative expense ratio | 13.8% | 11.9% | 13.1% | 10.8% | | Adjusted general and administrative expense ratio | 11.7% | 11.7% | 10.8% | 10.1% | Adjusted EBITDAC and Adjusted EBITDAC Margin - Adjusted EBITDAC is Net income before interest, taxes, depreciation, amortization, and change in contingent consideration, further adjusted for equity-based compensation, acquisition/restructuring expenses, and other non-recurring items[232][234] Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $15,703 | $29,279 | $135,977 | $117,475 | | Adjusted EBITDAC | $146,979 | $116,817 | $466,155 | $390,151 | | Net income margin | 3.1% | 7.1% | 8.8% | 9.1% | | Adjusted EBITDAC margin | 29.3% | 28.4% | 30.2% | 30.2% | Adjusted Net Income and Adjusted Net Income Margin - Adjusted net income is tax-effected earnings before amortization, equity-based compensation, acquisition/restructuring expenses, IPO costs, and other non-recurring items, calculated as if the Company owned 100% of the LLC[237][239] Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $15,703 | $29,279 | $135,977 | $117,475 | | Adjusted net income | $86,632 | $66,560 | $282,144 | $237,774 | | Net income margin | 3.1% | 7.1% | 8.8% | 9.1% | | Adjusted net income margin | 17.3% | 16.2% | 18.3% | 18.4% | Adjusted Diluted Earnings Per Share - Adjusted diluted EPS is calculated by dividing Adjusted net income by diluted shares outstanding, assuming 100% exchange of LLC Common Units for Class A common stock and adjusting for unvested equity awards[242] Metric | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Diluted EPS (GAAP) | $(0.04) | $0.09 | $0.34 | $0.37 | | Adjusted diluted EPS (Non-GAAP) | $0.32 | $0.25 | $1.04 | $0.88 | Liquidity and Capital Resources Analyzes the company's cash flow generation, liquidity sources and uses, and contractual obligations to meet financial commitments Cash Flows From Operating Activities - Cash flows from operating activities increased by $99.4 million to $250.3 million for the nine months ended September 30, 2023, compared to the same period in 2022, driven by increased net income and changes in other current/non-current assets and accrued liabilities[264] Cash Flows From Investing Activities - Cash flows used for investing activities significantly increased by $370.2 million to $381.9 million for the nine months ended September 30, 2023, primarily due to $366.1 million for business combinations (Griffin, Socius, ACE, Point6 acquisitions)[267] Cash Flows From Financing Activities - Cash flows used for financing activities were $32.0 million for the nine months ended September 30, 2023, a decrease of $292.3 million compared to cash flows provided in the prior year, mainly due to tax distributions, debt repayment, and contingent consideration payments, contrasting with the prior year's bond issuance[268] Contractual Obligations and Commitments Long-term Incentive Compensation Agreements (in thousands) | Long-term Incentive Compensation Agreements (in thousands) | Sep 30, 2023 | | :------------------------------------------------------- | :----------- | | Total liability | $1,785 | | Projected future expense | $5,144 | | Total projected future cash outflows | $6,928 | Contingent Consideration (in thousands) | Contingent Consideration (in thousands) | Sep 30, 2023 | | :------------------------------------ | :----------- | | Total liability | $36,018 | | Projected future expense | $5,432 | | Total projected future cash outflows | $41,450 | Critical Accounting Policies and Estimates - Critical accounting policies and estimates include revenue recognition, business combinations, goodwill and intangibles, income taxes, and tax receivable agreement liabilities, which involve significant judgment and assumptions[276] Recent Accounting Pronouncements - No material changes to significant accounting policies from the Annual Report on Form 10-K for the year ended December 31, 2022, were disclosed[43][279] Item 3. Quantitative and Qualitative Disclosure About Market Risk Discusses the company's exposure to market risks, specifically foreign currency and interest rate fluctuations from operations Foreign Currency Risk - Approximately 2% of revenues for the nine months ended September 30, 2023, were generated from activities in the United Kingdom, Europe, and Canada, with immaterial exposure to foreign currency risk[282] Interest Rate Risk - Fiduciary investment income is sensitive to changes in short-term interest rates[284] - The Company's Term Loan ($1,600.5 million outstanding principal as of September 30, 2023) bears floating interest (Adjusted Term SOFR + 3.00%, subject to a 0.75% floor), and an interest rate cap is in place to manage this exposure[284][285] Item 4. Controls and Procedures Evaluates the effectiveness of the company's disclosure controls and internal control over financial reporting as of September 30, 2023 Evaluation of Disclosure Controls and Procedures - As of September 30, 2023, the Company's disclosure controls and procedures were deemed effective at the reasonable assurance level, designed to ensure timely and accurate reporting of information[288] Changes in Internal Control - There have been no material changes in internal control over financial reporting during the quarter ended September 30, 2023[290] Inherent Limitations of Internal Control Over Financial Reporting - Management acknowledges that no control system can provide absolute assurance against all errors and fraud, only reasonable assurance, due to inherent limitations[291] PART II. OTHER INFORMATION Item 1. Legal Proceedings Confirms no current legal proceedings are expected to have a material adverse effect on the company's business - The Company is not currently a party to any litigation that, if determined adversely, would individually or collectively have a material adverse effect on its business, operating results, cash flows, or financial condition[293] Item 1A. Risk Factors Confirms no material changes to previously disclosed risk factors from prior SEC filings - There have been no material changes to the risk factors previously disclosed in the annual report on Form 10-K for December 31, 2022, and the Form 10-Q for March 31, 2023[294] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on the issuance of unregistered Class A common stock in connection with a recent acquisition - In connection with the Socius Insurance Services acquisition, the Company issued 60,021 shares of Class A common stock on July 3, 2023, at $37.85 per share, relying on a Regulation D exemption from registration[297] Item 3. Defaults Upon Senior Securities Confirms no defaults occurred on senior securities during the reporting period - No defaults upon senior securities were reported[298] Item 4. Mine Safety Disclosures States that mine safety disclosures are not applicable to the company's operations - Not applicable[299] Item 5. Other Information Updates on the ACCELERATE 2025 restructuring program's costs and savings, and confirms no changes in insider trading arrangements - The board approved an update to the ACCELERATE 2025 restructuring program on October 30, 2023, expecting approximately $90 million in cumulative pre-tax charges by end of 2024 and $50 million in annual cost savings in 2025[300][301] - Approximately 95% of the cumulative pre-tax charges for the ACCELERATE 2025 program are expected to result in future cash expenditures[301] - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023[303] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including corporate governance, debt, and equity agreements - The report includes a list of exhibits, such as the Amended and Restated Certificate of Incorporation, Bylaws, Registration Rights Agreement, Indenture, Tax Receivable Agreement, LLC Operating Agreements, Indemnification Agreements, Director Nomination Agreement, Omnibus Incentive Plan, and various equity award agreements[305][306] SIGNATURES Report Signatures Contains official signatures certifying the submission of the Quarterly Report on Form 10-Q by the authorized financial officer - The report was signed on November 2, 2023, by Jeremiah R. Bickham, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)[311]