Market Newsdesk

Essential Properties Announces Fourth Quarter 2020 Results

– Collected 95% of January Rent –

– Fourth Quarter Net Income per Share of $0.05 and AFFO per Share of $0.27 –

– Closed Quarterly Investments of $244.1 million at a 7.1% Weighted Average Cash Cap Rate –

– Reiterates 2021 AFFO Guidance of $1.22 to $1.26 per share –

PRINCETON, N.J.–(BUSINESS WIRE)–
Essential Properties Realty Trust, Inc. (NYSE: EPRT; “Essential Properties” or the “Company”), today announced operating results for the three months and year ended December 31, 2020.

Fourth Quarter 2020 Financial and Operating Highlights
Operating Results:
Investments (108 properties)		$ Invested		$244.1 million
		Weighted Avg Cash Cap Rate		7.1%
Net Income per share		Decreased by 72%		$0.05
Funds from Operations (“FFO”) per share		Decreased by 7%		$0.25
Core Funds from Operations (“Core FFO”) per share		Decreased by 19%		$0.25
Adjusted Funds from Operations (“AFFO”) per share		Decreased by 7%		$0.27
Equity Activity:
Equity Raised – ATM Program		$20.50/share		$34.6 million
Full Year 2020 Financial and Operating Highlights
Operating Results:
Investments (234 properties)		$ Invested		$602.8 million
		Weighted Avg Cash Cap Rate		7.1%
Net Income per share		Decreased by 30%		$0.44
FFO per share		Decreased by 1%		$1.08
Core FFO per share		Decreased by 8%		$1.10
AFFO per share		Decreased by 3%		$1.11
Financial Position & Equity Activity:
Net Debt to Annualized Adjusted EBITDAre				4.8x
Total Available Liquidity				$415.0 million
Equity Raised – ATM Program		$19.02/share		$85.6 million
Equity Raised – January Follow-On Offering		$25.20/share		$200.0 million
Equity Raised – September Overnight Offering		$19.00/share		$192.3 million
Portfolio Snapshot:
% of Portfolio Leased				99.7%
Weighted Average Lease Term (“WALT”)				14.5 years
Weighted Average Rent Coverage				2.9x
2021 Highlights to Date
Investments (21 properties)		$ Invested		$51.9 million
Dispositions (11 properties)		$ Gross Proceeds		$14.1 million
January Rent Collections				95%
Equity Activity:
Equity Raised – ATM Program		$20.99/share		$11.8 million

CEO Comments

Commenting on the fourth quarter 2020 results, the Company’s President and Chief Executive Officer, Pete Mavoides, said, “We’re pleased that our results in the fourth quarter and 95% collection rate of January 2021 rent have confirmed the stability of our portfolio, and the quality and durability of our middle market tenant base.” Mr. Mavoides added, “After completing a record level of investments in the fourth quarter, we are encouraged by the continued strength of our investment pipeline, which enabled us to introduce our 2021 AFFO guidance earlier this year.”

Portfolio Update

Investments

The Company’s investment activity during the three months and year ended December 31, 2020 is summarized as follows:

		Quarter Ended December 31, 2020		Year Ended December 31, 2020
Investments:
$ Invested		$244.1 million		$602.8 million
# of Properties		108		234
# of Separate Transactions		32		94
Weighted Average Cash and GAAP Cap Rate		7.1%/7.8%		7.1%/7.9%
WALT		16.2 years		16.5 years
% Sale-Leaseback Transactions		88%		90%
% Subject to Master Lease		89%		75%
% Required Financial Reporting (tenant/guarantor)		100%		100%

Dispositions

The Company’s disposition activity during the three months and year ended December 31, 2020 is summarized as follows:

		Quarter Ended December 31, 2020		Year Ended December 31, 2020
Dispositions:
Net Proceeds		$39.0 million		$81.7 million
# of Properties Sold		23		50
Net Gain / (Loss)		$1.9 million		$5.8 million
Weighted Average Cash Cap Rate (excluding vacant properties)		7.4%		7.2%

Portfolio Highlights

The Company’s investment portfolio as of December 31, 2020 is summarized as follows:

Number of properties		1,181
Weighted average lease term		14.5 years
Weighted average rent coverage ratio		2.9x
Number of tenants		238
Number of states		43
Number of industries		17
Weighted average occupancy		99.7%
Total square feet of rentable space		10,163,834
Cash ABR – service-oriented or experience-based		95.1%
Cash ABR – properties subject to master lease		61.1%

Leverage and Balance Sheet and Liquidity

The Company’s leverage, balance sheet and liquidity as of December 31, 2020 are summarized as follows:

Leverage:
Net debt to Annualized Adjusted EBITDAre		4.8x
Balance Sheet and Liquidity:
Cash and cash equivalents and restricted cash		$33.0 million
Unused borrowing capacity		$382.0 million
Total available liquidity		$415.0 million
ATM Program:
2020 ATM Program availability		$250.0 million
Aggregate gross sales under the 2020 ATM Program		$79.3 million
Availability remaining under the 2020 ATM Program		$170.7 million
Average price per share of gross sales to date		$17.62

Dividend Information

As previously announced, on December 3, 2020 Essential Properties’ board of directors declared a cash dividend of $0.24 per share of common stock for the quarter ended December 31, 2020. The dividend was paid on January 15, 2021 to stockholders of record as of the close of business on December 31, 2020.

2021 Guidance

The Company reiterates its previously issued expectation that 2021 AFFO per share on a fully diluted basis will be within a range of $1.22 to $1.26.

Conference Call Information

In conjunction with the release of Essential Properties’ operating results, the Company will host a conference call on Wednesday, February 24, 2021 at 10:00 a.m. EST to discuss the results. To access the conference, dial 877-407-9208 (International: 201-493-6784). A live webcast will also be available in listen-only mode by clicking on the webcast link in the Investor Relations section at www.essentialproperties.com.

A telephone replay of the conference call can also be accessed by calling 844-512-2921 (International: 412-317-6671) and entering the access code: 13715611. The telephone replay will be available through March 11, 2021.

A replay of the conference call webcast will be available on our website approximately two hours after the conclusion of the live broadcast. The webcast replay will be available for 90 days. No access code is required for this replay.

Supplemental Materials

The Company’s Supplemental Operating & Financial Data—Fourth Quarter Ended December 31, 2020 is available on Essential Properties’ website at investors.essentialproperties.com.

About Essential Properties Realty Trust, Inc.

Essential Properties Realty Trust, Inc. is an internally managed REIT that acquires, owns and manages primarily single- tenant properties that are net leased on a long-term basis to companies operating service-oriented or experience-based businesses. As of December 31, 2020, the Company’s portfolio consisted of 1,181 freestanding net lease properties with a weighted average lease term of 14.5 years and a weighted average rent coverage ratio of 2.9x. As of the same date, the Company’s portfolio was 99.7% leased to 238 tenants operating 336 different concepts in 17 industries across 43 states.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. When used in this press release, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and the Company may not be able to realize them. The Company does not guarantee that the transactions and events described will happen as described (or that they will happen at all). You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this press release. While forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events, except as required by law. In light of these risks and uncertainties, the forward-looking events discussed in this press release might not occur as described, or at all.

Additional information concerning factors that could cause actual results to differ materially from these forward-looking statements is contained in the company’s Securities and Exchange Commission (the “Commission”) filings, including, but not limited to, the Company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q. Copies of each filing may be obtained from the Company or the Commission. Such forward-looking statements should be regarded solely as reflections of the Company’s current operating plans and estimates. Actual operating results may differ materially from what is expressed or forecast in this press release.

The results reported in this press release are preliminary and not final. There can be no assurance that these results will not vary from the final results reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 that it will file with the Commission.

Non-GAAP Financial Measures and Certain Definitions

The Company’s reported results are presented in accordance with GAAP. The Company also discloses the following non-GAAP financial measures: FFO, Core FFO, AFFO, earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA further adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses (“EBITDAre”), adjusted EBITDAre, annualized adjusted EBITDAre, net debt, net operating income (“NOI”) and cash NOI (“Cash NOI”). The Company believes these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.

FFO, Core FFO and AFFO

The Company computes FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO is used by management, and may be useful to investors and analysts, to facilitate meaningful comparisons of operating performance between periods and among the Company’s peers primarily because it excludes the effect of real estate depreciation and amortization and net gains and losses on sales (which are dependent on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions).

The Company computes Core FFO by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that it believes are infrequent and unusual in nature and/or not related to its core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.

Core FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Core FFO include certain transaction related gains, losses, income or expense or other non-core amounts as they occur.

To derive AFFO, the Company modifies its computation of Core FFO to include other adjustments to GAAP net income related to certain items that it believes are not indicative of the Company’s operating performance, including straight-line rental revenue, non-cash interest expense, non-cash compensation expense, other amortization expense, other non-cash charges (including changes to our provision for loan losses following the adoption of ASC 326), capitalized interest expense and transaction costs. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. The Company believes that AFFO is an additional useful supplemental measure for investors to consider when assessing the Company’s operating performance without the distortions created by non-cash items and certain other revenues and expenses.

FFO, Core FFO and AFFO do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of FFO, Core FFO and AFFO may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.

EBITDA and EBITDAre

The Company computes EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDAre. The Company computes EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses. The Company presents EBITDA and EBITDAre as they are measures commonly used in its industry and the Company believes that these measures are useful to investors and analysts because they provide supplemental information concerning its operating performance, exclusive of certain non-cash items and other costs. The Company uses EBITDA and EBITDAre as measures of its operating performance and not as measures of liquidity.

EBITDA and EBITDAre do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, the Company’s computation of EBITDA and EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.

Net Debt

The Company calculates its net debt as its gross debt (defined as total debt plus net deferred financing costs on its secured borrowings) less cash and cash equivalents and restricted cash deposits held for the benefit of lenders. The Company believes excluding cash and cash equivalents and restricted cash deposits held for the benefit of lenders from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which it believes is a beneficial disclosure to investors and analysts.

NOI and Cash NOI

The Company computes NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income or loss. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as straight-line rental revenue and other amortization and non-cash charges. The Company believes NOI and Cash NOI provide useful information because they reflect only those revenue and expense items that are incurred at the property level and present such items on an unlevered basis.

NOI and Cash NOI are not measures of financial performance under GAAP. You should not consider the Company’s NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. Additionally, the Company’s computation of NOI and Cash NOI may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.

Adjusted EBITDAre / Adjusted NOI / Adjusted Cash NOI

The Company further adjusts EBITDAre, NOI and Cash NOI i) based on an estimate calculated as if all re-leasing, investment and disposition activity that took place during the quarter had occurred on the first day of the quarter, ii) to exclude certain GAAP income and expense amounts that the Company believes are infrequent and unusual in nature and iii) to eliminate the impact of lease termination fees and contingent rental revenue from its tenants which is subject to sales thresholds specified in the lease. The Company then annualizes these estimates for the current quarter by multiplying them by four, which it believes provides a meaningful estimate of the Company’s current run rate for all investments as of the end of the current quarter. You should not unduly rely on these measures, as they are based on assumptions and estimates that may prove to be inaccurate. The Company’s actual reported EBITDAre, NOI and Cash NOI for future periods may be significantly less than these estimates of current run rates.

Cash ABR

Cash ABR means annualized contractually specified cash base rent in effect as of the end of the current quarter for all of the Company’s leases (including those accounted for as direct financing leases) commenced as of that date and annualized cash interest on its mortgage loans receivable as of that date.

Cash Cap Rate

Cash Cap Rate means annualized contractually specified cash base rent for the first full month after investment or disposition divided by the purchase or sale price, as applicable, for the property.

GAAP Cap Rate

GAAP Cap Rate means annualized rental income computed in accordance with GAAP for the first full month after investment divided by the purchase price, as applicable, for the property.

Rent Coverage Ratio

Rent coverage ratio means the ratio of tenant-reported or, when unavailable, management’s estimate based on tenant-reported financial information, annual EBITDA and cash rent attributable to the leased property (or properties, in the case of a master lease) to the annualized base rental obligation as of a specified date.

Disclaimer

Essential Properties Realty Trust, Inc. and the Essential Properties Realty Trust REIT are not affiliated with or sponsored by Griffin Capital Essential Asset Operating Partnership, L.P. or the Griffin Capital Essential Asset REIT, information about which can be obtained at (https://www.gcear.com).

Essential Properties Realty Trust, Inc. Consolidated Statements of Operations
		Three months ended December 31,								Years ended December 31,
(in thousands, except share and per share data)		2020				2019				2020				2019
		(Unaudited)				(Unaudited)				(Unaudited)				(Audited)
Revenues:
Rental revenue1,2		$	38,986			$	37,828			$	155,792			$	135,670
Interest on loans and direct financing leases		2,106				1,355				8,136				3,024
Other revenue		17				22				81				663
Total revenues		41,109				39,205				164,009				139,357
Expenses:
General and administrative3		4,738				5,290				24,444				21,745
Property expenses4		2,126				736				3,881				3,070
Depreciation and amortization		19,004				12,378				59,446				42,745
Provision for impairment of real estate		3,319				997				8,399				2,918
Provision for loan losses		299				—				830				—
Total expenses		29,486				19,401				97,000				70,478
Other operating income:
Gain on dispositions of real estate, net		1,850				2,695				5,821				10,932
Income from operations		13,473				22,499				72,830				79,811
Other (expense)/income:
Loss on repayment and repurchase of secured borrowings5		—				(887		)		(924		)		(5,240		)
Interest expense		(7,764		)		(6,963		)		(29,651		)		(27,037		)
Interest income		52				71				485				794
Income before income tax expense		5,761				14,720				42,740				48,328
Income tax expense		56				94				212				303
Net income		5,705				14,626				42,528				48,025
Net income attributable to non-controlling interests		(35		)		(105		)		(255		)		(6,181		)
Net income attributable to stockholders		$	5,670			$	14,521			$	42,273			$	41,844
Basic weighted-average shares outstanding		104,963,676				81,232,922				95,311,035				64,104,058
Basic net income per share		$	0.05			$	0.18			$	0.44			$	0.65
Diluted weighted-average shares outstanding		105,840,736				82,231,030				96,197,705				75,309,896
Diluted net income per share		$	0.05			$	0.18			$	0.44			$	0.63

1. Includes contingent rent (based on a percentage of the tenant’s gross sales at the leased property) of $88, $137, $444 and $855 for the three months and year ended December 31, 2020 and 2019, respectively.
2. Includes reimbursable income from the Company’s tenants of $314, $247, $897 and $1,427 for the three months and year ended December 31, 2020 and 2019, respectively.
3. During the three months and year ended December 31, 2020, includes non-recurring expenses of $21 and $255, respectively, for reimbursement of executive relocation costs and non-recurring recruiting costs and, during the year ended December 31, 2020, includes $1,093 for costs and charges incurred in connection with the termination of one of our executive officers. During the year ended December 31, 2019, includes non-recurring expenses of $2,473 for costs and charges incurred in connection with the secondary offering by our funding capital partner and $275 for a provision for settlement of litigation.
4. Includes reimbursable expenses from the Company’s tenants $314, $247, $897, and $1,427 for the three months and year ended December 31, 2020 and 2019, respectively.
5. Includes the write-off of $887 and $924 of deferred financing costs during the three months ended December 31, 2019 and the year ended December 31, 2020, respectively, and, during the year ended December 31, 2019, includes premium paid on repurchase of notes issued under our Master Trust Funding Program of $1,400, the write-off of $3,740 of deferred financing costs related to the repurchased notes and $100 of legal costs related to the repurchase.

    

Essential Properties Realty Trust, Inc. Consolidated Balance Sheets
(in thousands, expect share and per share amounts)		December 31, 2020				December 31, 2019
		(Unaudited)				(Audited)
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements		$	741,254			$	588,279
Building and improvements		1,519,665				1,224,682
Lease incentive		14,297				4,908
Construction in progress		3,908				12,128
Intangible lease assets		80,271				78,922
Total real estate investments, at cost		2,359,395				1,908,919
Less: accumulated depreciation and amortization		(136,097		)		(90,071		)
Total real estate investments, net		2,223,298				1,818,848
Loans and direct financing lease receivables, net		152,220				92,184
Real estate investments held for sale, net		17,058				1,211
Net investments		2,392,576				1,912,243
Cash and cash equivalents		26,602				8,304
Restricted cash		6,388				13,015
Straight-line rent receivable, net		37,830				25,926
Rent receivables, prepaid expenses and other assets, net		25,406				15,959
Total assets		$	2,488,802			$	1,975,447
LIABILITIES AND EQUITY
Secured borrowings, net of deferred financing costs		$	171,007			$	235,336
Unsecured term loans, net of deferred financing costs		626,272				445,586
Revolving credit facility		18,000				46,000
Intangible lease liabilities, net		10,168				9,564
Dividend payable		25,703				19,395
Derivative liabilities		38,912				4,082
Accrued liabilities and other payables		16,792				13,371
Total liabilities		906,854				773,334
Commitments and contingencies		—				—
Stockholders’ equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; none issued and outstanding as of December 31, 2020 and 2019		—				—
Common stock, $0.01 par value; 500,000,000 authorized; 106,361,524 and 83,761,151 issued and outstanding as of December 31, 2020 and 2019, respectively		1,064				838
Additional paid-in capital		1,688,540				1,223,043
Distributions in excess of cumulative earnings		(77,665		)		(27,482		)
Accumulated other comprehensive loss		(37,181		)		(1,949		)
Total stockholders’ equity		1,574,758				1,194,450
Non-controlling interests		7,190				7,663
Total equity		1,581,948				1,202,113
Total liabilities and equity		$	2,488,802			$	1,975,447

Essential Properties Realty Trust, Inc. Reconciliation of Non-GAAP Financial Measures
		Three months ended December 31,								Year ended December 31,
(unaudited, in thousands except per share amounts)		2020				2019				2020				2019
Net income		$	5,705			$	14,626			$	42,528			$	48,025
Depreciation and amortization of real estate		18,979				12,354				59,309				42,649
Provision for impairment of real estate		3,319				997				8,399				2,918
Gain on dispositions of real estate, net		(1,850		)		(2,695		)		(5,821		)		(10,932		)
Funds from Operations		26,153				25,282				104,415				82,660
Other non-recurring expenses1		21				887				2,273				7,988
Core Funds from Operations		26,174				26,169				106,688				90,648
Adjustments:
Straight-line rental revenue, net		(2,584		)		(3,336		)		(11,905		)		(12,215		)
Non-cash interest expense		505				603				2,040				2,738
Non-cash compensation expense		1,386				1,022				5,427				4,546
Other amortization expense		2,836				80				3,854				815
Other non-cash charges		299				1				829				9
Capitalized interest expense		(5		)		(125		)		(228		)		(290		)
Transaction costs		179				—				291				—
Adjusted Funds from Operations		$	28,790			$	24,414			$	106,995			$	86,251
Net income per share2:
Basic		$	0.05			$	0.18			$	0.44			$	0.65
Diluted		$	0.05			$	0.18			$	0.44			$	0.63
FFO per share2:
Basic		$	0.25			$	0.27			$	1.08			$	1.11
Diluted		$	0.25			$	0.27			$	1.08			$	1.09
Core FFO per share2:
Basic		$	0.25			$	0.31			$	1.11			$	1.21
Diluted		$	0.25			$	0.31			$	1.10			$	1.20
AFFO per share2:
Basic		$	0.27			$	0.29			$	1.11			$	1.15
Diluted		$	0.27			$	0.29			$	1.11			$	1.14
Additional supplemental disclosure:
Scheduled principal repayments		$	989			$	941			$	3,885			$	3,696
Contractual deferred rents included in total revenues		992				—				12,417				—
Reduction of revenue for non-accrual tenants:
Cash		$	505			$	—			$	3,916			$	25
Straight-line		970				—				3,233				—
Total reduction of revenue for non-accrual tenants		$	1,475			$	—			$	7,149			$	25

1. Includes non-recurring expenses of $21 and $60 related to reimbursement of executive relocation costs during the three months and year ended December 31, 2020, $1,093 for severance payments and acceleration of non-cash compensation expense in connection with the termination of one of our executive officers during the year ended December 31, 2020, $195 of non-recurring recruiting costs during the year ended December 31, 2020, and our $924 loss on repayment of secured borrowings during the year ended December 31, 2020.
2. Calculations exclude $101, $110, $404 and $377 from the numerator for the three months and year ended December 31, 2020 and 2019, respectively, related to dividends paid on unvested restricted share awards and restricted share units.

    

Essential Properties Realty Trust, Inc. Reconciliation of Non-GAAP Financial Measures
(in thousands)		Three months ended December 31, 2020
Net income		$	5,705
Depreciation and amortization		19,004
Interest expense		7,764
Interest income		(52		)
Income tax expense		56
EBITDA		32,476
Provision for impairment of real estate		3,319
Gain on dispositions of real estate, net		(1,850		)
EBITDAre		33,945
Adjustment for current quarter re-leasing, investment and disposition activity1		4,681
Adjustment to exclude other non-recurring activity2		2,826
Adjusted EBITDAre – Current Estimated Run Rate		41,452
General and administrative		4,717
Adjusted net operating income (“NOI”)		46,169
Straight-line rental revenue, net1		(2,778		)
Other amortization expense		2,836
Adjusted Cash NOI		$	46,227
Annualized EBITDAre		$	135,780
Annualized Adjusted EBITDAre		$	165,808
Annualized Adjusted NOI		$	184,676
Annualized Adjusted Cash NOI		$	184,908

1. These adjustments are made to reflect EBITDAre, NOI and Cash NOI as if all re-leasing activity, investments in and dispositions of real estate made during the three months ended December 31, 2020 had occurred on October 1, 2020.
2. Adjustment excludes $21 of non-core expenses added back to compute Core FFO, the $299 adjustment to our provision for loan loss and $2,506 related to the write-off of receivables and real estate tax expense from prior periods for non-accrual tenants.

Essential Properties Realty Trust, Inc. Reconciliation of Non-GAAP Financial Measures
(dollars in thousands, except share and per share amounts)		December 31, 2020
Secured debt:
Series 2017-1, Class A		$	157,524
Series 2017-1, Class B		15,669
Total secured debt		173,193
Unsecured debt:
$200mm term loan		200,000
$430mm term loan		430,000
Revolving credit facility1		18,000
Total unsecured debt		648,000
Gross debt		821,193
Less: cash & cash equivalents		(26,602		)
Less: restricted cash deposits held for the benefit of lenders		(6,388		)
Net debt		788,203
Equity:
Preferred stock		—
Common stock & OP units (106,915,371 shares @ $21.20/share as of 12/31/20)2		2,266,606
Total equity		2,266,606
Total enterprise value (“TEV”)		$	3,054,809
Net Debt / TEV		25.8		%
Net Debt / Annualized Adjusted EBITDAre		4.8x

1. The Company’s revolving credit facility provides a maximum aggregate initial original principal amount of up to $400 million and includes an accordion feature to increase, subject to certain conditions, the maximum availability of the facility by up to $200 million.
2. Common equity & units as of December 31, 2020, based on 106,361,524 common shares outstanding (including unvested restricted share awards) and 553,847 OP units held by non-controlling interests.

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20210223006033/en/

Investor/Media:

Essential Properties Realty Trust, Inc.

Daniel Donlan, Senior Vice President, Capital Markets

609-436-0619

[email protected]

KEYWORDS: New Jersey United States North America

INDUSTRY KEYWORDS: Commercial Building & Real Estate Construction & Property REIT

MEDIA:

Logo

McAfee’s Fourth Quarter Revenue Grows 14%, Powered by 23% Consumer Revenue Growth

• Consumer Revenue Grew 23% Compared to Q4 2019 and Grew 20% for the Full Year 2020
• Core Direct to Consumer (“DTC”) Subscribers Increased to 18 Million, Up 2.8 Million YoY, and Up 668,000 QoQ
• Enterprise Revenue Grew 5% Compared to Q4 2019
• Net Cash Provided by Operating Activities Grew 40% Compared to Q4 2019 and Grew 53% for Full Year 2020

SAN JOSE, Calif.–(BUSINESS WIRE)–
McAfee Corp. (“McAfee,” or the “Company”) (NASDAQ: MCFE), the device-to-cloud cybersecurity company, today announced its financial results for the three months and full fiscal year ended December 26, 2020.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20210223006031/en/

In the fourth quarter net revenue was $777 million, up 14% year-over-year. For the full year 2020, net revenue was $2.9 billion, an increase of 10%.

“McAfee achieved significant increases in revenue, subscribers, profitability and cash flow to close out the year. We secure our customers’ ever increasing digital footprint as people are living more of their lives online. This accelerating transformation combined with our market leading capabilities drove 23% revenue growth in our consumer business, 14% growth in total net revenue, and strong growth in adjusted EBITDA in Q4. I am very pleased with our team’s execution, which is a testament to the dedication of McAfee employees worldwide,” said Peter Leav, McAfee’s President and Chief Executive Officer.

Fourth Quarter and Full Year Fiscal 2020 Financial Highlights

Revenue:

• Consumer revenue for the fourth quarter was $426 million, reflecting 23% growth year-over-year and was $1.6 billion, up 20% for the full year FY20.
• Enterprise revenue for the fourth quarter was $351 million, up 5% year-over-year and was $1.3 billion, up 1% for the full year FY20.

Unlevered Free Cash Flow:

• Net cash provided by operating activities was $760 million in the year ended December 26, 2020, up 53% compared to $496 million in the year ended December 28, 2019.
• Unlevered Free Cash Flow was $982 million for the year ended December 26, 2020, up more than 37% versus the prior year.

Consumer KPIs:

• The market leading growth in McAfee’s Consumer business is being driven by accelerating business fundamentals, with 18% year-over-year growth in Core DTC subscribers.
• McAfee ended the fourth quarter with 18.0 million Core DTC subscribers, adding approximately 2.8 million net new subscribers compared to the fourth quarter of 2019 and 668,000 net new subscribers during the past quarter alone.
• 13th consecutive quarter of positive quarter over quarter and year over year Core DTC subscriber growth.
• Consumer trailing twelve-month dollar retention rate was 100% for the fourth quarter, versus 97% in the comparable period last year.

Recent Business Highlights

• Announced a five year extension with Asus for consumer security services across their product portfolio.
• Signed a three year agreement with LG to pre-install a 30-day free trial of McAfee consumer security on LG devices.
• Renewed an agreement with Costco to continue to offer consumer security products on PCs purchased through Costco.com.
• Expanded worldwide relationship with Ingram Micro Inc. to now provide access to McAfee enterprise products and solutions across Ingram Micro’s global distribution network, including its regional Cloud Marketplaces and Centers of Excellence.
• Formed an enterprise agreement with ECS, a top-rated managed service provider and leader in cybersecurity, cloud, AI and ServiceNow delivery, where ECS will now offer managed threat detection and response capabilities through McAfee MVISION EDR.
• Introduced the availability of MVISION Extended Detection and Response (XDR) with inclusion of cloud and network telemetry, unifying and optimizing threat detection and response beyond endpoints.

Commenting on the company’s financial results, Venkat Bhamidipati, McAfee’s CFO added, “Across the business, results exceeded expectations driven by strong execution and increased demand for our security offerings. In our Consumer segment, we delivered high-teens subscriber growth as we saw robust demand in the large, critical, and growing personal protection market. In our Enterprise segment, we grew quarterly revenue by 5% year-over-year and increased profitability by focusing on core enterprise and government customers while prioritizing our investment spending and rationalizing costs.”

Financial Outlook

McAfee provides the following expected financial guidance for the quarter ending March 27, 2021:

Net Revenue of $725 million to $735 million

Total Adjusted EBITDA of $275 million to $285 million⁽¹⁾

The financial outlook is subject to a number of important assumptions and risks referenced in the section entitled “Forward-Looking Statements” below, which investors should read carefully.

Webcast / Conference Call Details

In conjunction with this announcement, McAfee will host a webcast conference call today, February 23, 2021, at 5:00 p.m. Eastern Time to discuss its financial results. The listen-only webcast is available at https://ir.mcafee.com/investors. Investors and participants can access the conference call over the phone by dialing (833) 301-1122, or for international callers (631) 658-1012. The conference ID is 7461775.

Following the conference call, a replay of the webcast, supplemental financial information and earnings slides will be made available on the Investor Relations page of the McAfee’s website at https://ir.mcafee.com/news-and-events/events.

About McAfee

McAfee is the device-to-cloud cybersecurity company. Inspired by the power of working together, McAfee creates consumer and business solutions that make the world a safer place. www.mcafee.com

(1)

Adjusted EBITDA is a non-GAAP financial measure, and should be considered in addition to, but not as a substitute for, information provided in accordance with GAAP. We are not able to forecast net income (loss), the most directly comparable GAAP financial measure, on a forward-looking basis without unreasonable efforts due to the high variability and difficulty in predicting certain items that affect net income (loss) including, but not limited to, interest expense and other, net, provision for income tax expense and foreign exchange gain (loss), net and equity-based compensation expense, any of which may be significant. Our forward-looking guidance regarding adjusted EBITDA should not be used to predict our future net income (loss), as the difference between the two measures varies as a result of these and other items.

Use of Non-GAAP Financial Information

In addition to McAfee’s results which are determined in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company believes the following non-GAAP measures presented in this press release and discussed on the related teleconference call are useful in evaluating its operating performance: adjusted operating income, adjusted operating income margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income margin, adjusted net income excluding impact of foreign exchange, adjusted net income excluding impact of foreign exchange margin, adjusted earnings per share (“EPS”) and unlevered free cash flow. Certain of these non-GAAP measures exclude equity-based compensation, depreciation and amortization expense, interest expense and other, net, provision for income tax expense, foreign exchange (gain) and loss, net and other costs we do not believe are reflective of our ongoing operations. McAfee believes that these non-GAAP financial measures are provided to enhance the reader’s understanding of our past financial performance and our prospects for the future. McAfee’s management team uses these non-GAAP financial measures in assessing McAfee’s performance, as well as in planning and forecasting future periods. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided herein for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Readers are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Forward-Looking Statements

In addition to historical consolidated financial information, certain statements in this press release and on the related teleconference call may contain “forward-looking statements” within the meaning U.S. federal securities laws that involve substantial risks and uncertainties. All statements other than statements of historical fact included in this press release and on the related teleconference call are forward-looking statements. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements McAfee makes relating to its estimated and projected financial results or its plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that the Company expected. Specific factors that could cause such a difference include, but are not limited to, those disclosed previously in the Company’s other filings with the SEC which include, but are not limited to: the impact of the COVID-19 pandemic; our ability to adapt to rapid technological change, evolving industry standards and changing customer needs, requirements or preferences; our ability to enhance and deploy our cloud-based offerings while continuing to effectively offer our on-premise offerings; our ability to maintain or improve our competitive position; the impact on our business of a network or data security incident or unauthorized access to our network or data or our customers’ data; the effects on our business if we are unable to acquire new customers, if our customers do not renew their arrangements with us, or if we are unable to expand sales to our existing customers or develop new solutions or solution packages that achieve market acceptance; our ability to manage our growth effectively, execute our business plan, maintain high levels of service and customer satisfaction or adequately address competitive challenges; our dependence on our senior management team and other key employees; our ability to enhance and expand our sales and marketing capabilities; our ability to attract and retain highly qualified personnel to execute our growth plan; the risks associated with interruptions or performance problems of our technology, infrastructure and service providers; our dependence on Amazon Web Services cloud infrastructure services; the impact of data privacy concerns, evolving regulations of cloud computing, cross-border data transfer restrictions and other domestic and foreign laws and regulations; the impact of volatility in quarterly operating results; the risks associated with our revenue recognition policy and other factors may distort our financial results in any given period; the effects on our customer base and business if we are unable to enhance our brand cost-effectively; our ability to comply with anti-corruption, anti-bribery and similar laws; our ability to comply with governmental export and import controls and economic sanctions laws; the potential adverse impact of legal proceedings; the impact of our frequently long and unpredictable sales cycle; our ability to identify suitable acquisition targets or otherwise successfully implement our growth strategy; the impact of a change in our pricing model; our ability to meet service level commitments under our customer contracts; the impact on our business and reputation if we are unable to provide high-quality customer support; our dependence on strategic relationships with third parties; the impact of adverse general and industry-specific economic and market conditions and reductions in IT and identity spending; the ability of our platform, solutions and solution packages to interoperate with our customers’ existing or future IT infrastructures; our dependence on adequate research and development resources and our ability to successfully complete acquisitions; our dependence on the integrity and scalability of our systems and infrastructures; our reliance on software and services from other parties; the impact of real or perceived errors, failures, vulnerabilities or bugs in our solutions; our ability to protect our proprietary rights; the impact on our business if we are subject to infringement claim or a claim that results in a significant damage award; the risks associated with our use of open source software in our solutions, solution packages and subscriptions; our reliance on SaaS vendors to operate certain functions of our business; the risks associated with indemnity provisions in our agreements; the risks associated with liability claims if we breach our contracts; the impact of the failure by our customers to pay us in accordance with the terms of their agreements; our ability to expand the sales of our solutions and solution packages to customers located outside of the United States; the risks associated with exposure to foreign currency fluctuations; the impact of Brexit; the impact of potentially adverse tax consequences associated with our international operations; the impact of changes in tax laws or regulations; the impact of the Tax Act; our ability to maintain our corporate culture; our ability to develop and maintain proper and effective internal control over financial reporting; our management team’s limited experience managing a public company; the risks associated with having operations and employees located in Israel; the risks associated with doing business with governmental entities; and the impact of catastrophic events on our business. Given these factors, as well as other variables that may affect McAfee’s operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, or use historical trends to anticipate results or trends in future periods. The forward-looking statements included in this press release and on the related teleconference call relate only to events as of the date hereof. The Company undertakes no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Presentation of Financial Measures

McAfee Corp. (the “Corporation”) was incorporated in Delaware on July 19, 2019. The Corporation was formed for the purpose of completing an initial public offering (the “IPO”) and related transactions in order to carry on the business of Foundation Technology Worldwide LLC (“FTW”) and its subsidiaries (the Corporation, FTW and its subsidiaries are collectively the “Company”). The Corporation, as the sole managing member of FTW, exclusively operates and controls the business and affairs of FTW. The Corporation consolidates the financial results of FTW and reports a redeemable noncontrolling interest (“RNCI”) related to the LLC Units and Management Incentive Units (MIUs) not owned by the Corporation.

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
		Three Months Ended								Year Ended
		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Net revenue		$	777			$	682			$	2,906			$	2,635
Cost of sales			256				211				875				843
Gross profit			521				471				2,031				1,792
Operating expenses:
Sales and marketing			292				203				826				770
Research and development			201				91				475				380
General and administrative			132				77				332				272
Amortization of intangibles			55				54				220				222
Restructuring and transition charges			16				8				25				22
Total operating expenses			696				433				1,878				1,666
Operating income (loss)			(175	)			38				153				126
Interest expense and other, net			(85	)			(76	)			(308	)			(295	)
Foreign exchange gain (loss), net			(55	)			(24	)			(104	)			20
Loss before income taxes			(315	)			(62	)			(259	)			(149	)
Provision for income tax expense			5				19				30				87
Net loss		$	(320	)		$	(81	)		$	(289	)		$	(236	)
Less: Net loss attributable to redeemable noncontrolling interests			(202	)		N/A					(171	)		N/A
Net loss attributable to McAfee Corp.		$	(118	)		N/A				$	(118	)		N/A
Net loss per share, basic and diluted(1)		$	(0.73	)		N/A				$	(0.73	)		N/A
Weighted-average shares outstanding, basic			162.3			N/A					162.3			N/A
Weighted-average shares outstanding, diluted			433.9			N/A					433.9			N/A

(1)

For the year ended December 26, 2020, basic and diluted earnings per share of Class A common stock are applicable only for the period from October 22, 2020 through December 26, 2020, which is the period following the initial public offering (“IPO”) and related Reorganization Transactions (as defined in Note 1 to the Consolidated Financial Statements to be included in our 2020 Annual Report on Form 10-K to be filed with the Securities Exchange Commission).

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
		December 26, 2020				December 28, 2019
Assets
Current assets:
Cash and cash equivalents		$	231			$	167
Accounts receivable, net			392				409
Deferred costs			233				187
Other current assets			58				68
Total current assets			914				831
Property and equipment, net			149				171
Goodwill			2,431				2,428
Identified intangible assets, net			1,644				2,071
Deferred tax assets			67				55
Other long-term assets			223				232
Total assets		$	5,428			$	5,788
Liabilities, redeemable noncontrolling interests and deficit
Current liabilities:
Accounts payable and other current liabilities		$	266			$	196
Accrued compensation and benefits			197				209
Accrued marketing			124				94
Income taxes payable			14				15
Long-term debt, current portion			44				43
Lease liabilities, current portion			25				29
Deferred revenue			1,715				1,574
Total current liabilities			2,385				2,160
Long-term debt, net			3,943				4,669
Deferred tax liabilities			12				160
Other long-term liabilities			204				175
Deferred revenue, less current portion			684				718
Total liabilities			7,228				7,882
Commitments and contingencies
Redeemable noncontrolling interests			4,840				—
Stockholders’ equity/members’ deficit:
Members’ deficit			—				(647	)
Class A common stock, $0.001 par value – 1,500,000,000 shares authorized, 161,266,648 shares issued and outstanding as of December 26, 2020			—				—
Class B common stock, $0.001 par value – 300,000,000 shares authorized, 267,065,127 shares issued and outstanding as of December 26, 2020			—				—
Additional paid-in capital			(6,477	)			—
Accumulated deficit			(118	)			(1,385	)
Accumulated other comprehensive income (loss)			(45	)			(62	)
Total deficit			(6,640	)			(2,094	)
Total liabilities, redeemable noncontrolling interests and deficit		$	5,428			$	5,788

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
		Year Ended
		December 26, 2020				December 28, 2019
Cash flows from operating activities:
Net loss		$	(289	)		$	(236	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			491				536
Equity-based compensation			313				25
Deferred taxes			(10	)			18
Foreign exchange (gain) loss, net			104				(20	)
Other operating activities			70				53
Change in assets and liabilities:
Accounts receivable, net			15				(60	)
Deferred costs			(46	)			(22	)
Other assets			(9	)			(71	)
Other current liabilities			41				28
Deferred revenue			106				186
Other liabilities			(26	)			59
Net cash provided by operating activities			760				496
Cash flows from investing activities:
Acquisitions, net of cash acquired			(5	)			(2	)
Additions to property and equipment			(42	)			(56	)
Other investing activities			(4	)			(5	)
Net cash used in investing activities			(51	)			(63	)
Cash flows from financing activities:
Proceeds from IPO, net of underwriters discount and commissions			586				—
Use of proceeds from issuance of Class A common stock to purchase Foundation Technology Worldwide LLC (“FTW”) units			(33	)			—
Proceeds from the issuance of Member units			2				1
Payment for the long-term debt due to third party			(869	)			(67	)
Proceeds from long-term debt			—				685
Payment for debt issuance costs			(5	)			(6	)
Distributions to members of FTW			(277	)			(1,334	)
Payment of tax withholding for shares and units withheld			(24	)			(8	)
Payment of IPO related expenses			(8	)			—
Other financing activities			(23	)			(5	)
Net cash used in financing activities			(651	)			(734	)
Effect of exchange rate fluctuations on cash and cash equivalents			6				—
Change in cash and cash equivalents			64				(301	)
Cash and cash equivalents, beginning of period			167				468
Cash and cash equivalents, end of period		$	231			$	167
Supplemental disclosures of noncash investing and financing activities and cash flow information:
Acquisition of property and equipment included in current liabilities		$	(2	)		$	(8	)
Distributions to members of FTW included in liabilities			(27	)			(4	)
Dividends payable included in liabilities			(14	)			—
Tax withholding for shares and units withheld included in liabilities			(4	)			—
Other			(3	)			(2	)
Cash paid during the period for:
Interest, net of cash flow hedges			(268	)			(281	)
Income taxes, net of refunds			(49	)			(47	)

MCAFEE CORP.

UNAUDITED NON-GAAP FINANCIAL MEASURES

(in millions)

We have included both financial measures compiled in accordance with GAAP and certain non-GAAP financial measures, including adjusted operating income, adjusted operating income margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income margin, adjusted net income excluding impact of foreign exchange, adjusted net income excluding impact of foreign exchange margin, adjusted diluted earnings per share and unlevered free cash flow and ratios based on these financial measures.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA and Adjusted EBITDA Margin

Total Company

The following table presents a reconciliation of our adjusted operating income and adjusted EBITDA to our net loss for the periods presented:

		Three Months Ended								Year Ended
(in millions)		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Net loss		$	(320	)		$	(81	)		$	(289	)		$	(236	)
Add: Amortization			106				117				436				470
Add: Equity-based compensation			288				6				313				25
Add: Cash in lieu of equity awards(1)			2				4				8				19
Add: Acquisition and integration costs(2)			2				5				8				23
Add: Restructuring and transition(3)			16				8				25				22
Add: Management fees(4)			22				2				28				8
Add: Implementation costs of adopting ASC Topic 606			—				—				—				4
Add: Transformation initiatives(5)			11				14				28				33
Add: Executive severance(6)			1				3				5				3
Add: Interest expense and other, net			85				76				308				295
Add: Provision for income tax expense			5				19				30				87
Add: Foreign exchange loss (gain), net			55				24				104				(20	)
Adjusted operating income			273				197				1,004				733
Add: Depreciation			13				19				55				66
Less: Other expense			(1	)			—				(2	)			—
Adjusted EBITDA		$	285			$	216			$	1,057			$	799
Net revenue		$	777			$	682			$	2,906			$	2,635
Net loss margin			(41.2	)%			(11.9	)%			(9.9	)%			(9.0	)%
Adjusted operating income margin			35.1	%			28.9	%			34.5	%			27.8	%
Adjusted EBITDA margin			36.7	%			31.7	%			36.4	%			30.3	%

See Appendix A for an explanation of non-GAAP measures and other items.

Consumer Segment

The following table presents a reconciliation of our Consumer adjusted operating income and Consumer adjusted EBITDA to our Consumer operating income for the periods presented:

		Three Months Ended								Year Ended
(in millions)		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Operating income — Consumer		$	26			$	79			$	333			$	277
Add: Amortization			63				62				252				253
Add: Equity-based compensation			74				1				84				4
Add: Cash in lieu of equity awards(1)			—				1				—				2
Add: Acquisition and integration costs(2)			2				2				8				8
Add: Restructuring and transition(3)			1				—				2				2
Add: Management fees(4)			12				—				13				1
Add: Implementation costs of adopting ASC Topic 606			—				—				—				1
Add: Transformation initiatives(5)			5				3				10				6
Add: Executive severance(6)			—				1				—				1
Adjusted operating income — Consumer			183				149				702				555
Add: Depreciation			5				8				20				25
Adjusted EBITDA — Consumer		$	188			$	157			$	722			$	580
Net revenue — Consumer		$	426			$	347			$	1,558			$	1,303
Operating income margin — Consumer			6.1	%			22.8	%			21.4	%			21.3	%
Adjusted operating income margin — Consumer			43.0	%			42.9	%			45.1	%			42.6	%
Adjusted EBITDA margin — Consumer			44.1	%			45.2	%			46.3	%			44.5	%

See Appendix A for an explanation of non-GAAP measures and other items.

Enterprise Segment

The following table presents a reconciliation of our Enterprise adjusted operating income and Enterprise adjusted EBITDA to our Enterprise operating loss for the periods presented:

		Three Months Ended								Year Ended
(in millions)		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Operating loss — Enterprise		$	(201	)		$	(41	)		$	(180	)		$	(151	)
Add: Amortization			43				55				184				217
Add: Equity-based compensation			214				5				229				21
Add: Cash in lieu of equity awards(1)			2				3				8				17
Add: Acquisition and integration costs(2)			—				3				—				15
Add: Restructuring and transition(3)			15				8				23				20
Add: Management fees(4)			10				2				15				7
Add: Implementation costs of adopting ASC Topic 606			—				—				—				3
Add: Transformation initiatives(5)			6				11				18				27
Add: Executive severance(6)			1				2				5				2
Adjusted operating income — Enterprise			90				48				302				178
Add: Depreciation			8				11				35				41
Less: Other expense			(1	)			—				(2	)			—
Adjusted EBITDA — Enterprise		$	97			$	59			$	335			$	219
Net revenue — Enterprise		$	351			$	335			$	1,348			$	1,332
Operating loss margin — Enterprise			(57.3	)%			(12.2	)%			(13.4	)%			(11.3	)%
Adjusted operating income margin — Enterprise			25.6	%			14.3	%			22.4	%			13.4	%
Adjusted EBITDA margin — Enterprise			27.6	%			17.6	%			24.9	%			16.4	%

See Appendix A for an explanation of non-GAAP measures and other items.

Adjusted Net Income, Adjusted Net Income Margin, Adjusted Net Income Excluding Impact of Foreign Exchange, and Adjusted Net Income Excluding Impact of Foreign Exchange Margin

The following table presents a reconciliation of our adjusted net income and adjusted net income excluding impact of foreign exchange to our net loss for the periods presented:

		Three Months Ended								Year Ended
(in millions except per share amounts)		December 26, 2020				December 28, 2019				December 26, 2020				December 28, 2019
Net loss		$	(320	)		$	(81	)		$	(289	)		$	(236	)
Add: Amortization of debt discount and issuance costs			22				4				36				17
Add: Amortization			106				117				436				470
Add: Equity-based compensation			288				6				313				25
Add: Cash in lieu of equity awards(1)			2				4				8				19
Add: Acquisition and integration costs(2)			2				5				8				23
Add: Restructuring and transition(3)			16				8				25				22
Add: Management fees(4)			22				2				28				8
Add: Implementation costs of adopting ASC Topic 606			—				—				—				4
Add: Transformation initiatives(5)			11				14				28				33
Add: Executive severance(6)			1				3				5				3
Add: Provision for income taxes			5				19				30				87
Add: TRA adjustment(7)			2				—				2				—
Add: Other			2				—				2				—
Adjusted income before taxes		$	159			$	101			$	632			$	475
Adjusted provision for income taxes(8)			36				23				139				105
Adjusted net income		$	123			$	78			$	493			$	370
Adjusted income before taxes		$	159			$	101			$	632			$	475
Add: Foreign exchange loss (gain), net(9)			55				24				104				(20	)
Adjusted income before taxes excluding impact of foreign exchange			214				125				736				455
Adjusted provision for income taxes excluding impact of foreign exchange(8)			47				28				162				100
Adjusted net income excluding impact of foreign exchange		$	167			$	97			$	574			$	355
Net revenue		$	777			$	682			$	2,906			$	2,635
Net loss margin			(41.2	)%			(11.9	)%			(9.9	)%			(9.0	)%
Adjusted net income margin			15.8	%			11.4	%			17.0	%			14.0	%
Adjusted net income excluding impact of foreign exchange margin			21.5	%			14.2	%			19.8	%			13.5	%
Net loss per share, diluted		$	(0.73	)
Adjusted EPS(a)		$	0.38
Weighted average shares outstanding, basic			162.3
Impact on dilution
Equity awards			4.6
Assumed conversion of LLC Units and vested MIUs			272.5
Weighted average shares outstanding, diluted(10)			439.4

(a)

Adjusted EPS is calculated by dividing adjusted net income excluding impact of foreign exchange for the full quarter by the weighted average shares outstanding, diluted.

See Appendix A for an explanation of non-GAAP measures and other items.

Unlevered Free Cash Flow

The following table presents a reconciliation of our unlevered free cash flow to our net cash provided by operating activities for the periods presented:

		Year Ended
(in millions)		December 26, 2020				December 28, 2019
Net cash provided by operating activities		$	760			$	496
Add: Interest payments			268				281
Less: Capital expenditures(1)			(46	)			(61	)
Unlevered free cash flow		$	982			$	716
Net cash used in investing activities		$	(51	)		$	(63	)
Net cash used in financing activities		$	(651	)		$	(734	)

(1)

Capital expenditures includes payments for property and equipment and capitalized labor costs incurred in connection with certain software development activities.

MCAFEE CORP.

APPENDIX A

EXPLANATION OF NON-GAAP MEASURES AND OTHER ITEMS

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted operating income for the total Company as net income (loss), excluding the impact of amortization of intangible assets, equity-based compensation expense, interest expense and other, net, provision for income tax expense, foreign exchange (gain) loss, net, and other costs that we do not believe are reflective of our ongoing operations. We define adjusted operating income for our Consumer and Enterprise segments as segment operating income (loss), excluding the impact of amortization of intangible assets, equity-based compensation expense and other costs attributable to the segment that we do not believe are reflective of the segment’s ongoing operations. We present this reconciliation of adjusted operating income (loss) to operating income for Consumer and Enterprise segments because operating income (loss) is the primary measure of profitability used to assess segment performance and is therefore the most directly comparable GAAP financial measure for our operating segments. Adjusted operating income margin is calculated as adjusted operating income divided by net revenue. We define adjusted EBITDA as adjusted operating income, excluding the impact of depreciation expense and other non-operating costs. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by net revenue.

Adjusted Net Income, Adjusted Net Income Margin, Adjusted Net Income Excluding Impact of Foreign Exchange, and Adjusted Net Income Excluding Impact of Foreign Exchange Margin

We define adjusted net income as net income (loss), excluding the impact of amortization of intangible assets, amortization of debt issuance costs, equity-based compensation expense, other costs, and certain non-recurring tax benefits and expenses that we do not believe to be reflective of our ongoing operations and the tax impact of these adjustments. Adjusted net income margin is calculated as adjusted net income divided by net revenue.

Adjustments for Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Excluding Impact of Foreign Exchange

Adjusted net income and adjusted net income excluding impact of foreign exchange assumes all net income is attributable to McAfee Corp., which assumes the full exchange of all outstanding LLC Units for shares of Class A common stock of McAfee Corp., and is adjusted for the impact of amortization of intangible assets, amortization of debt issuance costs, equity-based compensation expense, other costs, and certain non-recurring tax benefits and expenses that we do not believe to be reflective of our ongoing operations. The adjusted provision for income taxes and adjusted provision for income taxes excluding impact of foreign exchange represents the tax effect on net income, adjusted for all of the listed adjustments, assuming that all consolidated net income was subject to corporate taxation for all periods presented. We have assumed rate of 22% which represents our long term expected corporate tax rate excluding discrete and non-recurring tax items. This amount has been recast for periods reported previously.

Adjusted net income margin is calculated as adjusted net income divided by net revenue. Adjusted net income excluding impact of foreign exchange margin is calculated as adjusted net income excluding impact of foreign exchange divided by net revenue. Adjusted net income, adjusted net income excluding impact of foreign exchange, adjusted net income margin and adjusted net income excluding impact of foreign exchange margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

Below are additional information to the adjustments for adjusted operating income, adjusted EBITDA, adjusted net income and adjusted net income excluding impact of foreign exchange:

(1)		As a result of our Sponsors’ acquisition from Intel of a majority interest in FTW in April 2017 (“Sponsor Acquisition”), cash awards were provided to certain employees who held Intel equity awards in lieu of equity in Foundation Technology Worldwide LLC (“FTW”). In addition, as a result of the Skyhigh acquisition, cash awards were provided to certain employees who held Skyhigh equity awards in lieu of equity in FTW and vest over multiple periods based on employee service requirements. As these rollover awards reflect one-time grants to former employees of Intel and Skyhigh Networks in connection with these transactions, we believe this expense is not reflective of our ongoing results.
(2)		Represents both direct and incremental costs in connection with business acquisitions, including acquisition consideration structured as cash retention, third party professional fees, and other integration costs.
(3)		Represents both direct and incremental costs associated with our separation from Intel, including standing up our back office and costs to execute strategic restructuring events, including third-party professional fees and services, transition services provided by Intel, severance, and facility restructuring costs.
(4)		Represents management fees paid to certain affiliates of our Sponsors and Intel pursuant to the Management Services Agreement. The Management Services Agreement has been terminated subsequent to the IPO and we paid a one-time fee of $22 million to such parties in October 2020.
(5)		Represents costs incurred in connection with transformation of the business post-Intel separation. Also includes the cost of workforce restructurings involving both eliminations of positions and relocations to lower cost locations in connection with MAP and other transformational initiatives, strategic initiatives to improve customer retention, activation to pay and cost synergies, inclusive of duplicative run rate costs related to facilities and data center rationalization.
(6)		Represents severance for executive terminations not associated with a strategic restructuring event.
(7)		Represents the impact of net income of adjustments of liabilities under our tax receivable agreement.
(8)		Prior to our IPO our structure was that of a pass through entity for U.S. federal income tax purposes with certain U.S. and foreign subsidiaries subject to income tax in their respective jurisdictions. Subsequent to the IPO, McAfee Corp. is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from Foundation Technology Worldwide LLC. This amount has been recast for periods reported previously. The adjusted provision for income taxes now represents the tax effect on net income, adjusted for all of the listed adjustments, assuming that all consolidated net income was subject to corporate taxation for all periods presented. We have assumed rate of 22% which represents our long term expected corporate tax rate excluding discrete and non-recurring tax items.
(9)		Represents Foreign exchange gain (loss), net as shown on the consolidated statement of operations. This amount is primarily attributable to realized and unrealized gains or losses on non-U.S. Dollar denominated balances and is primarily due to unrealized gains or losses associated with our 1st Lien Euro Term Loan.
(10)		Represent weighted average shares outstanding for the period from October 22, 2020 through December 26, 2020, which is the period following the IPO and related Reorganization Transactions, and includes the dilutive impact of our outstanding equity awards and assumed conversion of our LLC units and MIUs not owned by the Corporation.

Unlevered Free Cash Flow

We define unlevered free cash flow as net cash provided by operating activities add interest payments less capital expenditures. We consider unlevered free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet.

View source version on businesswire.com: https://www.businesswire.com/news/home/20210223006031/en/

Investor Contact:

Eduardo Fleites

[email protected]

Media Contact:

Jaime Le

[email protected]

KEYWORDS: United States North America California

INDUSTRY KEYWORDS: Data Management Security Technology Mobile/Wireless Software Networks Internet

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