01—Abstract
Summary
Summary of the 10-K filed February 27, 2012. Cited figures are marked; the original filing is the authoritative source.
LPL Investment Holdings Inc. reported net revenues of $3.48 billiona for 2011, up 11.8% from $3.11 billion in 2010, and net income of $170.4 million, or $1.50 diluted earnings per share, compared with a net loss of $56.9 million in 2010.
The 2010 loss reflected a $222.0 millionb share-based compensation charge tied to the November 2010 IPO. Adjusted EBITDA rose to $459.7 million (11.3% growth stated in the filing) and Adjusted Earnings to $218.6 million, or $1.95 per diluted share. Commission revenue was $1.75 billion, advisory fees $1.03 billion, and recurring revenue was 63% of net revenue.
Advisory and brokerage assets totaled $330.3 billionc at December 31, 2011, including $101.6 billion in advisory assets under management. The company serves approximately 12,800 advisors and reports 12,847 advisors as of year-end, with a stated advisor production retention of 96%. Its open-architecture, self-clearing model pays advisors 85 to 90% of commission and advisory revenue.
Total indebtedness was $1.3 billiond at December 31, 2011, and the company was in compliance with its senior secured credit agreement covenants, with a leverage ratio of 1.77 against a 3.00 maximum. Cash and cash equivalents rose to $720.8 million. Risks highlighted include dependence on attracting and retaining advisors, sensitivity to market levels and interest rates (including low returns on cash sweep balances), regulatory and FINRA oversight, and a majority ownership position held by the Majority Holders at 61.9%.
The filing also describes pending and completed acquisitions, including Concord Wealth Management (closed June 2011, total consideration about $33.8 million) and the announced acquisition of Fortigent Holdings Company, Inc., which had more than $50.0 billion in advisory assets. It also discloses a UVEST consolidation expected to generate $10.0 million to $12.0 million per year in pre-tax profitability improvements upon completion of integration.
02—Key points
Key Highlights
- Net revenues grew 11.8% to $3.48 billion in 2011, while net income swung to $170.4 million from a $56.9 million loss in 2010 that included IPO-related charges.
- Adjusted EBITDA reached $459.7 million and Adjusted Earnings reached $218.6 million ($1.95 per diluted share), both non-GAAP measures reconciled in the filing.
- Advisory and brokerage assets totaled $330.3 billion at December 31, 2011, with $101.6 billion in advisory assets under management.
- Recurring revenue represented 63% of total net revenue in 2011, with advisory fees growing 19.4% to $1.03 billion.
- Advisor base of 12,847 at year-end 2011 with a stated advisor production retention of 96%; the company reports the highest average payout ratios among the five largest U.S. broker-dealers by advisor count.
- Total indebtedness was $1.3 billion, with a leverage ratio of 1.77 against a covenant maximum of 3.00, and the company was in compliance with all covenants at year-end.
- Pending acquisition of Fortigent Holdings Company, Inc. (announced January 3, 2012) adds high net worth and RIA platform capabilities, with more than $50.0 billion in advisory assets across over 90 institutions.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 27, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $3.48B$3.11B | +11.8% |
| Operating Expenses | $3.13B$3.07B | +1.8% |
| Net Income | $170.38M-$56.86M | +399.6% |
| EPS (Basic) | $1.55$-0.64 | +342.2% |
| EPS (Diluted) | $1.50$-0.64 | +334.4% |
| Shares Outstanding (Basic) | 108.37M89.44M | +21.2% |
| Shares Outstanding (Diluted) | 112.12M89.44M | +25.4% |
05—Questions
Frequently Asked Questions
Why did LPL swing from a net loss in 2010 to a profit in 2011?
The 2010 net loss of $56.9 million was driven largely by a $222.0 million share-based compensation charge recorded at the November 2010 IPO, when restrictions on 7.4 million advisor shares were released, plus $240.9 million of equity issuance and related costs in the EBITDA adjustments. In 2011, net income was $170.4 million, with net revenues up 11.8% and production expenses rising 2.1%.
How does LPL generate its revenue?
Commissions ($1.75 billion) and advisory fees ($1.03 billion) generated from advisor activity make up the bulk of revenue, with asset-based fees of $359.7 million and transaction and other fees of $292.2 million. The company retains 10% to 15% of commission and advisory revenue and pays the remaining 85% to 90% to advisors.
What are the main risks identified in the filing?
Key risks include the ability to attract and retain experienced advisors, market declines reducing asset-based and advisory fees, low interest rates reducing cash sweep revenue, regulatory changes including the Dodd-Frank Act and a potential fiduciary standard, leverage from $1.3 billion of senior secured debt, and concentrated ownership by the Majority Holders, who owned approximately 61.9% of common stock at year-end 2011.
What did LPL say about its outlook and acquisitions?
Management described its outlook as cautiously optimistic and cited growth drivers including industry trends toward independent advice, advisor ramp-up over about three years, and acquisitions. The filing notes the UVEST consolidation is expected to improve pre-tax profitability by $10.0 million to $12.0 million per year once integration is complete, and the Fortigent acquisition was announced in January 2012.
06—Continue