01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
LPL Financial Holdings Inc. describes itself as the nation's largest independent broker-dealer, a top custodian for registered investment advisors, and a leading independent consultant to retirement plans.
It supports more than 13,300 independent financial advisors and advisors at approximately 700 financial institutions, and reports net revenues of $3.66 billiona for 2012, up 5.2% from $3.48 billion in 2011, with net income of $151.9 million (diluted EPS of $1.37) compared with $170.4 million in 2011. Recurring revenue was 65% of net revenue in 2012, and advisory and brokerage assets reached $373.3 billion at December 31, 2012. Capital returns were significant in 2012: the company paid a $2.00 per share special dividend ($222.6 million), began quarterly dividends of $0.12, and spent $199.2 million repurchasing shares.
On February 5, 2013 it declared a $0.135b quarterly dividend and expanded its Service Value Commitment, a program expected to be completed in 2015 with total charges of approximately $70 million to $75 million, including pre-tax restructuring charges of approximately $60 million to $65 million. Total debt was $1.3 billion at year-end, with a total leverage ratio of 2.38 to 1.00 against a covenant maximum of 4.00. Key risks highlighted include dependence on attracting and retaining advisors, sensitivity to market levels and interest rates (the low-rate environment has pressured cash sweep revenue), intense competition, extensive regulation including the Dodd-Frank Act and potential fiduciary standards, reliance on outsourced service providers, and the Sponsors' ownership of 43.1% of common stock, which gives them significant influence over stockholder votes.
02—Key points
Key Highlights
- Net revenues of $3,661.1 million in 2012, up 5.2% from $3,479.4 million in 2011; net income of $151.9 million versus $170.4 million in 2011
- Diluted EPS of $1.37 in 2012 compared with $1.50 in 2011; Adjusted EPS of $2.03 versus $1.95 in 2011
- Advisory and brokerage assets of $373.3 billion at December 31, 2012, including $122.1 billion in advisory assets under custody
- Recurring revenue was 65% of total net revenue in 2012; total payout ratio to advisors of 87.06%
- Capital returned to shareholders in 2012: $222.6 million special dividend, $26.2 million in quarterly dividends, and $199.2 million of share repurchases
- Service Value Commitment expansion announced February 5, 2013, with estimated pre-tax restructuring charges of approximately $60 million to $65 million and total program charges of approximately $70 million to $75 million
- Total debt of $1.3 billion at December 31, 2012; leverage ratio of 2.38 to 1.00 versus a covenant maximum of 4.00
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $3.66B$3.48B | +5.2% |
| Operating Expenses | $3.34B$3.13B | +6.8% |
| Net Income | $151.92M$170.38M | −10.8% |
| EPS (Basic) | $1.39$1.55 | −10.3% |
| EPS (Diluted) | $1.37$1.50 | −8.7% |
| Shares Outstanding (Basic) | 109.44M108.37M | +1.0% |
| Shares Outstanding (Diluted) | 111.06M112.12M | −0.9% |
05—Questions
Frequently Asked Questions
How is LPL Financial's revenue structured?
In 2012, commission revenue was $1,820.5 million (50% of net revenue), advisory revenue $1,062.5 million (29%), asset-based revenue $403.1 million (11%), and transaction and other revenue $321.6 million (9%). Commission revenue is 39% recurring, advisory revenue 99% recurring, and asset-based revenue 100% recurring. Advisors generally retain 85% to 90% of commission and advisory revenue.
What is the company's exposure to interest rates?
Revenue from cash sweep programs is sensitive to short-term rates. Cash sweep balances totaled $24.7 billion at year-end. The filing notes that the low interest rate environment has reduced cash sweep revenue, and that the Federal Funds effective rate averaged 0.14% in 2012. Term loan debt of $1.3 billion is floating-rate, and a 100 basis point increase would add about $8.2 million in annual interest expense.
What is the Service Value Commitment and what does it cost?
It is a program announced February 5, 2013 to outsource certain non-advisor-facing functions to third-party providers, reposition the labor force, and invest in technology. The company expects total charges of approximately $70 million to $75 million, with $11 million incurred in the second half of 2012, and expects to complete the program in 2015. It anticipates future cash expenditures of $58 million to $63 million.
What are the main risks to shareholders?
Key risks include the company's dependence on attracting and retaining advisors, market declines that reduce asset-based and advisory revenue, intense competition, heavy regulation including potential changes from the Dodd-Frank Act, reliance on outsourced providers, and the influence of the Sponsors, who owned 43.1% of common stock as of December 31, 2012. The stock price is also described as likely to be volatile.
What is the company's dividend policy?
The board declared a special dividend of $2.00 per share in 2012, followed by quarterly dividends of $0.12 per share in the third and fourth quarters. On February 5, 2013, it declared a $0.135 per share quarterly dividend payable March 4, 2013. Future dividends depend on board discretion, earnings, cash flows, the credit agreement's restrictions, and broker-dealer capital requirements, which may limit dividends from LPL Financial.
06—Continue