01—Abstract
Summary
Summary of the 10-K filed February 21, 2018. Cited figures are marked; the original filing is the authoritative source.
LPL Financial Holdings Inc. (NASDAQ: LPLA) reported net income of $238.9 milliona, or $2.59 per diluted share, for 2017, up from $191.9 million, or $2.13 per diluted share, in 2016.
Net revenues rose to $4.28 billionb from $4.05 billion, driven by higher asset-based fees (largely cash sweep revenue tied to federal funds rate increases) and advisory fee revenue. The filing describes the company as the nation's largest independent broker-dealer, serving more than 15,000 independent financial advisors with about 4.8 million client accounts. Total brokerage and advisory assets served reached $615.1 billion at year-end 2017, versus $509.4 billion a year earlier, with net new assets of $43.4 billion compared with $5.9 billion in 2016.
Growth in 2017 was supported by the acquisition of certain assets of National Planning Holdings, Inc. (NPH), for which the company paid $325 millionc at closing and agreed to a potential contingent payment of up to $122.8 million. The company also refinanced its debt in 2017, issuing a $1.7 billion Term Loan B and $900 million of 5.75% senior unsecured notes in total, and returned $204.0 million to shareholders through dividends and share repurchases. Total indebtedness at December 31, 2017 was $2.4 billion, of which $1.5 billion bears floating rates.
The filing also highlights ongoing risks. The Department of Labor fiduciary rule became applicable on June 9, 2017, with certain exemption conditions delayed to July 1, 2019, and the company expects increased compliance costs.
The company has a number of pending regulatory matters, including state "blue sky" compliance, and a putative securities class action relating to share repurchases and financial performance in late 2015. Management expects the costs of the NPH onboarding to be largely complete by mid-2018.
02—Key points
Key Highlights
- Net income rose to $238.9 million ($2.59 diluted EPS) in 2017 from $191.9 million ($2.13) in 2016.
- Net revenues were $4.28 billion in 2017 versus $4.05 billion in 2016; asset-based revenue increased to $708.3 million, driven mainly by cash sweep revenue of $301.4 million.
- Total brokerage and advisory assets served reached $615.1 billion at December 31, 2017, up from $509.4 billion, with net new assets of $43.4 billion.
- The NPH acquisition added $34.2 billion in brokerage and advisory assets in Wave 1; $325 million was paid at closing with a contingent payment of up to $122.8 million possible.
- Debt was refinanced in 2017, including a $1.7 billion Term Loan B and $500.0 million of 5.75% senior notes, with $400.0 million of add-on notes issued in September; total indebtedness was $2.4 billion at year-end.
- The company returned $204.0 million to shareholders in 2017, including $90.3 million of dividends and $113.7 million of share repurchases.
- The DOL fiduciary rule became applicable June 9, 2017, with the company expecting increased costs and litigation risk; a putative class action related to 2015 share repurchases and financial performance is pending.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 21, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $4.28B$4.05B | +5.7% |
| Operating Expenses | $3.79B$3.66B | +3.6% |
| Net Income | $238.86M$191.93M | +24.5% |
| EPS (Basic) | $2.65$2.15 | +23.3% |
| EPS (Diluted) | $2.59$2.13 | +21.6% |
| Shares Outstanding (Basic) | 90.00M89.07M | +1.0% |
| Shares Outstanding (Diluted) | 92.11M90.01M | +2.3% |
05—Questions
Frequently Asked Questions
What drove the increase in LPL Financial's earnings in 2017?
The filing states that increased asset-based fee revenue and advisory fee revenue contributed to earnings per share growth. Asset-based revenue rose to $708.3 million, mainly from cash sweep revenue, which increased to $301.4 million due to higher federal funds target rates, and advisory revenue grew to $1.41 billion on net new advisory assets and market gains.
What is the NPH acquisition and what did it cost?
On August 15, 2017, LPL entered into an asset purchase agreement with National Planning Holdings, Inc. and its four broker-dealer subsidiaries to acquire certain assets, including business relationships with financial advisors. The company paid $325 million at closing and agreed to a potential contingent payment of up to $122.8 million, based on the percentage of transferred gross dealer concessions between 72% and 93.5%. The company onboarded $34.2 billion in brokerage and advisory assets in Wave 1.
How much debt does LPL Financial carry and what are the key terms?
At December 31, 2017, total indebtedness was $2.4 billion, of which $1.5 billion was floating-rate Term Loan B debt maturing in 2024. The company also has $900.0 million of 5.75% senior unsecured notes due September 15, 2025, and a $500.0 million revolving credit facility with no borrowings outstanding at year-end. The filing notes the company was in compliance with its financial covenants, with a leverage ratio of 2.81 against a maximum of 5.0.
What regulatory and legal risks does the filing highlight?
The filing highlights the DOL fiduciary rule, which became applicable June 9, 2017, with full implementation of certain conditions delayed to July 1, 2019, and which the company expects to increase compliance costs and litigation risk. It also notes a number of pending regulatory matters, including compliance with state blue sky laws, and a putative class action lawsuit alleging misstatements related to share repurchases and financial performance in late 2015, which the company intends to defend vigorously.
06—Continue