01—Abstract
Summary
Summary of the 10-K filed February 26, 2019. Cited figures are marked; the original filing is the authoritative source.
LPL Financial Holdings Inc. reported net income of $439.5 milliona, or $4.85 per diluted share, for 2018, up from $238.9 million, or $2.59 per diluted share, in 2017.
Net revenues were $5.19 billionb, compared with $4.28 billion in 2017. Gross profit, a non-GAAP measure the company defines as net revenues less commission and advisory expenses and brokerage, clearing, and exchange fees, was $1,947.7 million, up 25.3%. The company describes itself as the nation's largest independent broker-dealer, serving independent financial advisors and financial institutions.
Total brokerage and advisory assets served were $628.1 billionc at year-end 2018, with net new assets of $51.6 billion. The 2017 acquisition of certain assets of National Planning Holdings, Inc. for $325 million and the 2018 acquisition of AdvisoryWorld for $28.1 million contributed to these results. The company returned $506.3 million to shareholders in 2018, including $88.4 million in dividends and $417.9 million in share repurchases covering 6,533,146 shares.
Total indebtedness was $2.4 billiond at December 31, 2018, of which $1.5 billion bears floating interest rates. The company reports that it was in compliance with both financial covenants under its revolving credit facility. The filing highlights regulatory and legal exposure.
Under a settlement structure with the North American Securities Administrators Association related to historical state 'blue sky' law compliance, the company expects aggregate fines of approximately $26.4 million, with administrative orders entered in 21 jurisdictions and the remaining 32 expected in 2019. The scope and cost of potential customer remediation cannot yet be estimated, and actual reimbursements could exceed reserves. A putative securities class action related to share repurchases and financial performance in late 2015 is also pending, which the company intends to defend vigorously.
02—Key points
Key Highlights
- Net income rose to $439.5 million ($4.85 per diluted share) in 2018, compared with $238.9 million ($2.59 per diluted share) in 2017.
- Net revenues reached $5,188.4 million in 2018, versus $4,281.5 million in 2017. Gross profit was $1,947.7 million, up 25.3%.
- Total brokerage and advisory assets served were $628.1 billion at December 31, 2018, up from $615.1 billion. Net new assets were $51.6 billion, compared with $43.4 billion in 2017.
- Shareholder returns totaled $506.3 million in 2018, including $88.4 million in dividends and $417.9 million in share repurchases. The board declared a $0.25 per share dividend on January 30, 2019.
- Cash sweep program assets were $34.9 billion at year-end 2018. Average cash sweep balances rose to $29.4 billion from $28.7 billion.
- Pending regulatory matters include blue sky settlement fines of approximately $26.4 million and potential customer remediation whose cost cannot yet be estimated.
- The company had total indebtedness of $2.4 billion at December 31, 2018, of which $1.5 billion bears floating interest rates. It reported 4,229 full-time employees and 16,109 advisors.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 26, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $5.19B$4.28B | +21.2% |
| Operating Expenses | $4.47B$3.79B | +18.0% |
| Net Income | $439.46M$238.86M | +84.0% |
| EPS (Basic) | $4.99$2.65 | +88.3% |
| EPS (Diluted) | $4.85$2.59 | +87.3% |
| Shares Outstanding (Basic) | 88.12M90.00M | −2.1% |
| Shares Outstanding (Diluted) | 90.62M92.11M | −1.6% |
05—Questions
Frequently Asked Questions
How did LPL Financial's profitability change in 2018?
Net income increased to $439.5 million, or $4.85 per diluted share, from $238.9 million, or $2.59 per diluted share, in 2017. Net revenues rose to $5,188.4 million from $4,281.5 million. Management attributed growth in sales-based commissions, advisory fees, and asset-based fees largely to the National Planning Holdings acquisition, net new assets, and rising interest rates. The effective income tax rate fell to 25.8% from 34.5%, reflecting the federal rate reduction under the Tax Cuts and Jobs Act.
What are the main sources of revenue?
In 2018, the company's revenue came from commissions of $1,919.7 million, advisory fees of $1,793.5 million, asset-based revenue of $972.5 million, and transaction and fee revenue of $471.3 million. Commission and advisory expenses, which are largely payouts to advisors, were $3,177.6 million. The company's advisory assets were $282.0 billion and brokerage assets were $346.0 billion at year-end 2018.
What legal and regulatory risks does the company face?
The company agreed to a settlement structure with the North American Securities Administrators Association over historical state blue sky law compliance. It expects aggregate fines of approximately $26.4 million and has entered administrative orders with 21 jurisdictions, with the remaining 32 expected in 2019. Customer remediation costs cannot yet be estimated, and actual reimbursements could exceed reserves. A putative class action lawsuit alleging misstatements related to share repurchases and financial performance in late 2015 has also been filed against the company and certain executive officers.
How much debt does the company carry and what are its covenant obligations?
Total indebtedness was $2.4 billion at December 31, 2018, with $1.5 billion subject to floating interest rates tied to the senior secured term loan. The Credit Agreement and the indenture governing the 5.75% senior unsecured notes due 2025 contain restrictions on dividends, share repurchases, and additional indebtedness. At year-end, the leverage test ratio was 2.15 against a maximum of 5.0, and the interest coverage ratio was 8.19 against a minimum of 3.0.
How did the company return capital to shareholders?
In 2018, the company returned $506.3 million to shareholders, consisting of $88.4 million in dividends and $417.9 million in share repurchases of 6,533,146 shares. It paid a quarterly dividend of $0.25 per share in each quarter of 2018. As of December 31, 2018, $1.0 billion remained under the existing share repurchase program. The board declared another $0.25 per share dividend on January 30, 2019, payable March 29, 2019.
06—Continue