01—Abstract
Summary
Summary of the 10-K filed February 23, 2021. Cited figures are marked; the original filing is the authoritative source.
LPL Financial Holdings Inc. (LPLA) describes itself as a leader in the retail financial advice market and the nation's largest independent broker-dealer, serving independent financial advisors and financial institutions with technology, research, self-clearing and compliance services, and practice management programs.
As of December 31, 2020, its advisors supported approximately 6.0 million client accounts, with total advisory and brokerage assets of $903.1 billiona, up from $764.4 billion a year earlier. Net income for 2020 was $472.6 million, or $5.86 per diluted share, compared with $559.9 million, or $6.62 per share, in 2019. Total net revenues rose to $5,871.6 million from $5,624.9 million, while gross profit (a non-GAAP measure) declined to $2,103.3 million from $2,172.2 million.
The company's net new assets were $60.2 billionb in 2020, compared with $36.3 billion in 2019, and it ended the year with $48.9 billion in total client cash balances. Client cash revenues fell to $481.4 million from $652.8 million as the federal funds rate declined, a key pressure point identified in the filing. Shareholder returns totaled $229.1 million in 2020, including $150.0 million of share repurchases before the company suspended buybacks in early 2020 due to COVID-19 uncertainty, with $349.8 million remaining under the authorization.
Total indebtedness was $2.3 billionc at year-end. The filing also highlights the pending acquisition of the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million, expected to close in the middle of 2021 upon Macquarie's acquisition of Waddell & Reed. Management notes that COVID-19 remains a risk to operations, advisor recruiting, and client cash economics, and that regulatory matters, including Regulation BI and new DOL fiduciary rules, may increase compliance costs.
02—Key points
Key Highlights
- Total advisory and brokerage assets reached $903.1 billion at December 31, 2020, up from $764.4 billion, with total net new assets of $60.2 billion versus $36.3 billion in 2019.
- Net income declined to $472.6 million ($5.86 diluted EPS) from $559.9 million ($6.62 diluted EPS) in 2019, while total net revenues increased to $5,871.6 million from $5,624.9 million.
- Gross profit fell to $2,103.3 million from $2,172.2 million, and asset-based revenues decreased by $121.5 million, driven mainly by lower client cash program revenues as the federal funds rate declined.
- Client cash balances totaled $48.9 billion at year-end, up from $33.7 billion, while client cash revenues dropped to $481.4 million from $652.8 million.
- The company returned $229.1 million to shareholders in 2020 ($79.1 million in dividends and $150.0 million in repurchases) and suspended repurchases in early 2020 amid COVID-19 uncertainty, with $349.8 million remaining under the program.
- Pending acquisition of the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million is expected to close in the middle of 2021, subject to closing conditions.
- Leverage ratio was 2.16 against a covenant maximum of 5.0, and interest coverage was 9.81 against a minimum of 3.0, with total indebtedness of $2.3 billion at December 31, 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 23, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $5.87B$5.62B | +4.4% |
| Operating Expenses | $5.25B$4.88B | +7.4% |
| Interest Expense | $105.77M$130.00M | −18.6% |
| Net Income | $472.64M$559.88M | −15.6% |
| EPS (Basic) | $5.96$6.78 | −12.1% |
| EPS (Diluted) | $5.86$6.62 | −11.5% |
| Shares Outstanding (Basic) | 79.24M82.55M | −4.0% |
| Shares Outstanding (Diluted) | 80.70M84.62M | −4.6% |
05—Questions
Frequently Asked Questions
How did LPL Financial's profitability change in 2020?
Net income fell to $472.6 million, or $5.86 per diluted share, from $559.9 million, or $6.62 per share, in 2019. Total net revenues grew to $5,871.6 million from $5,624.9 million, but advisory and commission expenses rose to $3,697.1 million from $3,388.2 million, and gross profit declined to $2,103.3 million from $2,172.2 million.
What drove the decline in asset-based revenue and client cash income?
The filing attributes the decline to lower federal funds effective rates, which reduced client cash program revenues to $481.4 million from $652.8 million, partially offset by higher average client cash balances of $44.7 billion versus $31.0 billion and increases in recordkeeping and sponsorship revenues.
What is the status of the Waddell & Reed wealth management acquisition?
LPL Holdings agreed in December 2020 to acquire the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million, upon completion of Macquarie's acquisition of Waddell & Reed. The transaction is expected to close in the middle of 2021, subject to closing conditions, including regulatory and stockholder approvals.
How much capital did LPL return to shareholders, and what is the buyback outlook?
LPL returned $229.1 million in 2020, including $79.1 million in dividends and $150.0 million in share repurchases. The company suspended repurchases in early 2020 due to COVID-19 uncertainty, and $349.8 million remained under the existing authorization. Any resumption will be determined at management's discretion within the limits of the Credit Agreement and the Indentures.
What are the main risks to LPL's business highlighted in the filing?
Key risks include dependence on attracting and retaining advisors, market fluctuations, interest rate changes affecting client cash program fees, reliance on third-party and off-shore service providers, cybersecurity threats, and regulatory and litigation exposure, including Regulation BI and the new DOL fiduciary rule. The filing also cites COVID-19 as a continuing source of operational and financial uncertainty.
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