LPL Financial Announces Second Quarter 2019 Results

Second Quarter 2019 Key Performance Indicators

• Earnings per share ("EPS") increased 32% year-over-year to $1.71.
  º Net Income increased 23% year-over-year to $146 million.
• EPS Prior to Amortization of Intangible Assets** increased 30% year-over-year to $1.85.
• Total Brokerage and Advisory Assets increased 7% year-over-year to $706 billion.
• Total Net New Assets were an inflow of $4.0 billion, translating to a 2.3% annualized growth rate.
  º Prior to the impact of a hybrid firm that formed its own broker-dealer, total net new assets were an inflow of $5.2 billion, translating to an annualized growth rate of 3.0%
  º Total Net New Assets increased throughout the quarter from $0.7 billion in April to $1.4 billion in May to $1.9 billion in June.
  º Net new advisory assets were an inflow of $6.6 billion, translating to a 8.4% annualized growth rate.
  º Net new brokerage assets were an outflow of $2.6 billion, translating to a (2.7)% annualized rate.
  º Recruited Assets⁽¹⁾ were $8.5 billion, contributing to a trailing twelve-month total of $33.3 billion.
  º Advisor count was 16,161, and production retention rate was 96%.
  • Prior to the impact of a hybrid firm that formed its own broker-dealer, advisor count increased by 161 sequentially and 372 year-over-year.
• Total client cash balances were $30.1 billion, down $0.7 billion sequentially.
  º Total client cash balances increased throughout the quarter, from $29.6 billion in April to $29.8 billion in May to $30.1 billion in June.
• Gross Profit** increased 11% year-over-year to $536 million.
• EBITDA** increased 15% year-over-year to $268 million.
  º EBITDA** as a percentage of Gross Profit** was 50%, up from 48% a year ago.
  º Core G&A** increased 10% year-over-year to $211 million, down 1% sequentially.
• Shareholder capital returns were $146 million, translating to $1.71 per share.
  º Share repurchases were $125 million for 1.6 million shares at an average purchase price of $78.54.
  º Weighted average fully diluted share count was 85.4 million, down 7% year-over-year.
  º Dividends were $21 million.
• Cash available for corporate use was $296 million.
• Credit Agreement Net Leverage Ratio⁽²⁾ was 1.99x, down 0.06x from the prior quarter.

Key Updates

• Anticipate Allen & Co.* acquisition will close by the end of Q3 2019.
• Updated 2019 Core G&A** outlook range to $860 to $875 million by both tightening the range and adding $5 million related to the acquisition of Allen & Co.
• Completed $125 million of share repurchases in the second quarter.

SAN DIEGO, July 25, 2019 (GLOBE NEWSWIRE) -- LPL Financial Holdings Inc. (Nasdaq: LPLA) (the “Company”) today announced results for its second quarter ended June 30, 2019, reporting net income of $146 million, or $1.71 per share. This compares with $119 million, or $1.30 per share, in the second quarter of 2018 and $155 million, or $1.79 per share, in the prior quarter.

“We believe a well-positioned strategy combined with extraordinary execution and a mission-driven culture will drive long-term growth and value,” said Dan Arnold, President and CEO.  “In the second quarter, this approach helped us deliver business and financial growth, including surpassing $700 billion in total brokerage and advisory assets served for the first time.  Going forward, we will continue to focus on our strategy as we work to innovate on new advisor affiliation models and capabilities, deliver an industry-leading service experience, and create a new layer of value in the independent marketplace.”

“We delivered solid business and financial results in the second quarter,” said Matt Audette, CFO. “Organic growth increased throughout the quarter, earnings per share grew year-over-year, and we continued our pace of capital return to shareholders.  We also ramped our investment in technology to support our advisors and drive future growth.  Looking forward, we believe our business and financial strength positions us well to drive long-term shareholder value.”

Dividend Declaration

The Company's Board of Directors declared a $0.25 per share dividend to be paid on August 23, 2019 to all stockholders of record as of August 13, 2019.

Conference Call and Additional Information

The Company will hold a conference call to discuss its results at 5:00 p.m. EDT on Thursday, July 25.  To listen, call 877-677-9122 (domestic) or 708-290-1401 (international); passcode 6269674, or visit investor.lpl.com (webcast).  Replays will be available by phone and on investor.lpl.com beginning two hours after the call and until August 1 and August 15, respectively.  For telephonic replay, call 855-859-2056 (domestic) or 404-537-3406 (international); passcode 6269674.

About LPL Financial

LPL Financial is a leader in the retail financial advice market and the nation’s largest independent broker-dealer⁺. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow their practices.  LPL enables them to provide objective guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. LPL.com

⁺Based on total revenues, Financial Planning magazine June 1996-2018.

Securities and Advisory Services offered through LPL Financial. A Registered Investment Advisor, Member FINRA/SIPC.

*Allen & Company of Florida, Inc. (“Allen & Co.”)

**Non-GAAP Financial Measures

Management believes that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use this information to analyze the Company’s current performance, prospects, and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP financial measures and metrics discussed below are appropriate for evaluating the performance of the Company.

EPS Prior to Amortization of Intangible Assets is defined as GAAP EPS plus the per share impact of Amortization of Intangible Assets. The per share impact is calculated as Amortization of Intangible Assets expense, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period. The Company presents EPS Prior to Amortization of Intangible Assets because management believes that the metric can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items that management does not believe impact the Company’s ongoing operations. EPS Prior to Amortization of Intangible Assets is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. For a reconciliation of EPS Prior to Amortization of Intangible Assets to GAAP EPS, please see footnote 33 on page 19 of this release.

Gross Profit is calculated as net revenues, which were $1,390 million for the three months ended June 30, 2019, less commission and advisory expenses and brokerage, clearing, and exchange fees, which were $838 million and $16 million, respectively, for the three months ended June 30, 2019. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature. Because the Company’s gross profit amounts do not include any depreciation and amortization expense, the Company considers its gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in its industry. Management believes that Gross Profit can provide investors with useful insight into the Company’s core operating performance before indirect costs that are general and administrative in nature.

Core G&A consists of total operating expenses, which were $1,161 million for the three months ended June 30, 2019, excluding the following expenses: commission and advisory, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing, and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as commission and advisory expenses, or which management views as promotional expense necessary to support advisor growth and retention including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. For a reconciliation of Core G&A against the Company’s total operating expenses, please see footnote 7 on page 18 of this release. The Company does not provide an outlook for its total operating expenses because it contains expense components, such as commission and advisory expenses, that are market-driven and over which the Company cannot exercise control. Accordingly a reconciliation of the Company’s outlook for Core G&A to an outlook for total operating expenses cannot be made available without unreasonable effort.

EBITDA is defined as net income plus interest and other expense, income tax expense, depreciation and  amortization and amortization of intangibles assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.

Credit Agreement EBITDA is defined in, and calculated by management in accordance with, the Company's credit agreement (“Credit Agreement”) as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization and further adjusted to exclude certain non-cash charges and other adjustments, including unusual or non-recurring charges and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. The Company presents Credit Agreement EBITDA because management believes that it can be a useful financial metric in understanding the Company’s debt capacity and covenant compliance under its Credit Agreement. Credit Agreement EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s Credit Agreement-defined EBITDA can differ significantly from adjusted EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, capital investments, and types of adjustments made by such companies.

Forward-Looking Statements

Statements in this press release regarding the Company's future financial and operating results, growth, priorities and business strategies, including forecasts and statements relating to future expenses (including 2019 Core G&A** outlook), the acquisition of Allen & Co., future advisor affiliation models and capabilities, future advisor service experience, future capital returns and long-term shareholder value, as well as any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company's historical performance and its plans, estimates, and expectations as of July 25, 2019. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual financial or operating results, levels of activity, or the timing of events, to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: changes in general economic and financial market conditions, including retail investor sentiment; changes in interest rates and fees payable by banks participating in the Company's client cash programs, the Company's strategy and success in managing client cash program fees; changes in the growth and profitability of the Company's fee-based business; fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenue; effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions; whether the retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company; the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations and the implementation of Regulation BI (Best Interest); the costs of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess of our reserves; changes made to the Company’s services and pricing, and the effect that such changes may have on the Company’s gross profit streams and costs; execution of the Company's plans and its success in realizing the synergies, expense savings, service improvements, and/or efficiencies expected to result from its initiatives and programs, and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 2018 Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q or other filings with the SEC. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this earnings release, even if its estimates change, and you should not rely on statements contained herein as representing the Company's views as of any date subsequent to the date of this press release.

LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income
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(Unaudited)

LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income Trend
(In thousands, except per share data)
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LPL Financial Holdings Inc.
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except par value)
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LPL Financial Holdings Inc.
Management's Statements of Operations⁽³⁾
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Certain information presented on pages 8-16 of this release is presented as reviewed by the Company’s management and includes information derived from the Company’s Unaudited Condensed Consolidated Statements of Income, non-GAAP financial measures, and operational and performance metrics. For information on non-GAAP financial measures, please see the section titled "Non-GAAP Financial Measures" that begins on page 3 of this release. 

LPL Financial Holdings Inc.
Management's Statements of Operations Trend ⁽³⁾
(In thousands, except per share data)
(Unaudited)

LPL Financial Holdings Inc.
Operating Measures⁽³⁾
(Dollars in billions, except where noted) (Unaudited)

LPL Financial Holdings Inc.
Operating Measures⁽³⁾
(Dollars in billions, except where noted) (Unaudited)

LPL Financial Holdings Inc.
Monthly Metrics⁽³⁾
(Dollars in billions, except where noted)
(Unaudited)

LPL Financial Holdings Inc.
Financial Measures⁽³⁾
(Dollars in thousands, except where noted)
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LPL Financial Holdings Inc.
Financial Measures⁽³⁾
(Dollars in thousands, except where noted)
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LPL Financial Holdings Inc.
Capital Management Measures⁽³⁾
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1. The Revolving Credit Facility has a borrowing capacity of $500 million.
2. The LIBOR rate option is one-month LIBOR rate and subject to an interest rate floor of 0 basis points.
3. The Senior Unsecured Notes were issued in two separate transactions; $500 million in notes were issued in March 2017 at par; the remaining $400 million were issued in September 2017 and priced at 103% of the aggregate principal amount.
4. Does not include unamortized premium of approximately $9.3 million as of June 30, 2019.

LPL Financial Holdings Inc.
Key Business and Financial Metrics⁽³⁾
(Dollars in thousands, except where noted)
(Unaudited)

Endnote Disclosures

1. Represents the estimated total brokerage and advisory assets expected to transition to the Company's broker-dealer subsidiary, LPL Financial LLC ("LPL Financial"), associated with advisors who transferred their licenses to LPL Financial during the period. The estimate is based on prior business reported by the advisors, which has not been independently and fully verified by LPL Financial. The actual transition of assets to LPL Financial generally occurs over several quarters including the initial quarter of the transition, and the actual amount transitioned may vary from the estimate.
2. Compliance with the Credit Agreement Leverage Ratio is only required under the revolving credit facility.
3. Certain information presented on pages 8-16 includes non-GAAP financial measures and operational and performance metrics. For more information on non-GAAP financial measures, please see the section titled “Non-GAAP Financial Measures” on page 3.
4. Production based payout is an operating measure calculated as a commission and advisory expense less advisor deferred compensation expense. Below is a reconciliation of production based payout against the Company’s commission and advisory expense for the periods presented (in thousands):

5. Consists of revenues from the Company's sponsorship programs with financial product manufacturers and omnibus processing and networking services, but does not include fees from client cash programs. Other asset-based revenues are a component of asset-based revenues and are derived from the Company's Unaudited Condensed Consolidated Statements of Income.
6. Interest income and other, net is an operating measure calculated as interest income, net of interest expense plus other revenue, less advisor deferred compensation expense. Below is a reconciliation of interest income and other, net against the Company’s interest income, net of interest expense and other revenue for the periods presented (in thousands):

7. Core G&A is a non-GAAP financial measure. Please see a description of core G&A under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Below is a reconciliation of core G&A against the Company’s total operating expense for the periods presented:

8. Consists of total advisory assets under custody at LPL Financial.
9. Consists of brokerage assets serviced by advisors licensed with LPL Financial.
10. Consists of total assets on LPL Financial's corporate advisory platform serviced by investment advisor representatives of LPL Financial.
11. Consists of total assets on LPL Financial's independent advisory platform serviced by investment advisor representatives of separate investment advisor firms ("Hybrid RIAs"), rather than of LPL Financial.
12. Represents those advisory assets in LPL Financial’s Model Wealth Portfolios, Optimum Market Portfolios, Personal Wealth Portfolios, and Guided Wealth Portfolios platforms.
13. Consists of total client deposits into advisory accounts less total client withdrawals from advisory accounts. The Company considers conversions from and to brokerage accounts as deposits and withdrawals respectively.
14. Consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts. The Company considers conversions from and to advisory accounts as deposits and withdrawals, respectively.
15. Consists of existing custodied assets that converted from brokerage to advisory, less existing custodied assets that converted from advisory to brokerage.
16. Calculated as annualized current period net new assets divided by preceding period assets in their respective categories of advisory assets or total brokerage and advisory assets.
17. Consists of total client deposits into advisory accounts on LPL Financial's corporate advisory platform (FN 10) less total client withdrawals from advisory accounts on its corporate advisory platform.
18. Consists of total client deposits into advisory accounts on LPL Financial's independent advisory platform (FN 11) less total client withdrawals from advisory accounts on its independent advisory platform.
19. Consists of total client deposits into centrally managed assets accounts (FN 12) less total client withdrawals from centrally managed assets accounts. The Company does not consider conversions from or to advisory accounts on LPL Financial’s advisory platforms as deposits or withdrawals, respectively.
20. Calculated by dividing revenue for the period by the average balance during the period.
21. Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received, or fees paid.
22. Consists of cash unrestricted by the Credit Agreement and other regulations available for operating, investing, and financing uses.
    
23. Credit agreement EBITDA is a non-GAAP financial measure. Please see a description of credit agreement EBITDA under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Under the Credit Agreement, management calculates credit agreement EBITDA for a trailing twelve month period at the end of each fiscal quarter, and in doing so may make further adjustments to prior quarters.
24. Calculated based on the average advisor count from the current period and prior period.
25. Calculated based on the end of period total brokerage and advisory assets divided by end of period advisor count.
26. Represents the amortization expense amount of forgivable loans for transition assistance to advisors and financial institutions.
27. Represents annualized Gross Profit (FN 3) for the period, divided by average month-end total brokerage and advisory assets for the period.
28. Represents annualized operating expenses for the period, excluding production-related expense, divided by average month-end total brokerage and advisory assets for the period. Production-related expense includes commissions and advisory expense and brokerage, clearing and exchange expense. For purposes of this metric, operating expenses includes core G&A (FN 7), regulatory, promotional, employee share based compensation, depreciation & amortization, and amortization of intangible Assets.
29. EBIT ROA is calculated as Gross Profit ROA less OPEX ROA.
30. Reflects retention of commission and advisory revenues, calculated by deducting the prior year production of the annualized year-to-date attrition rate, over the prior year total production.
31. Recurring Gross Profit Rate refers to the percentage of the Company’s gross profit, a non-GAAP financial measure, that was recurring for the trailing twelve month period. Management tracks recurring gross profit, a characterization of gross profit and a statistical measure, which is defined to include the Company’s revenues from asset-based fees, advisory fees, trailing commissions, client cash programs, and certain other fees that are based upon client accounts and advisors, less the expenses associated with such revenues and certain other recurring expenses not specifically associated with a revenue line. Management allocates such other recurring expenses on a pro-rata basis against specific revenue lines at its discretion.
32. Capital Allocated per Share equals the amount of capital allocated for share repurchases and cash dividends divided by the diluted weighted-average shares outstanding.
33. EPS prior to amortization of intangible assets is a non-GAAP financial measure. Please see a description of EPS prior to amortization of intangible assets under “Non-GAAP Financial Measures” on page 3 of this release for additional information. Below is a reconciliation of EPS prior to amortization of intangible assets to the Company’s GAAP EPS for the periods presented: