LPL Financial Announces Third Quarter 2015 Results and Updates Capital and Expense Management Plans
— Established a new leveraged target of ~4x Net Debt / Adjusted EBITDA —
— Increased share repurchase authorization to
— Strengthened expense management aimed at improving operating leverage and advisor support —
"Our third quarter results were solid and consistent with the market environment," stated
Three Months Ended | Nine Months Ended
| ||||||||||||||||||||
2015 | 2014 | % Change | 2015 | 2014 | % Change | ||||||||||||||||
Financial Highlights (unaudited) | (dollars in thousands, except per share data) | ||||||||||||||||||||
GAAP Measures: | |||||||||||||||||||||
Net Revenue | $ | 1,054,745 | $ | 1,089,234 | (3.2 | )% | $ | 3,254,708 | $ | 3,269,394 | (0.4 | )% | |||||||||
Net Income | $ | 41,052 | $ | 33,272 | 23.4 | % | $ | 141,972 | $ | 129,498 | 9.6 | % | |||||||||
Earnings Per Share — diluted | $ | 0.43 | $ | 0.33 | 30.3 | % | $ | 1.46 | $ | 1.26 | 15.9 | % | |||||||||
Non-GAAP Measures: | |||||||||||||||||||||
Gross Profit(1) | $ | 339,757 | $ | 331,143 | 2.6 | % | $ | 1,035,342 | $ | 990,594 | 4.5 | % | |||||||||
Adjusted Earnings | $ | 52,772 | $ | 48,773 | 8.2 | % | $ | 179,190 | $ | 181,577 | (1.3 | )% | |||||||||
Adjusted Earnings Per Share | $ | 0.55 | $ | 0.48 | 14.6 | % | $ | 1.84 | $ | 1.77 | 4.0 | % | |||||||||
Adjusted EBITDA | $ | 118,352 | $ | 108,878 | 8.7 | % | $ | 388,846 | $ | 378,554 | 2.7 | % |
____________________
A full reconciliation of GAAP measures to non-GAAP measures, along with an explanation of these metrics, follows later in this release.
(1) 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 measures that may not be comparable to those of others in its industry.
Casady continued, "Given the current market and regulatory environment, we are taking advantage of an opportunity to reposition our capital and expense plans to maximize shareholder returns. After careful deliberation, we developed a capital allocation strategy to better take advantage of our financial strength and the competitive
advantage our capital-light model provides. Our Board has approved what we see as the best combined approach - increased leverage to ~4x Adjusted EBITDA and an investment of
"Adjusted earnings per
share for the quarter were
2015 | 2014 | % Change | ||||||||
Business Highlights (unaudited) | ||||||||||
Advisory and Brokerage Assets (billions)(1) | $ | 461.8 | $ | 464.8 | (0.6 | )% | ||||
Advisory Assets Under Custody (billions)(2) | $ | 179.7 | $ | 169.5 | 6.0 | % | ||||
Advisors | 14,073 | 13,910 | 1.2 | % |
____________________
(1) Advisory and brokerage assets are comprised of assets that are custodied, networked, and non-networked, and reflect market
movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account and money market account balances are also included in advisory and brokerage assets.
(2) Advisory assets under custody is a component of advisory and brokerage assets and consists of advisory assets under management, as well as assets of independent advisors that are custodied by
Third Quarter 2015 Financial and Business Highlights
Assets
- Strong asset gathering as net new advisory assets totaled
$4.2 billion in the quarter, translating to a 9.3% annualized growth rate. - Reduction in market-sensitive asset valuations offset strong asset flows, and brokerage and advisory assets declined 5% sequentially.
- Advisory asset growth continued to outpace growth in total assets and advisory assets represented 39% of advisory and brokerage assets at quarter-end. Hybrid RIA platform assets were 24% of advisory and brokerage assets served.
Advisors
- The Company continued to recruit high-producing advisors that have fueled much of its net new advisory growth. The Company's recruiting outlook remains positive given competitive and regulatory dynamics.
- Advisor production retention also remained high at 97 percent during the quarter.
- Overall advisor count declined in the third quarter, but the Company has been pleased with the high quality of the new assets and advisors that joined the firm during the quarter. Gross recruiting wins were offset by the departure of lower-producing advisors.
Gross Profit
- Third quarter gross profit of
$340 million was flat sequentially in spite of declines in the valuations of advisory and brokerage assets. - The declining value of customer assets reduced market-sensitive revenue streams such as trail commissions, advisory fees, and sponsor revenue, but volatile equity markets contributed to record transaction volumes and revenues.
- Sales commissions for variable annuity products in the third quarter continued to be low due to 10-year treasury rates remaining below 3%. Alternative investment sales commissions were also challenged by a mature real estate market.
- Third quarter cash sweep revenues increased sequentially to
$24 million as client cash balances reached a record$28 billion at the end of the third quarter.
Expenses
- Third quarter Core G&A expenses, excluding regulatory charges, were flat sequentially at
$171 million and up 5% year-over-year. The Company expects full year 2015 Core G&A expenses to be in its expected range of 7.5 to 8.5% year-over-year growth, and likely in the lower part of that range. - Promotional expenses in the third quarter increased sequentially to
$42 million due to the$15 million expense of the Company's annual national advisor conference. - Regulatory-related charges increased by
$1 million sequentially to$8 million in the third quarter, as the Company reached agreements to resolve several regulatory matters that it had been working on.
Capital Allocation
- The Company returned
$49 million of capital to shareholders during the third quarter, including$24 million of dividends and$25 million of share repurchases. The Company purchased approximately 600,000 shares at a weighted-average price of$42.12 per share. - Year to date, the Company has returned
$213 million of capital to shareholders through$72 million of dividends and$141 million of share repurchases. - The Company's Board of Directors declared a cash dividend of
$0.25 per share on the Company's outstanding common stock to be paid onNovember 24, 2015 to stockholders of record onNovember 12, 2015 . - Capital expenditures for technology to support growth and for the construction of the Company's new campus in
Fort Mill, South Carolina totaled$20 million .
Capital Management Plans
- The Company announced the repositioning of its capital management plan to create greater shareholder value, including:
- Increased share repurchase authorization to
$500 million . Repurchases may be effected in open market or privately negotiated transactions, which may include a combination of an accelerated share repurchase program and open market purchases. - Increased target leverage to net debt of approximately 4 times adjusted EBITDA. The Company is planning to amend its credit agreement to provide for incremental upsizing of its credit facilities by up to
$700 million , extension of the maturity of certain or all currently outstanding term B loans (fromMarch 2019 toMarch 2021 ), and modification of the restricted payment provisions to enable execution of the full amount of the increased share repurchase authorization.
- Increased share repurchase authorization to
- The Company and Board are committed to moving forward as quickly as possible consistent with best execution, its general operating needs, and any applicable constraints under its credit agreement.
Updated Expense Management Plans
- The Company announced that it expects 2 to 4% Core G&A growth in 2016 compared to 2015, including:
- Full-year cost of 2015 investments;
- Prioritized 2016 investments in the Company's business, including accelerated development of its ClientWorkssm platform;
- Planned enhancements for its
financial advisors, as well as potential costs to comply with the final
Department of Labor fiduciary rule; and - Efforts and initiatives to keep other Core G&A expenses flat.
Conference Call and Additional Information
The Company will hold a conference call to discuss its results at
The conference call will also be webcast simultaneously on the Investor Relations section of the Company's website (www.lpl.com), where a replay of the call will also be available following the live webcast. A telephonic replay will be available shortly after the call and can be accessed by dialing 855-859-2056 (domestic) or 404-537-3406 (international) and entering passcode 52748981. The telephonic replay will be available until
Consolidated Statements of Operations | |||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
2015 | 2014 | % Change | 2015 | 2014 | % Change | ||||||||||||||||
Revenues | |||||||||||||||||||||
Commission | $ | 480,271 | $ | 520,388 | (7.7 | )% | $ | 1,513,359 | $ | 1,590,139 | (4.8 | )% | |||||||||
Advisory | 341,217 | 340,369 | 0.2 | % | 1,028,213 | 998,016 | 3.0 | % | |||||||||||||
Asset-based | 123,921 | 121,283 | 2.2 | % | 369,625 | 354,494 | 4.3 | % | |||||||||||||
Transaction and fee | 105,593 | 94,674 | 11.5 | % | 305,099 | 276,284 | 10.4 | % | |||||||||||||
Other | 3,743 | 12,520 | (70.1 | )% | 38,412 | 50,461 | (23.9 | )% | |||||||||||||
Net revenues | 1,054,745 | 1,089,234 | (3.2 | )% | 3,254,708 | 3,269,394 | (0.4 | )% | |||||||||||||
Expenses | |||||||||||||||||||||
Production | 714,988 | 758,091 | (5.7 | )% | 2,219,366 | 2,278,800 | (2.6 | )% | |||||||||||||
Compensation and benefits | 110,494 | 106,290 | 4.0 | % | 335,111 | 317,459 | 5.6 | % | |||||||||||||
General and administrative | 117,246 | 122,056 | (3.9 | )% | 331,057 | 323,232 | 2.4 | % | |||||||||||||
Depreciation and amortization | 26,766 | 24,519 | 9.2 | % | 79,564 | 70,618 | 12.7 | % | |||||||||||||
Restructuring charges | 3,071 | 9,928 | (69.1 | )% | 11,487 | 26,473 | (56.6 | )% | |||||||||||||
Total operating expenses | 972,565 | 1,020,884 | (4.7 | )% | 2,976,585 | 3,016,582 | (1.3 | )% | |||||||||||||
Non-operating interest expense | 13,493 | 12,897 | 4.6 | % | 40,671 | 38,651 | 5.2 | % | |||||||||||||
Total expenses | 986,058 | 1,033,781 | (4.6 | )% | 3,017,256 | 3,055,233 | (1.2 | )% | |||||||||||||
Income before provision for income taxes | 68,687 | 55,453 | 23.9 | % | 237,452 | 214,161 | 10.9 | % | |||||||||||||
Provision for income taxes | 27,635 | 22,181 | 24.6 | % | 95,480 | 84,663 | 12.8 | % | |||||||||||||
Net income | $ | 41,052 | $ | 33,272 | 23.4 | % | $ | 141,972 | $ | 129,498 | 9.6 | % | |||||||||
Earnings per share | |||||||||||||||||||||
Basic | $ | 0.43 | $ | 0.33 | 30.3 | % | $ | 1.48 | $ | 1.29 | 14.7 | % | |||||||||
Diluted | $ | 0.43 | $ | 0.33 | 30.3 | % | $ | 1.46 | $ | 1.26 | 15.9 | % | |||||||||
Weighted-average shares outstanding — basic | 94,972 | 100,052 | (5.1 | )% | 95,744 | 100,519 | (4.8 | )% | |||||||||||||
Weighted-average shares outstanding — diluted | 96,472 | 101,834 | (5.3 | )% | 97,303 | 102,384 | (5.0 | )% |
The Company reports Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share to present information about its earnings that eliminates the effects of items that it does not consider indicative of its core operating performance. Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of the Company's results as reported under GAAP. Some of these limitations are:
a. Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share do not reflect all cash expenditures, or contractual commitments; and do not reflect changes in, or cash requirements for, working capital needs; and
b. Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt.
The reconciliation from net income to Adjusted EBITDA, a non-GAAP measure, for the periods presented is as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(unaudited) | |||||||||||||||
Net income | $ | 41,052 | $ | 33,272 | $ | 141,972 | $ | 129,498 | |||||||
Non-operating interest expense | 13,493 | 12,897 | 40,671 | 38,651 | |||||||||||
Provision for income taxes | 27,635 | 22,181 | 95,480 | 84,663 | |||||||||||
Amortization of intangible assets | 9,534 | 9,634 | 28,707 | 29,046 | |||||||||||
Depreciation and amortization of fixed assets | 17,231 | 14,885 | 50,856 | 41,572 | |||||||||||
EBITDA | 108,945 | 92,869 | 357,686 | 323,430 | |||||||||||
EBITDA Adjustments: | |||||||||||||||
Employee share-based compensation expense(a) | 6,250 | 5,550 | 19,213 | 16,087 | |||||||||||
Acquisition and integration related expenses(b) | (8 | ) | (328 | ) | 58 | 764 | |||||||||
Restructuring and conversion costs(c) | 3,080 | 9,958 | 11,487 | 26,606 | |||||||||||
Other(d) | 85 | 829 | 402 | 11,667 | |||||||||||
Total EBITDA Adjustments | 9,407 | 16,009 | 31,160 | 55,124 | |||||||||||
Adjusted EBITDA | $ | 118,352 | $ | 108,878 | $ | 388,846 | $ | 378,554 |
The reconciliation from net income to Adjusted Earnings, a non-GAAP measure, for the periods presented is as follows (in thousands, except per share data):
Three Months Ended | Nine Months
Ended | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(unaudited) | |||||||||||||||
Net income | $ | 41,052 | $ | 33,272 | $ | 141,972 | $ | 129,498 | |||||||
After-Tax: | |||||||||||||||
EBITDA Adjustments(e) | |||||||||||||||
Employee share-based compensation expense(f) | 3,928 | 3,666 | 12,256 | 10,778 | |||||||||||
Acquisition and integration related expenses | (5 | ) | (703 | ) | 36 | (33 | ) | ||||||||
Restructuring and conversion costs | 1,891 | 6,114 | 7,053 | 16,336 | |||||||||||
Other | 52 | 509 | 247 | 7,164 | |||||||||||
Total EBITDA Adjustments | 5,866 | 9,586 | 19,592 | 34,245 | |||||||||||
Amortization of intangible assets(e) | 5,854 | 5,915 | 17,626 | 17,834 | |||||||||||
Adjusted Earnings | $ | 52,772 | $ | 48,773 | $ | 179,190 | $ | 181,577 | |||||||
Adjusted Earnings per share(g) | $ | 0.55 | $ | 0.48 | $ | 1.84 | $ | 1.77 | |||||||
Weighted-average shares outstanding — diluted | 96,472 | 101,834 | 97,303 | 102,384 |
___________________________
(a) Represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant-date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period.
(b) Represents acquisition and integration costs resulting from various acquisitions, including changes in the estimated fair value of future payments, or contingent consideration that may be required to be made to former shareholders of certain acquired entities.
(c) Represents organizational restructuring charges, conversion, and other related costs primarily resulting from the expansion of the Company's Service Value Commitment initiative. Results for the three and nine months ended
(d) Results for the three and nine months ended
(e) Generally, EBITDA Adjustments and amortization of intangible assets have been tax effected using a federal rate of 35.0% and the applicable effective state rate, which was 3.6%, net of the federal tax benefit, for the periods ended
(f) Includes the impact of incentive stock options granted to employees that qualify for preferential tax treatment and conversely for which the Company does not receive a tax deduction.
(g) Represents Adjusted Earnings, a non-GAAP measure, divided by weighted-average number of shares outstanding on a fully diluted basis. Set forth below is a reconciliation of earnings per share on a fully diluted basis, as calculated in accordance with GAAP, to Adjusted Earnings per share:
Three Months Ended | Nine Months Ended | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(unaudited) | |||||||||||||||
Earnings per share — diluted | $ | 0.43 | $ | 0.33 | $ | 1.46 | $ | 1.26 | |||||||
After-Tax: | |||||||||||||||
EBITDA Adjustments per share | 0.06 | 0.09 | 0.20 | 0.33 | |||||||||||
Amortization of intangible assets per share | 0.06 | 0.06 | 0.18 | 0.18 | |||||||||||
Adjusted Earnings per share | $ | 0.55 | $ | 0.48 | $ | 1.84 | $ | 1.77 |
Non-GAAP Financial Measures
Adjusted Earnings represent net income before: (a) employee share-based compensation expense, (b) acquisition and integration related expenses, (c) restructuring and conversion costs, (d) amortization of intangible assets resulting from various acquisitions, and (e) other. Reconciling items are tax effected using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts. Adjusted Earnings per share represents Adjusted Earnings divided by weighted average outstanding shares on a fully diluted basis. The Company prepared Adjusted Earnings and Adjusted Earnings per share to eliminate the effects of items that it does not consider indicative of its core operating performance. The Company believes this measure provides investors with greater transparency by helping illustrate the underlying financial and business trends relating to results of operations and financial condition and comparability between current and prior periods. Adjusted Earnings and Adjusted Earnings per share are not measures of the Company's financial performance under GAAP and should not be considered as an alternative to net income or earnings per share 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.
Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization), further adjusted to exclude certain non-cash charges and other adjustments set forth in the table above. The Company presents Adjusted EBITDA because the Company considers it a useful financial metric in assessing the Company's operating performance from period to period by excluding certain items that the Company believes are not representative of its core business, such as certain material non-cash items and other adjustments that are outside the control of management. Adjusted 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, Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.
Gross Profit is calculated as net revenues less production expenses. Production expenses consist of the following expense categories from the Company's consolidated statements of income: (i) commission and advisory and (ii) brokerage, clearing, and exchange. All other expense categories, including depreciation and amortization, 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 measures that may not be comparable to those of others in its industry.
Forward-Looking Statements
Statements in this press release regarding the Company's future financial and operating results, growth, returns to shareholders, business strategies and plans, including statements relating to the Company's future asset growth, future advisor recruitment, future benefits from improvements to its compliance infrastructure and risk management capabilities, future resolution of regulatory matters and related expenditures, future expense savings and service enhancements, and the Company's ability and plans to invest in its business, increase its indebtedness, repurchase shares, or pay dividends in the future, 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
About
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LPLA-F
Investor RelationsSource:Chris Koegel LPL Financial Phone: (617) 897-4574 Email: investor.relations@lpl.com Media RelationsBrett Weinberg LPL Financial Phone: (980) 321-1904 Email: brett.weinberg@lpl.com
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