LPL Financial Holdings Inc.
LPL Financial Holdings Inc. (Form: 8-K, Received: 10/26/2017 16:28:04)




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
October 26, 2017
Date of report (date of earliest event reported)
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
001-34963
20-3717839
(State or other jurisdictions of incorporation or organization)
(Commission File Number)
(I.R.S. Employer Identification Nos.)
75 State Street, Boston MA 02109
(Address of principal executive offices) (Zip Code)
(617) 423-3644
(Registrant's telephone number, including area code)
N/A
(Former Name or Former Address, if Changed since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrants under any of the following provisions:
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o






Item 2.02
Results of Operations and Financial Condition.
On October 26, 2017 , LPL Financial Holdings Inc. ("LPLFH" and collectively with its subsidiaries, the “Company”) issued a press release announcing its financial results for the three months ended September 30, 2017 . A copy of the press release is furnished with this Form 8-K and attached hereto as Exhibit 99.1.
Exhibit 99.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act.
Item 9.01

Financial Statements and Exhibits.
(d)

 
Exhibits
 
 
 
99.1

 





SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

LPL FINANCIAL HOLDINGS INC.
 
 
 
By:
/s/ Matthew J. Audette
 
Name: Matthew J. Audette
 
Title: Chief Financial Officer


Dated: October 26, 2017

    





LPLLOGO541LARGENEWNOLINESA04.JPG
Investor Relations - Chris Koegel, (617) 897-4574
For Immediate Release
Media Relations - Jeff Mochal, (704) 733-3589
 
 
investor.lpl.com/contactus.cfm
LPL Financial Announces Third Quarter 2017 Results

Key Performance Indicators
Earnings per share ("EPS") increased 9% year-over-year to $0.63 , down 15% sequentially.
Q3 2017 EPS prior to $0.02 of cost related to the acquisition of National Planning Holdings, Inc. ("NPH"), and $0.01 of cost related to a debt refinancing was $0.66.
Q3 2016 EPS prior to $0.16 of benefit related to management tax planning initiatives from prior periods and account termination fees from an institutional client was $0.42.
Q3 2017 EPS prior to the items cited above was up 57% year-over-year.
Net Income increased 12% year-over-year to $58 million , down 15% sequentially.
Prior to the items cited above, Q3 2017 Net Income increased 64% year-over-year.
Total Brokerage and Advisory Assets increased 11% year-over-year to $560 billion , up 3% sequentially.
Total Net New Assets were an inflow of $2.9 billion , translating to a 2% annualized growth rate.
Net new advisory assets were an inflow of $6.9 billion , translating to a 12% annualized growth rate.
Net new brokerage assets were an outflow of $4.0 billion , translating to a (5%) annualized rate.
Advisor count decreased to 14,253 , down 3 sequentially.
Production retention rate year-to-date was 95% . Prior to the impact of client departures discussed during the Company's Q2 2017 earnings call, the production retention rate year-to-date was 97%.
Gross Profit** increased 12% year-over-year to $387 million , down slightly sequentially.
EBITDA** increased 30% year-over-year to $156 million , down 8% sequentially.
EBITDA as a percentage of Gross Profit was 40% , up from 35% a year ago, down from 44% sequentially.
Core G&A** increased 2% year-over-year to $179 million , and increased 1% sequentially.
Prior to $3 million of NPH-related expenses, Core G&A** was $176 million, flat sequentially.

Key Updates
Narrowed outlook range for 2017 Core G&A** prior to NPH-related costs to $710 to $715 million .
Conducted $25 million of share repurchases at an average price of $46.37 per share.

SAN DIEGO - October 26, 2017 LPL Financial Holdings Inc. (NASDAQ: LPLA) (the “Company”) today announced results for its third quarter ended September 30, 2017 , reporting net income of $58 million , or $0.63 per share. This compares with $52 million , or $0.58 per share, in the third quarter of 2016 and $68 million , or $ 0.74 per share, in the prior quarter.
“We remained focused on our strategic priorities of growing our core business and executing with excellence in the third quarter,” said Dan Arnold, president and CEO. “Consistent with that focus, we announced and closed our acquisition of NPH, and we are working hard to share our value proposition with NPH advisors and enable a smooth onboarding process.”
“We actively used our balance sheet strength in the quarter to deploy capital on several fronts,” said Matt Audette, CFO. “We acquired NPH, invested in growth through technology and recruiting, refinanced our debt, and returned capital to shareholders through share repurchases and dividends.”


1



Additional Third Quarter 2017 Financial and Business Highlights
Market Drivers
S&P 500 index ended the quarter at 2,519 , up 4% sequentially. The S&P 500 index averaged 2,467 during the quarter, up 3% sequentially.
Federal Funds Daily Effective Rate averaged 116 bps during the quarter, up 21 bps sequentially.

NPH Acquisition
Announced and closed the acquisition of NPH on August 15, 2017.
As of June 30th, 2017, NPH broker/dealers served approximately 3,200 advisors and $120 billion of client assets. (1)  
Initial purchase price of $325 million paid at closing and a potential contingent payment of up to $123 million in the first half of 2018.
NPH advisors and assets are scheduled to onboard in two waves scheduled for Q4 2017 and Q1 2018, respectively.

Capital Management
Completed debt refinancing in September to fund NPH-related costs, shift mix from floating to fixed rate debt, reduce pricing, and extend maturities. Results include:
Issued $400 million of add-on senior unsecured notes (now totaling $900 million) above par with a yield to worst of 5.115% (coupon at 5.750%). Used $200 million to reduce term loan balance and plan to use the remaining proceeds for general corporate purposes, including to fund NPH-related costs.
Reduced term loan and revolving credit facility spreads above LIBOR by 25 basis points each, and lowered senior secured term loan balance to $1.5 billion.
Returned capital to shareholders totaling $48 million or $0.52 per share.
Deployed $25 million of capital to repurchase 539 thousand shares at an average price of $46.37 per share.
Paid dividends of $23 million on August 24, 2017. For the fourth quarter, the Company’s Board of Directors has declared a $0.25 cent quarterly dividend to be paid on November 27, 2017 to shareholders of record as of November 9, 2017 .
Capital expenditures were $27 million, primarily driven by technology spend.
Cash available for corporate use was $514 million as of quarter-end, and Credit Agreement Net Leverage Ratio, which only applies to the revolving credit facility, was 3.21x , up 0.13x from the prior quarter.
After applying $300 million of cash available for corporate use to Credit Agreement Net Debt, this left an additional $214 million of cash, which if applied to the debt, would further reduce the Credit Agreement Net Leverage Ratio to 2.88x.

(1) Advisors affiliated with NPH’s broker-dealer subsidiaries serviced approximately $120 billion of client brokerage and advisory assets, as of June 30, 2017. Asset numbers were reported by NPH based on prior business and have not been independently and fully verified by LPL Financial.


2



Conference Call and Additional Information
The Company will hold a conference call to discuss its results at 5:00 p.m. EDT on Thursday, October 26, 2017 . The conference call can be accessed by dialing either 877-677-9122 (domestic) or 708-290-1401 (international) and entering passcode 90277577.
The conference call will also be webcast simultaneously on the Investor Relations section of the Company's website (investor.lpl.com), where a replay of the call will also be available following the live webcast. A telephonic replay will be available approximately two hours after the call and can be accessed by dialing 855-859-2056 (domestic) or 404-537-3406 (international) and entering passcode 90277577. The telephonic replay will be available until 11:59 p.m. EDT on November 2, 2017 and the webcast replay will be available until November 16, 2017.
About LPL Financial
LPL Financial LLC, a wholly owned subsidiary of LPL Financial Holdings Inc. (NASDAQ:LPLA), is a leader in the retail financial advice market and served approximately $560 billion in brokerage and advisory assets as of September 30, 2017 . LPL is one of the fastest growing RIA custodians and the nation’s largest independent broker-dealer (based on total revenues, Financial Planning magazine June 1996-2017), and the firm and its financial advisors were ranked No. 1 in net customer loyalty in a 2016 Cogent Reports TM study. The Company provides proprietary technology, comprehensive clearing and compliance services, practice management programs and training, and independent research to more than 14,000 financial advisors and over 700 financial institutions, enabling them to provide a range of financial services including wealth management, retirement planning, financial planning and other investment services to help their clients turn life’s aspirations into financial realities. As of September 30, 2017 , financial advisors associated with LPL served more than 4 million client accounts across the U.S. as well as an estimated 41,000 retirement plans with an estimated $137 billion in retirement plan assets. Additionally, LPL supports approximately 3,700 financial advisors licensed and affiliated with insurance companies with customized clearing, advisory platforms, and technology solutions. LPL Financial and its affiliates have more than 3,500 employees with primary offices in Boston, Charlotte, and San Diego. For more information, visit www.lpl.com .
Securities and Advisory Services offered through LPL Financial. A Registered Investment Advisor, Member FINRA/SIPC.
**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 some or all of 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 measures and metrics discussed below are appropriate for evaluating the performance of the Company.
Gross Profit is calculated as net revenues, which were $1,064 million for the three months ended September 30, 2017 , less commission and advisory expenses and brokerage, clearing, and exchange fees, which were $664 million and $13 million , respectively, for the three months ended September 30, 2017 . 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. Management believes that Gross Profit can be useful to investors because it shows 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 $940 million for the three months ended September 30, 2017 , 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 3 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

3



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. Prior to 2016, the Company calculated Core G&A as consisting of total operating expenses, excluding the items described above, as well as excluding other items that primarily consisted of acquisition and integration costs resulting from various acquisitions and organizational restructuring and conversion costs. Beginning with results reported for Q1 2016, Core G&A was presented as including these items that were historically adjusted out .
EBITDA is defined as net income plus interest expense, income tax expense, depreciation, and amortization. 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. 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, and capital investments.
Forward-Looking Statements
Statements in this press release regarding the Company's future financial and operating results, outlook, growth, prospects, business strategies, future market position, future operating environment, and goals, including forecasts and statements relating to the Company’s future expenses, capital plans, and success in recruiting and onboarding advisors from NPH's broker/dealer network, 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 October 26, 2017 . The words “anticipates,” “believes,” “expects,” “may,” “plans,” “will,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied by the Company 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; fluctuations in the value of advisory and brokerage assets; fluctuations in levels of net new assets and the related impact on revenue; fluctuations in the number of retail investors served by the Company; effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions; changes in the number of the Company's financial advisors and institutions, and their ability to market effectively financial products and services; whether the retail investors served by newly-recruited advisors choose to open brokerage and/or advisory accounts and/or move their respective assets to new accounts at the Company; changes in interest rates and fees payable by banks participating in the Company's cash sweep program, including the Company's success in negotiating agreements with current or additional counterparties; the Company's strategy in managing cash sweep program fees; changes in the growth and profitability of the Company's fee-based business; the effect of current, pending and future legislation, regulation and regulatory actions, including the U.S. Department of Labor's final rule ("DOL Rule") and disciplinary actions imposed by federal and state securities regulators and self-regulatory organizations; the costs of settling and remediating issues related to pending or future regulatory matters or legal proceedings; execution of the Company's capital management plans, including its compliance with the terms of its existing credit agreement and

4



the indenture governing its senior notes; the price, the availability of shares, and trading volumes of the Company's common stock, which will affect the timing and size of future share repurchases by the Company; changes made to the Company’s offerings and services in response to the current, pending and future legislation, regulation and regulatory actions, including the DOL Rule, 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 expense savings and service improvements and efficiencies expected to result from its initiatives and programs, particularly its expense plans and technological initiatives; the Company's success in negotiating and developing commercial arrangements with third-party services providers; the performance of third-party service providers to which business processes are transitioned from the Company; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company's 2016 Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q or subsequent filings with the SEC. In particular, the Company can provide no assurance that the assets reported as serviced by NPH financial advisors will translate into assets serviced at LPL Financial or that such financial advisors will join LPL Financial or remain at LPL Financial. Important factors that could cause or contribute to such differences include: difficulties and delays in recruiting or transferring the licenses of NPH’s advisors and/or onboarding the clients or businesses of NPH’s advisors; disruptions of the Company’s business due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with its financial advisors and their clients, employees, other business partners or governmental entities; the choice by clients of NPH’s advisors not to open brokerage and/or advisory accounts at LPL Financial and/or move their respective assets from NPH to a new account at LPL Financial; and effects of competition in the financial services industry, including competitors’ success in recruiting NPH’s advisors. 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.




5



LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Commission
$
403,011

 
$
431,686

 
(7
%)
 
$
1,244,881

 
$
1,314,168

 
(5
%)
Advisory
356,945

 
321,911

 
11
%
 
1,033,319

 
964,298

 
7
%
Asset-based
183,953

 
138,291

 
33
%
 
514,626

 
412,339

 
25
%
Transaction and fee
103,999

 
108,413

 
(4
%)
 
321,522

 
312,927

 
3
%
Interest income, net of interest expense
6,162

 
5,372

 
15
%
 
17,931

 
15,940

 
12
%
Other
10,038

 
11,767

 
(15
%)
 
32,760

 
22,254

 
47
%
Total net revenues
1,064,108

 
1,017,440

 
5
%
 
3,165,039

 
3,041,926

 
4
%
EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Commission and advisory
663,765

 
657,432

 
1
%
 
1,971,874

 
1,954,123

 
1
%
Compensation and benefits
113,659

 
107,988

 
5
%
 
337,170

 
327,816

 
3
%
Promotional
42,935

 
42,609

 
1
%
 
111,595

 
113,010

 
(1
%)
Depreciation and amortization
21,996

 
18,434

 
19
%
 
63,933

 
56,145

 
14
%
Amortization of intangible assets
9,352

 
9,502

 
(2
%)
 
28,296

 
28,536

 
(1
%)
Occupancy and equipment
22,803

 
23,530

 
(3
%)
 
70,989

 
67,347

 
5
%
Professional services
16,438

 
17,045

 
(4
%)
 
50,732

 
49,184

 
3
%
Brokerage, clearing and exchange expense
13,491

 
13,098

 
3
%
 
41,567

 
40,296

 
3
%
Communications and data processing
10,866

 
10,333

 
5
%
 
32,525

 
31,801

 
2
%
Other
24,376

 
25,356

 
(4
%)
 
71,140

 
69,512

 
2
%
Total operating expenses
939,681

 
925,327

 
2
%
 
2,779,821

 
2,737,770

 
2
%
Non-operating interest expense
26,519

 
23,889

 
11
%
 
78,131

 
71,583

 
9
%
Loss on extinguishment of debt
1,268

 

 
n/m

 
22,407

 

 
n/m

Income before provision for income taxes
96,640

 
68,224

 
42
%
 
284,680

 
232,573

 
22
%
PROVISION FOR INCOME TAXES
38,498

 
16,270

 
137
%
 
109,915

 
82,378

 
33
%
NET INCOME
$
58,142

 
$
51,954

 
12
%
 
$
174,765

 
$
150,195

 
16
%
Earnings per share, basic
$
0.65

 
$
0.58

 
12
%
 
$
1.94

 
$
1.69

 
15
%
Earnings per share, diluted
$
0.63

 
$
0.58

 
9
%
 
$
1.90

 
$
1.67

 
14
%
Weighted-average shares outstanding, basic
89,967

 
89,092

 
1
%
 
90,029

 
89,025

 
1
%
Weighted-average shares outstanding, diluted
92,042

 
89,951

 
2
%
 
92,027

 
89,732

 
3
%








6



LPL Financial Holdings Inc.
Condensed Consolidated Statements of Income Trend
(Dollars in thousands, except per share data)
(Unaudited)
 
Quarterly Results
 
Q3 2017
 
Q2 2017
 
Q1 2017
REVENUES
 
 
 
 
 
Commission
$
403,011

 
$
420,706

 
$
421,164

Advisory
356,945

 
346,515

 
329,859

Asset-based
183,953

 
173,450

 
157,223

Transaction and fee
103,999

 
109,361

 
108,162

Interest income, net of interest expense
6,162

 
5,976

 
5,793

Other
10,038

 
9,496

 
13,226

Total net revenues
1,064,108

 
1,065,504

 
1,035,427

EXPENSES
 
 
 
 
 
Commission and advisory
663,765

 
663,046

 
645,063

Compensation and benefits
113,659

 
110,299

 
113,212

Promotional
42,935

 
32,006

 
36,654

Depreciation and amortization
21,996

 
21,190

 
20,747

Amortization of intangible assets
9,352

 
9,453

 
9,491

Occupancy and equipment
22,803

 
22,987

 
25,199

Professional services
16,438

 
18,757

 
15,537

Brokerage, clearing and exchange expense
13,491

 
13,890

 
14,186

Communications and data processing
10,866

 
10,645

 
11,014

Other
24,376

 
24,201

 
22,563

Total operating expenses
939,681

 
926,474

 
913,666

Non-operating interest expense
26,519

 
26,261

 
25,351

Loss on extinguishment of debt
1,268

 

 
21,139

INCOME BEFORE PROVISION FOR INCOME TAXES
96,640

 
112,769

 
75,271

PROVISION FOR INCOME TAXES
38,498

 
44,335

 
27,082

NET INCOME
$
58,142

 
$
68,434

 
$
48,189

Earnings per share, basic
$
0.65

 
$
0.76

 
$
0.54

Earnings per share, diluted
$
0.63

 
$
0.74

 
$
0.52

Weighted-average shares outstanding, basic
89,967

 
90,251

 
89,868

Weighted-average shares outstanding, diluted
92,042

 
92,013

 
92,004


7



LPL Financial Holdings Inc.
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except par value)
(Unaudited)
 
 
September 30,
2017
 
December 31, 2016
ASSETS
Cash and cash equivalents
 
$
577,961

 
$
747,709

Cash and securities segregated under federal and other regulations
 
754,683

 
768,219

Restricted cash
 
45,224

 
42,680

Receivables from:
 
 
 
 
Clients, net of allowance of $490 at September 30, 2017 and $1,580 at December 31, 2016
 
391,650

 
341,199

Product sponsors, broker-dealers, and clearing organizations
 
179,576

 
175,122

Advisor loans, net of allowance of $3,660 at September 30, 2017 and $1,852 at December 31, 2016
 
184,328

 
194,526

Others, net of allowance of $6,351 at September 30, 2017 and $12,851 at December 31, 2016
 
214,235

 
189,632

Securities owned:
 
 
 
 
Trading — at fair value
 
13,419

 
11,404

Held-to-maturity
 
11,832

 
8,862

Securities borrowed
 
16,655

 
5,559

Fixed assets, net of accumulated depreciation and amortization of $410,902 at September 30, 2017 and $355,919 at December 31, 2016
 
402,246

 
387,368

Goodwill
 
1,365,838

 
1,365,838

Intangible assets, net of accumulated amortization of $409,070 at September 30, 2017 and $380,775 at December 31, 2016
 
325,700

 
353,996

National Planning Holdings acquisition payment
 
325,000

 

Other assets
 
249,926

 
242,812

Total assets
 
$
5,058,273

 
$
4,834,926

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
 
 
 
 
Drafts payable
 
$
153,366

 
$
198,839

Payables to clients
 
767,250

 
863,765

Payables to broker-dealers and clearing organizations
 
53,239

 
63,032

Accrued commission and advisory expenses payable
 
133,133

 
128,476

Accounts payable and accrued liabilities
 
403,723

 
385,545

Income taxes payable
 
11,440

 
4,607

Unearned revenue
 
73,551

 
62,785

Securities sold, but not yet purchased — at fair value
 
135

 
183

Long-term debt, net of unamortized debt issuance cost of $23,637 at September 30, 2017 and $21,924 at December 31, 2016
 
2,388,321

 
2,175,436

Leasehold financing obligation
 
108,223

 
105,649

Deferred income taxes, net
 
25,327

 
25,614

Total liabilities
 
4,117,708

 
4,013,931

Commitments and contingencies
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
Common stock, $.001 par value; 600,000,000 shares authorized; 122,825,821 shares issued at September 30, 2017 and 119,917,854 shares issued at December 31, 2016
 
123

 
120

Additional paid-in capital
 
1,543,428

 
1,445,256

Treasury stock, at cost — 32,665,566 shares at September 30, 2017 and 30,621,270 shares at December 31, 2016
 
(1,279,700
)
 
(1,194,645
)
Accumulated other comprehensive income
 

 
315

Retained earnings
 
676,714

 
569,949

Total stockholders’ equity
 
940,565

 
820,995

Total liabilities and stockholders’ equity
 
$
5,058,273

 
$
4,834,926


8



LPL Financial Holdings Inc.
Management's Statements of Operations (1)
(Dollars in thousands, except per share data)
(Unaudited)
The information presented on pages 9-17 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.
 
Quarterly Results
 
Q3 2017
 
Q2 2017
 
% Change
 
Q3 2016
 
% Change
Gross Profit(1)
 
 
 
 
 
 
 
 
 
Sales-based commissions
$
160,098

 
$
181,843

 
(12
%)
 
$
196,364

 
(18
%)
Trailing commissions
242,913

 
238,863

 
2
%
 
235,322

 
3
%
Advisory
356,945

 
346,515

 
3
%
 
321,911

 
11
%
Commission and advisory fees
759,956

 
767,221

 
(1
%)
 
753,597

 
1
%
Commission and advisory expense
(663,765
)
 
(663,046
)
 
%
 
(657,432
)
 
1
%
Commission and advisory fees, net of payout
96,191

 
104,175

 
(8
%)
 
96,165

 
%
Cash sweep
81,617

 
71,848

 
14
%
 
40,701

 
101
%
Other asset-based(2)
102,336

 
101,602

 
1
%
 
97,590

 
5
%
Transaction and fee
103,999

 
109,361

 
(5
%)
 
108,413

 
(4
%)
Interest income and other
16,200

 
15,472

 
5
%
 
17,139

 
(5
%)
Total net commission and advisory fees and attachment revenue
400,343


402,458

 
(1
%)
 
360,008

 
11
%
Brokerage, clearing, and exchange expense
(13,491
)
 
(13,890
)
 
(3
%)
 
(13,098
)
 
3
%
Gross profit(1)
386,852

 
388,568

 
%
 
346,910

 
12
%
 
 
 
 
 
 
 
 
 
 
G&A Expense
 
 
 
 
 
 
 
 
 
Core G&A(3)
178,769

 
176,428

 
1
%
 
175,385

 
2
%
Regulatory charges
4,433

 
5,428

 
n/m

 
4,436

 
n/m

Promotional
42,935

 
32,006

 
34
%
 
42,609

 
1
%
Employee share-based compensation
4,940

 
5,033

 
(2
%)
 
4,431

 
11
%
Total G&A
231,077

 
218,895

 
6
%
 
226,861

 
2
%
EBITDA(1)
155,775

 
169,673

 
(8
%)
 
120,049

 
30
%
Depreciation and amortization
21,996

 
21,190

 
4
%
 
18,434

 
19
%
Amortization of intangible assets
9,352

 
9,453

 
(1
%)
 
9,502

 
(2
%)
Non-operating interest expense
26,519

 
26,261

 
1
%
 
23,889

 
11
%
Loss on extinguishment of debt
1,268

 

 
n/m

 

 
n/m

INCOME BEFORE PROVISION FOR INCOME TAXES
96,640

 
112,769

 
(14
%)
 
68,224

 
42
%
PROVISION FOR INCOME TAXES
38,498

 
44,335

 
(13
%)
 
16,270

 
137
%
NET INCOME
$
58,142

 
$
68,434

 
(15
%)
 
$
51,954

 
12
%
Earnings per share, diluted
$
0.63

 
$
0.74

 
(15
%)
 
$
0.58

 
9
%
Weighted-average shares outstanding, diluted
92,042

 
92,013

 
%
 
89,951

 
2
%

9



LPL Financial Holdings Inc.
Management's Statements of Operations Trend (1)
(Dollars in thousands, except per share data)
(Unaudited)
The information presented on pages 9-17 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.
 
Quarterly Results
 
Q3 2017
 
Q2 2017
 
Q1 2017
Gross Profit(1)
 
 
 
 
 
Sales-based commissions
$
160,098

 
$
181,843

 
$
186,577

Trailing commissions
242,913

 
238,863

 
234,587

Advisory
356,945

 
346,515

 
329,859

Commission and advisory fees
759,956

 
767,221

 
751,023

Commission and advisory expense
(663,765
)
 
(663,046
)
 
(645,063
)
Commission and advisory fees, net of payout
96,191

 
104,175

 
105,960

Cash sweep
81,617

 
71,848

 
59,651

Other asset-based(2)
102,336

 
101,602

 
97,572

Transaction and fee
103,999

 
109,361

 
108,162

Interest income and other
16,200

 
15,472

 
19,019

Total net commission and advisory fees and attachment revenue
400,343

 
402,458


390,364

Brokerage, clearing, and exchange expense
(13,491
)
 
(13,890
)
 
(14,186
)
Gross profit(1)
386,852

 
388,568

 
376,178

 
 
 
 
 
 
G&A Expense
 
 
 
 
 
Core G&A(3)
178,769

 
176,428

 
177,026

Regulatory charges
4,433

 
5,428

 
5,270

Promotional
42,935

 
32,006

 
36,654

Employee share-based compensation
4,940

 
5,033

 
5,229

Total G&A
231,077

 
218,895

 
224,179

EBITDA(1)
155,775

 
169,673

 
151,999

Depreciation and amortization
21,996

 
21,190

 
20,747

Amortization of intangible assets
9,352

 
9,453

 
9,491

Non-operating interest expense
26,519

 
26,261

 
25,351

Loss on extinguishment of debt
1,268

 

 
21,139

INCOME BEFORE PROVISION FOR INCOME TAXES
96,640

 
112,769

 
75,271

PROVISION FOR INCOME TAXES
38,498

 
44,335

 
27,082

NET INCOME
$
58,142

 
$
68,434

 
$
48,189

Earnings per share, diluted
$
0.63

 
$
0.74

 
$
0.52

Weighted-average shares outstanding, diluted
92,042

 
92,013

 
92,004



10



LPL Financial Holdings Inc.
Operating Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
Q3 2017
 
Q2 2017
 
Change
 
Q3 2016
 
Change
Market Drivers
 
 
 
 
 
 
 
 
 
S&P 500 Index (end of period)
2,519

 
2,423

 
4%
 
2,168

 
16%
Fed Funds Daily Effective Rate (FFER) (average bps)
116

 
95

 
21bps
 
39

 
77bps
 
 
 
 
 
 
 
 
 
 
Assets (dollars in billions)
 
 
 
 
 
 
 
 
 
Brokerage Assets(4)
$
309.8

 
$
305.2

 
2%
 
$
296.9

 
4%
Advisory Assets(5)
250.2

 
236.8

 
6%
 
205.5

 
22%
Total Brokerage and Advisory Assets
$
560.0

 
$
542.0

 
3%
 
$
502.4

 
11%
Advisory % of Total Assets
44.7
%
 
43.7
%
 
100bps
 
40.9
%
 
380bps
 
 
 
 
 
 
 
 
 
 
Net New Advisory Assets(6)
$
6.9

 
$
5.9

 
n/m
 
$
4.1

 
n/m
Net New Brokerage Assets(7)
(4.0
)
 
(5.5
)
 
n/m
 
(3.1
)
 
n/m
Total Net New Assets (NNA)
$
2.9


$
0.4


n/m

$
1.0


n/m
 
 
 
 
 
 
 
 
 
 
Net Brokerage to Advisory Conversions(8)
$
1.9

 
$
2.0

 
n/m
 
$
1.3

 
n/m
Advisory NNA Annualized Growth(9)
12
%
 
10
%
 
n/m
 
8
%
 
n/m
Total NNA Annualized Growth(9)
2
%
 
0.3
%
 
n/m
 
0.8
%
 
n/m
 
 
 
 
 
 
 
 
 
 
Corporate Platform Advisory Assets(10)
$
145.0

 
$
137.7

 
5%
 
$
124.9

 
16%
Hybrid Platform Advisory Assets(11)
105.2

 
99.1

 
6%
 
80.6

 
31%
Total Brokerage Assets
309.8

 
305.2

 
2%
 
296.9

 
4%
Total Brokerage and Advisory Assets
$
560.0


$
542.0

 
3%
 
$
502.4

 
11%
 
 
 
 
 
 
 
 
 
 
Brokerage Retirement Assets(12)
$
155.5

 
$
149.9

 
4%
 
$
149.2

 
4%
Advisory Retirement Assets(12)
139.3

 
131.5

 
6%
 
112.1

 
24%
Total Brokerage and Advisory Retirement Assets(12)
$
294.8

 
$
281.4

 
5%
 
$
261.3

 
13%
Retirement % of Total Assets
52.6
%
 
51.9
%
 
70bps
 
52.0
%
 
60bps
 
 
 
 
 
 
 
 
 
 
Insured Cash Account Balances
$
21.9

 
$
20.8

 
5%
 
$
21.1

 
4%
Deposit Cash Account Balances
4.1

 
3.7

 
11%
 
4.2

 
(2%)
Money Market Account Cash Balances
2.3

 
3.3

 
(30%)
 
3.9

 
(41%)
Total Cash Sweep Balances
$
28.3

 
$
27.8

 
2%
 
$
29.2

 
(3%)
Cash Sweep % of Total Assets
5.1
%
 
5.1
%
 
—%
 
5.8
%
 
(70bps)
 
 
 
 
 
 
 
 
 
 
Insured Cash Account Average Fee - bps(13)
124

 
108

 
16
 
62

 
62
Deposit Cash Account Fee - Average Fee bps(13)
100

 
85

 
15
 
36

 
64
Money Market Account Average Fee - bps(13)
67

 
69

 
(2)
 
42

 
25
Total Cash Sweep Average Fee - bps(13)
116

 
100

 
16
 
56

 
60

11



LPL Financial Holdings Inc.
Monthly Metrics (1)
(Dollars in thousands, except where noted)
(Unaudited)
(Dollars in billions, unless noted)
 
September 2017
 
August 2017
 
Aug to Sep Change
 
July 2017
 
June 2017
Assets Served
 
 
 
 
 
 
 
 
 
 
Brokerage Assets(4)
 
$
309.8

 
$
306.1

 
1.2%
 
$
307.5

 
$
305.2

Advisory Assets(5)
 
250.2

 
245.3

 
2.0%
 
242.2

 
236.8

Total Brokerage and Advisory Assets
 
$
560.0

 
$
551.4

 
1.6%
 
$
549.7

 
$
542.0

 
 
 
 
 
 

 
 
 
 
Net New Advisory Assets(6)
 
$
1.7

 
$
2.7

 
n/m
 
$
2.5

 
$
2.0

Net New Brokerage Assets(7)
 
(0.8
)
 
(1.6
)
 
n/m
 
(1.6
)
 
(2.1
)
Total Net New Assets
 
$
0.9

 
$
1.1

 
n/m
 
$
0.9

 
$
(0.1
)
 
 
 
 
 
 
 
 
 
 
 
Net Brokerage to Advisory Conversions(8)
 
$
0.5

 
$
0.7

 
n/m
 
$
0.7

 
$
0.6

 
 
 
 
 
 
 
 
 
 
 
Insured Cash Account Balances
 
$
21.9

 
$
22.0

 
(0.5%)
 
$
21.5

 
$
20.8

Deposit Cash Account Balances
 
4.1

 
4.0

 
2.5%
 
3.6

 
3.7

Money Market Account Cash Balances
 
2.3

 
2.3

 
—%
 
2.2

 
3.3

Total Client Cash Sweep Balances
 
$
28.3

 
$
28.3

 
—%
 
$
27.3

 
$
27.8

 
 
 
 
 
 

 
 
 
 
Market Indices
 
 
 
 
 

 
 
 
 
S&P 500 Index (end of period)
 
2,519

 
2,472

 
1.9%
 
2,470

 
2,423

Fed Funds Effective Rate (average bps)
 
116

 
116

 
 
116

 
104


12



LPL Financial Holdings Inc.
Financial Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)

 
Q3 2017
 
Q2 2017
 
% Change
 
Q3 2016
 
% Change
Commission Revenue by Product
 
 
 
 
 
 
 
 
 
Variable annuities
$
163,778

 
$
167,454

 
(2%)
 
$
169,413

 
(3%)
Mutual funds
131,339

 
134,510

 
(2%)
 
137,238

 
(4%)
Alternative investments
6,676

 
6,719

 
(1%)
 
8,514

 
(22%)
Fixed annuities
32,764

 
39,560

 
(17%)
 
44,933

 
(27%)
Equities
17,748

 
18,799

 
(6%)
 
20,263

 
(12%)
Fixed income
23,912

 
26,256

 
(9%)
 
21,756

 
10%
Insurance
17,338

 
16,294

 
6%
 
18,083

 
(4%)
Group annuities
9,319

 
11,000

 
(15%)
 
11,266

 
(17%)
Other
137

 
114

 
20%
 
220

 
(38%)
Total commission revenue
$
403,011

 
$
420,706

 
(4%)
 
$
431,686

 
(7%)
 
 
 
 
 

 
 
 

Commission Revenue by Sales-based and Trailing Commission
 

 
 
 

Sales-based commissions
 
 
 
 
 
 
 
 
 
Variable annuities
$
46,148

 
$
53,032

 
(13%)
 
$
57,337

 
(20%)
Mutual funds
30,638

 
34,909

 
(12%)
 
34,985

 
(12%)
Alternative investments
2,550

 
3,645

 
(30%)
 
7,198

 
(65%)
Fixed annuities
27,906

 
34,931

 
(20%)
 
41,995

 
(34%)
Equities
17,748

 
18,799

 
(6%)
 
20,263

 
(12%)
Fixed income
17,967

 
20,501

 
(12%)
 
16,588

 
8%
Insurance
15,906

 
14,861

 
7%
 
16,520

 
(4%)
Group annuities
1,098

 
1,051

 
4%
 
1,258

 
(13%)
Other
137

 
114

 
20%
 
220

 
(38%)
Total sales-based commissions
$
160,098

 
$
181,843

 
(12%)
 
$
196,364

 
(18%)
Trailing commissions
 
 
 
 

 
 
 

Variable annuities
$
117,630

 
$
114,422

 
3%
 
$
112,076

 
5%
Mutual funds
100,701

 
99,601

 
1%
 
102,253

 
(2%)
Alternative investments
4,126

 
3,074

 
34%
 
1,316

 
214%
Fixed annuities
4,858

 
4,629

 
5%
 
2,938

 
65%
Fixed income
5,945

 
5,755

 
3%
 
5,168

 
15%
Insurance
1,432

 
1,433

 
—%
 
1,563

 
(8%)
Group annuities
8,221

 
9,949

 
(17%)
 
10,008

 
(18%)
Total trailing commissions
$
242,913

 
$
238,863

 
2%
 
$
235,322

 
3%
Total commission revenue
$
403,011

 
$
420,706

 
(4%)
 
$
431,686

 
(7%)



13



LPL Financial Holdings Inc.
Financial Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
Q3 2017
 
Q2 2017
 
Change
 
Q3 2016
 
Change
Payout Rate
 
 
 
 
 
 
 
 
 
Base Payout Rate
83.01
%
 
82.94
%
 
7bps
 
83.10
%
 
(9bps)
Production Based Bonuses
3.04
%
 
2.56
%
 
48bps
 
3.04
%
 
GDC Sensitive Payout
86.05
%
 
85.50
%
 
55bps
 
86.14
%
 
(9bps)
Non-GDC Sensitive Payout
1.29
%
 
0.92
%
 
37bps
 
1.10
%
 
19bps
Total Payout Ratio
87.34
%
 
86.42
%
 
92bps
 
87.24
%
 
10bps
Production Based Bonuses Ratio (Trailing Twelve Months)
2.7
%
 
2.7
%
 
 
2.7
%
 

14



LPL Financial Holdings Inc.
Capital Management Measures (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
Q3 2017
 
Q2 2017
Credit Agreement EBITDA(1)
 
 
 
Net income
$
58,142

 
$
68,434

Non-operating interest expense
26,519

 
26,261

Provision for income taxes
38,498

 
44,335

Loss on extinguishment of debt
1,268

 

Depreciation and amortization
21,996

 
21,190

Amortization of intangible assets
9,352

 
9,453

EBITDA(1)
$
155,775

 
$
169,673

Credit Agreement Adjustments:
 
 
 
Employee share-based compensation expense
4,940

 
5,033

Advisor share-based compensation expense
3,120

 
1,821

Other(14)
9,244

 
7,631

Credit Agreement EBITDA
$
173,079

 
$
184,158

 
 
 
 
Cash Available for Corporate Use(15)
 
 
 
Cash at Parent
$
384,404

 
$
408,381

Excess Cash at Broker-Dealer subsidiary per Credit Agreement
120,454

 
109,714

Other Available Cash
9,261

 
8,555

Total Cash Available for Corporate Use
$
514,119

 
$
526,650

 
 
 
 
Credit Agreement Net Leverage
 
 
 
Total Debt (does not include unamortized premium)
$
2,400,000

 
$
2,195,750

Cash Available (up to $300 million)
300,000

 
300,000

Credit Agreement Net Debt
$
2,100,000

 
$
1,895,750

Credit Agreement EBITDA (trailing twelve months)(16)
$
655,172

 
$
614,627

Credit Agreement Net Leverage Ratio
3.21
x
 
3.08
x

15



LPL Financial Holdings Inc.
Debt Schedule (1)
(Dollars in thousands, except where noted)
(Unaudited)
Total Debt
 
Outstanding (end of period)
 
Current Applicable
Margin
 
Yield At Issuance
 
Interest Rate (end of period)
 
Maturity
Revolving Credit Facility Loans(a)
 
$

 
LIBOR+150bps(b)
 
 
 
%
 
9/21/2022
Senior Secured Term Loan B
 
1,500,000

 
LIBOR+225 bps(b)
 
 
 
3.65
%
 
9/21/2024
Senior Unsecured Notes(c)
 
500,000

 
5.75% Fixed
 
5.750
%
 
5.75
%
 
9/15/2025
Senior Unsecured Notes(c)
 
400,000

(d)
5.75% Fixed
 
5.115
%
 
5.75
%
 
9/15/2025
Total / Weighted Average
 
$
2,400,000

 
 
 
 
 
4.44
%
 
 

(a)
The Revolving Credit Facility has a borrowing capacity of $500 million .
(b)
The LIBOR rate option is one-, two-, three- or six-month LIBOR rate and subject to an interest rate floor of 0 basis points .
(c)
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.
(d)
Does not include unamortized premium of approximately $12 million as of September 30, 2017 .


16



LPL Financial Holdings Inc.
Key Business and Financial Metrics (1)
(Dollars in thousands, except where noted)
(Unaudited)
 
Q3 2017
 
Q2 2017
 
Change
 
Q3 2016
 
Change
Advisors
 
 
 
 
 
 
 
 
 
Advisors
14,253

 
14,256

 
%
 
14,185

 
%
Net New Advisors
(3
)
 
(98
)
 
n/m

 
(8
)
 
n/m

Custom Clearing Service Subscribers(17)
3,660

 
3,703

 
(1
%)
 
4,207

 
(13
%)
Annualized commission and advisory fees per Advisor(18)
$
213

 
$
215

 
(1
%)
 
$
212

 
%
Average Total Assets per Advisor ($ in millions)(19)
$
39.3

 
$
38.0

 
3
%
 
$
35.4

 
11
%
Transition assistance loan amortization($ in millions)(20)
$
13.9

 
$
14.0

 
(1
%)
 
$
12.0

 
16
%
Total client accounts (in millions)
4.7

 
4.6

 
2
%
 
4.7

 
%
 
 
 
 
 
 
 
 
 
 
Employees - period end
3,564

 
3,419

 
4
%
 
3,254

 
10
%
 
 
 
 
 
 
 
 
 
 
Productivity Metrics
 
 
 
 
 
 
 
 
 
Annualized Advisory Revenue as a percentage of Corporate Advisory Assets
1.04
%
 
1.04
%
 

 
1.06
%
 
(2
bps)
Gross Profit ROA(21)
27.6
bps
 
28.7
bps
 
(1.1
bps)
 
27.6
bps
 

OPEX ROA(22)
18.7
bps
 
18.4
bps
 
0.3
bps
 
20.3
bps
 
(1.6
bps)
EBIT ROA(23)
8.9
bps
 
10.3
bps
 
(1.4
bps)
 
7.3
bps
 
1.6
bps
Production Retention Rate (YTD Annualized)(24)
94.6
%
 
93.4
%
 
120
bps
 
95.2
%
 
(60
bps)
Recurring Revenue Rate
79.6
%
 
77.3
%
 
230
bps
 
74.3
%
 
530
bps
EBITDA as a percentage of Gross Profit
40.3
%
 
43.7
%
 
(340
bps)
 
34.6
%
 
570
bps
 
 
 
 
 
 
 
 
 
 
Capital Allocation per Share(25)
(in millions, except per share data)
 
 
 
 


 
 
 


Share Repurchases
$
25.0

 
$
36.2

 
(31
%)
 
$

 
n/m

Dividends
22.5