LPL Investment Holdings Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2011, for LPL Investment Holdings Inc. and its consolidated subsidiaries. The company provides technology, brokerage, custody, clearing, and investment advisory services to independent financial advisors and financial institutions. It supported approximately 12,660 advisors, 2,700 employees, $340.8 billion of advisory and brokerage assets, and $103.2 billion of advisory assets under management at quarter-end. The interim financial statements are unaudited and should be read with the 2010 Form 10-K.
Financial performance and key metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net revenues | $894.0 million | $790.2 million | $1.768 billion | $1.534 billion |
| Net income | $45.5 million | $8.0 million | $94.5 million | $33.6 million |
| Diluted EPS | $0.40 | $0.08 | $0.82 | $0.33 |
| Adjusted EBITDA | $123.0 million | $109.9 million | $247.3 million | $215.3 million |
| Adjusted diluted EPS | $0.52 | $0.47 | $1.04 | $0.88 |
- Quarterly revenue increased 13.1%; six-month revenue increased 15.3%.
- Quarterly net income increased 468.8%; six-month net income increased 181.7%. The comparison is affected by the $38.0 million 2010 loss on extinguishment of debt and an unusually low 2010 quarterly tax rate.
- Recurring revenue was 62.4% of quarterly net revenue and 61.3% for the six months, compared with 59.3% and 59.7%, respectively, in the prior periods.
- Gross margin was $259.9 million, or 29.1% of net revenue, in the quarter and $529.5 million, or 29.9%, for the six months. Gross-margin percentages declined modestly from 29.6% and 30.2% in the comparable periods.
- Quarterly revenue growth was led by advisory fees, up 22.8%, asset-based fees, up 16.9%, and commissions, up 9.5%. Six-month increases were 20.6%, 21.1%, and 12.7%, respectively.
- Net cash provided by operating activities was $349.7 million for the six months, compared with $53.0 million in 2010. The increase included a $55.8 million excess tax benefit from option exercises and a $181.8 million favorable change in tax receivables.
- Cash and cash equivalents were $681.5 million at June 30, 2011, compared with $419.2 million at December 31, 2010. Total assets were $3.663 billion and stockholders’ equity was $1.263 billion.
- Capital expenditures were $12.5 million and acquisition payments were $37.2 million during the first six months. Financing cash outflows included $47.0 million of debt repayment and $67.0 million of treasury-stock purchases.
- Senior secured credit facilities totaled $1.340 billion at June 30, 2011, down from $1.387 billion at year-end 2010. The company had no outstanding revolving-credit or uncommitted-line borrowings and reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Advisory and brokerage assets increased 23.1% to $340.8 billion, advisory assets under management increased 30.8% to $103.2 billion, and net new advisory assets increased to $6.8 billion from $3.9 billion.
- Operating expenses increased 11.8% in the quarter and 13.3% for the six months, below revenue growth. Production expenses increased in line with advisor-generated commission and advisory revenue, while the average production payout rose to 86.3% from 86.1% in the quarter and 85.9% from 85.5% for the six months.
- Interest expense declined 34.4% in the quarter and 30.2% for the six months, primarily because of the 2010 refinancing and the $40.0 million term-loan repayment in January 2011.
- Depreciation and amortization declined 16.7% in the quarter and 23.3% for the six months, partly because a $89.1 million software basis step-up became fully amortized in April 2010.
- The company acquired National Retirement Partners in February 2011 for provisional total consideration of $24.2 million and Concord Capital Partners in June 2011 for provisional total consideration of approximately $33.8 million. Purchase-price allocations remain provisional.
- The company initiated an $80.0 million share-repurchase program and repurchased 2.3 million shares for $79.6 million through June 30, 2011, leaving approximately $0.4 million authorized under the program.
Guidance, outlook, risks, contingencies, and unusual items
- Management described its outlook as cautiously optimistic, citing market recovery, advisor recruitment, new advisory assets, and expense management, but warned that results remain sensitive to financial-market conditions and low interest rates.
- The UVEST consolidation is expected to be completed by December 2011. Estimated restructuring expenditures are approximately $52.7 million, including a projected $5.6 million non-cash impairment charge. Management expects annual pre-tax profitability improvement of approximately $10 million to $12 million after integration.
- The company recorded $4.8 million of restructuring charges in the quarter and $5.4 million for the six months, including a $1.7 million intangible-asset impairment related to lost institutional relationships.
- Approximately $1.3 billion of debt was subject to floating interest rates, while only $65.0 million was hedged by an interest-rate swap. A 100-basis-point increase in applicable variable rates would increase annual interest expense by approximately $2.4 million based on the filing’s sensitivity analysis.
- Contractual cash obligations totaled approximately $1.690 billion, including $1.340 billion of senior secured term-loan principal, $80.4 million of leases and other obligations, and projected variable interest payments.
- The company reported litigation and indemnification matters, including an $8.9 million receivable fully reserved pending appeal of a favorable judgment. Management believes the matters will not have a material adverse effect, but litigation outcomes are inherently uncertain.
- Clearing and exchange guarantees, client margin lending, settlement obligations, regulatory capital requirements, technology dependence, advisor retention, competition, regulation, and market volatility remain material risks. The company reported excess net capital of $86.6 million for LPL Financial LLC and $22.5 million for UVEST.
- Management stated that operating cash flow and available borrowing capacity should be adequate for working capital, obligations, capital expenditures, and anticipated growth for the foreseeable future. No formal full-year revenue or earnings guidance was provided in the filing.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted EBITDA and adjusted earnings, particularly the treatment of share-based compensation, amortization, restructuring, acquisition, and equity-issuance costs.
- Assess the sustainability of revenue growth and margins given market-sensitive advisory, asset-based, and trail-commission revenue and the modest decline in gross-margin percentage.
- Verify the final purchase-price allocations and contingent consideration for NRP and Concord, including potential payments of up to $15.0 million for Concord.
- Monitor execution and total costs of the UVEST consolidation, including the projected $52.7 million expenditure and expected $10 million to $12 million annual benefit.
- Review debt maturities, floating-rate exposure, covenant headroom, and the company’s ability to continue reducing debt while funding acquisitions and repurchases.
- Separate reported operating cash flow from temporary tax benefits and working-capital movements, including the $55.8 million option-related tax benefit and $181.8 million tax-receivable change.
- Confirm the status and potential exposure of litigation, third-party indemnification disputes, clearing guarantees, and other off-balance-sheet commitments.