LPL Financial Holdings Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
LPL provides brokerage, investment advisory, custody, clearing, technology, and related services to independent financial advisors, institutions, and registered investment advisers in the United States. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, compared primarily with the same periods in 2020.
- Supported 19,114 advisors at quarter-end, versus 16,973 a year earlier.
- Total advisory and brokerage assets were $1.112 trillion, up 46% year over year.
- In April 2021, LPL acquired the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenues | $1,898.3 million | $1,366.7 million | 38.9% |
| Net income | $119.1 million | $101.7 million | 17.2% |
| Diluted EPS | $1.46 | $1.27 | 14.9% |
| Gross profit | $601.6 million | $488.2 million | 23.2% |
| EBITDA | $243.4 million | $207.1 million | 17.5% |
| Core G&A | $251.7 million | $222.4 million | 13.2% |
Q2 gross profit margin was approximately 31.7% of revenue, and net income margin was approximately 6.3%. EBITDA was 40.5% of gross profit, down from 42.4% in the prior-year quarter. The payout rate increased to 86.35% from 86.24%.
- Advisory revenue increased 61.7% to $846.3 million, reflecting higher assets from acquisitions, recruiting, advisor productivity, and market appreciation.
- Commission revenue increased 40.0% to $598.2 million, led by annuities, mutual funds, and fixed-income products.
- Asset-based revenue increased 13.2% to $279.6 million. Higher recordkeeping and sponsorship revenue more than offset lower client cash revenue caused by low short-term interest rates.
- Total net new assets were $106.0 billion, including $68.9 billion associated with Waddell & Reed. Organic net new assets were $37.1 billion.
- Advisory assets were $577.6 billion and brokerage assets were $534.7 billion at June 30, 2021.
Six-month results, cash flow, debt, and liquidity
| Metric | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|
| Total revenues | $3,605.9 million | $2,830.1 million |
| Net income | $248.7 million | $257.3 million |
| Diluted EPS | $3.05 | $3.19 |
| Gross profit | $1,181.0 million | $1,063.8 million |
| EBITDA | $511.0 million | $487.3 million |
| Net cash from operating activities | $(58.7) million | $338.1 million |
- Operating cash flow was negative primarily because of increased advisor loans, client receivables, and other working-capital requirements.
- Investing cash flow was $(325.5) million, including $243.0 million for acquisitions and $85.0 million of capital expenditures.
- Financing cash flow was $312.0 million, reflecting new senior-note issuance, debt refinancing, dividends, and other financing activity.
- Cash, cash equivalents, and restricted cash totaled $1.727 billion at June 30, 2021.
- Corporate cash was $278.4 million, compared with $279.9 million at December 31, 2020. Management targets approximately $200.0 million of corporate cash.
- Long-term borrowings, net, were $2.727 billion, up from $2.345 billion at year-end 2020. Debt included a $1.054 billion Term Loan B, $400.0 million of 2027 notes, $900.0 million of 2029 notes, and $400.0 million of 2031 notes.
- The $1.0 billion parent revolving facility and approximately $575.0 million of broker-dealer external lines were undrawn at quarter-end.
- The leverage ratio was 2.26 versus a maximum covenant of 5.00; interest coverage was 12.01 versus a minimum covenant of 3.00.
- LPL Financial had $140.8 million of net capital against a $13.3 million minimum requirement.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, led by higher advisory and commission revenues and the Waddell & Reed acquisition.
- Q2 net income and diluted EPS increased, but six-month net income and EPS declined because the prior-year period benefited from lower expenses and the 2021 period included a $24.4 million loss on extinguishment of debt.
- Operating expenses increased 42.3% in Q2, exceeding revenue growth, with higher advisory and commission payouts, compensation, promotional spending, technology-related depreciation, and professional services.
- Debt was refinanced: LPL issued $900.0 million of 4.00% 2029 notes and $400.0 million of 4.375% 2031 notes, redeemed the $900.0 million 2025 notes, and increased its revolving facility to $1.0 billion.
- Goodwill increased to $1.647 billion and intangible assets increased to $486.4 million, primarily from the Waddell & Reed acquisition.
- The company adopted a new 2021 Omnibus Equity Incentive Plan and authorized up to 17.8 million shares for grant.
Guidance, outlook, commentary, and risks
- Management expected to restart share repurchases in Q3 2021, initially to offset dilution, at approximately $40.0 million per quarter, subject to discretion, liquidity, market conditions, and debt-covenant restrictions.
- The Board declared a quarterly dividend of $0.25 per share payable August 27, 2021.
- Management expected to dissolve the Waddell & Reed broker-dealer during Q4 2021.
- The business remained sensitive to equity-market levels, advisory and brokerage asset balances, advisor recruiting and retention, net new assets, short-term interest rates, and client cash-program fees.
- Low interest rates reduced client cash revenue despite higher average client cash balances.
- Key risks include regulatory examinations and enforcement, customer restitution and remediation, Regulation BI and retirement-account fiduciary requirements, cybersecurity and operational disruptions, third-party service-provider dependence, margin lending and collateral risk, acquisition integration, COVID-19 effects, and potential legal or regulatory losses exceeding recorded reserves or insurance.
- Self-insurance liabilities were $64.0 million at June 30, 2021, compared with $51.5 million at December 31, 2020. The filing does not provide a clear aggregate maximum exposure for certain guarantees.
Important facts for investors to verify
- Whether organic asset gathering remains strong after excluding the $68.9 billion of Waddell & Reed-related assets.
- The pace and cost of integrating Waddell & Reed and the timing of the planned broker-dealer dissolution.
- Whether operating expenses, promotional spending, and advisor payout rates moderate as acquisition-related activity normalizes.
- The effect of short-term interest rates and client cash balances on asset-based revenue.
- Future operating cash flow, particularly the funding required for advisor loans, margin lending, acquisitions, and capital expenditures.
- Debt refinancing benefits, floating-rate exposure on approximately $1.1 billion of debt, and continued compliance with financial covenants.
- Actual timing and amount of share repurchases, which remain discretionary and subject to liquidity and contractual restrictions.
- Developments in legal and regulatory matters, including whether reserves and captive insurance are sufficient for potential remediation, restitution, fines, or settlements.