LPL Financial Holdings Inc

Previous wording

The following discussion presents an analysis of our results of operations for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following discussion presents an analysis of our results of operations for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients on a quarterly basis in advance, and are recognized as revenue ratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of these client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on our corporate RIA advisory platform is proposed by the advisor and agreed to by the client and was approximately 1% of the underlying assets for the three months ended March 31, 2024.

Current wording

Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients on a quarterly basis in advance, and are recognized as revenue ratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of these client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on our corporate RIA advisory platform is proposed by the advisor and agreed to by the client and was approximately 1% of the underlying assets for the six months ended June 30, 2024.

Previous wording

Advisory revenue increased during the three months ended March 31, 2024 as compared to the same period in 2023, due primarily to continued organic growth, which increased advisory asset balances during the period.

Current wording

Advisory revenue increased during the three and six months ended June 30, 2024 as compared to the same periods in 2023 due primarily to an increase in advisory asset balances and related market impacts.

Previous wording

The increase in trailing commission revenue for the three months ended March 31, 2024 compared to 2023 was primarily due to an increase in sales of annuities during the period. The increase in sales-based commission revenue for the three months ended March 31, 2024 compared to 2023 was primarily driven by an increase in sales of annuities and fixed income securities as a result of the higher interest rate environment.

Current wording

The increase in sales-based commission revenue for the three and six months ended June 30, 2024 compared to 2023 was primarily driven by an increase in sales of annuities and fixed income securities as a result of the higher interest rate environment. The increase in trailing commission revenue for the three and six months ended June 30, 2024 compared to 2023 was primarily due to an increase in sales of annuities and mutual funds as compared to the prior period.

Previous wording

Asset-based revenue for the three months ended March 31, 2024 decreased by $21.0 million compared to 2023, primarily due to a decrease in client cash revenue. Client cash revenue for the three months ended March 31, 2024 decreased compared to 2023 due to lower average client cash balances during the three months ended March 31, 2024 as compared to 2023. For the three months ended March 31, 2024, our average client cash balances decreased to $44.4 billion comp ared to $55.7 billion in 2023.

Current wording

Asset-based revenue increased by $11.3 million for the three months ended June 30, 2024 and decreased by $9.7 million for the six months ended June 30, 2024 as compared to 2023, primarily due to increases in other asset-based revenues that offset the decreases in client cash revenues for both the three and six month periods. Client cash revenue for the three and six months ended June 30, 2024 decreased compared to 2023 due to lower average client cash balances during the three and six months ended June 30, 2024 as compared to 2023. For the three months ended June 30, 2024, our average client cash balances decreased to $43.0 billion comp ared to $49.0 billion in 2023. For the six months ended June 30, 2024, our average client cash balances decreased to $43.7 billion compared to $52.3 billion in 2023.

Previous wording

Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, business services and planning and advice services, Individual Retirement Account (“IRA”) custodian and other client account fees. We charge separate fees to RIAs on our Independent RIA advisory platform for technology, clearing, administrative, oversight and custody services, which may vary. We also host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee. Service and fee revenue for the three months ended March 31, 2024 increased compared to 2023, primarily due to increases in IRA custodian fees, business services and planning and advice services fees, and fees relating to confirmations and error and omission insurance.

Current wording

Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, business services and planning and advice services, Individual Retirement Account (“IRA”) custodian and other client account fees. We charge separate fees to RIAs on our Independent RIA advisory platform for technology, clearing, administrative, oversight and custody services, which may vary. We also host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee. Service and fee revenue for the three and six months ended June 30, 2024 increased compared to 2023, primarily due to increases in IRA custodian fees, business services and planning and advice services fees, and fees relating to error and omission insurance.

Previous wording

Transaction revenue includes transaction charges generated in both advisory and brokerage accounts from mutual funds, exchange-traded funds and fixed income products. Transaction revenue for the three months ended March 31, 2024 increased compared to 2023, primarily due to increases in the number of transactions and transaction charges for fixed income products, partially offset by a decrease in charges for managed assets.

Current wording

Transaction revenue includes transaction charges generated in both advisory and brokerage accounts from mutual funds, exchange-traded funds and fixed income products. Transaction revenue for the three and six months ended June 30, 2024 increased compared to 2023, primarily due to increases in the number of transactions and transaction charges for managed assets and fixed income products.

Previous wording

Other revenue primarily includes unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is not generated from contracts with customers. Other revenue for the three months ended March 31, 2024 increased compared to 2023, primarily due to unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, and a related increase in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Current wording

Other revenue primarily includes unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is not generated from contracts with customers. Other revenue decreased for the three months ended June 30, 2024 and remained flat for the six months ended June 30, 2024 as compared to 2023. The decrease during the three months ended June 30, 2024 as compared to the same period in 2023 was due primarily to lower unrealized gains in our deferred compensation plan.

Previous wording

Our payout rate for the three months ended March 31, 2024 increased slightly compared to 2023, primarily due to the effect of acquisitions during the prior year.

Current wording

Our payout rate for the three and six months ended June 30, 2024 increased slightly compared to 2023, primarily due to the effect of changes in product mix, large bank integrations and pricing changes as compared to the prior periods.

Previous wording

Compensation and benefits expense for the three months ended March 31, 2024 increased by $40.8 million compared to 2023, primarily due to an increase in average headcount.

Current wording

Compensation and benefits expense for the three and six months ended June 30, 2024 increased by $42.3 million and $83.2 million, respectively, compared to 2023, primarily due to an increase in average headcount.

Previous wording

Promotional expense includes business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events, and other costs that support advisor business growth. Promotional expense for the three months ended March 31, 2024 increased by $28.4 million compared to 2023, primarily due to increases in recruited assets and advisors that led to higher costs to support transition assistance and retention.

Current wording

Promotional expense includes business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events, and other costs that support advisor business growth. Promotional expense for the three and six months ended June 30, 2024 increased by $33.6 million and $62.0 million, respectively, compared to 2023, primarily due to increases in recruited assets and advisors that led to higher costs to support transition assistance and retention and increases in large institutional onboarding costs.

Previous wording

Depreciation and amortization expense relates to the use of property and equipment, which includes internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization expense for the three months ended March 31, 2024 increased by $11.1 million compared to 2023, primarily due to our continued investment in technology to support integrations, enhance our advisor platform and experience, and support onboarding of institutions.

Current wording

Depreciation and amortization expense relates to the use of property and equipment, which includes internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization expense for the three and six months ended June 30, 2024 increased by $12.6 million and $23.7 million, respectively, compared to 2023, primarily due to our continued investment in technology to support integrations, enhance our advisor platform and experience, and support onboarding of institutions.

Previous wording

Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”) and revolving credit facilities; amortization of debt issuance costs; and fees associated with the Company’s revolving lines of credit. Interest expense on borrowings for the three months ended March 31, 2024 increased by $20.9 million compared to 2023, primarily due to increased interest rates on our Term Loan B and revolving credit facilities and higher outstanding debt balances. See Note 9 -Corporate Debt and Other Borrowings, Net, within the notes to the condensed consolidated financial statements for further detail.

Current wording

Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”) and revolving credit facilities; amortization of debt issuance costs; and fees associated with the Company’s revolving lines of credit. Interest expense on borrowings for the three and six months ended June 30, 2024 increased by $19.5 million and $40.4 million, respectively, compared to 2023, primarily due to increases as a result of our issuance of $750.0 million senior notes in November 2023 and $1.0 billion senior notes in May 2024. See Note 9 -Corporate Debt and Other Borrowings, Net, within the notes to the condensed consolidated financial statements for further detail.

Previous wording

Our effective income tax rate was 22.8% and 23.8% for the three months ended March 31, 2024 and 2023, respectively. The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a result of state taxes, reserves for uncertain tax positions and non-deductible expenses. Our effective income tax rate is reduced by tax benefits received from income tax credits as well as share-based compensation vesting and exercises. The decrease in our effective tax rate for the three months ended March 31, 2024 was primarily driven by lower pre-tax income during the first quarter of 2024 as compared to the prior year.

Current wording

Our effective income tax rate was 26.1% and 26.6% for the three months ended June 30, 2024 and 2023, respectively, and 24.4% and 25.1% for the six months ended June 30, 2024 and 2023, respectively. The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a result of state taxes, reserves for uncertain tax positions and non-deductible expenses. Our effective income tax rate is reduced by tax benefits received from income tax credits as well as share-based compensation vesting and exercises. The decrease in our effective tax rate for the three and six months ended June 30, 2024 was primarily driven by higher tax benefits related to share-based compensation deductions through the second quarter of 2024 as compared to the same periods in the prior year.

Previous wording

LPL Holdings, Inc. (the “Parent”), the direct holding company of our operating subsidiaries, considers its primary sources of liquidity to be dividends from and excess capital generated by LPL Financial, as well as capacity for additional borrowing under its $2.0 billion secured revolving credit facility, which it has the ability to borrow against for working capital and general corporate purposes.

Current wording

LPL Holdings, Inc. (the “Parent”), the direct holding company of our operating subsidiaries, considers its primary sources of liquidity to be dividends from and excess capital generated by LPL Financial, as well as capacity for additional borrowing under its$2.25 billion secured revolving credit facility, which it has the ability to borrow against for working capital and general corporate purposes.

Previous wording

Dividends from and excess capital generated by LPL Financial are primarily generated through our cash flow from operations. Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements and internal capital thresholds. During the three months ended March 31, 2024, LPL Financial paid dividends of $120.0 million to the Parent. No such dividends were paid during the three months ended March 31, 2023.

Current wording

Dividends from and excess capital generated by LPL Financial are primarily generated through our cash flow from operations. Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements, Credit Agreement requirements and internal capital thresholds. During the six months ended June 30, 2024 and 2023, LPL Financial paid dividends of $260.0 million and $395.0 million to the Parent, respectively.

Previous wording

Corporate Cash is monitored as part of our liquidity risk management. We target maintaining approximately $200 million in Corporate Cash, which covers approximately 12 monthsof principal and interest due on our corporate debt.

Current wording

Corporate Cash is monitored as part of our liquidity risk management strategy, and we target maintaining approximately $200 million of Corporate Cash to meet our near-term corporate debt obligations. Corporate Cash increased by $500.4 million during the six months ended June 30, 2024 primarily as a result of proceeds received from our $1.0 billion debt issuance in May 2024 offset by the repayment of balances outstanding on our senior secured revolving credit facility. See Note 9 - Corporate Debt and Other Borrowings, Net, within the notes to the condensed consolidated financial statements for additional information.

Previous wording

We engage in a share repurchase program that was approved by our Board of Directors (the “Board”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate and returning excess capital to stockholders. We repurchased 296,145 shares for a total of $70.0 million during the three months ended March 31, 2024. As of March 31, 2024, we had $830.0 million remaining under our existing repurchase program. As a result of our planned acquisition of Atria, we paused share repurchases during the quarter. Subsequent to closing of the transaction, we will evaluate resuming share repurchases, consistent with our existing capital management strategy. The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, applicable laws and consideration of our general liquidity needs. See Note 11 -Stockholders’ Equity, within the notes to the condensed consolidated financial statements for additional information regarding our share repurchases.

Current wording

We engage in a share repurchase program that was approved by our Board of Directors (the “Board”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate and returning excess capital to stockholders. We repurchased 296,145 shares for a total of $70.0 million during the six months ended June 30, 2024. As of June 30, 2024, we had $830.0 million remaining under our existing repurchase program. As a result of our planned acquisition of Atria, we paused share repurchases beginning in the first quarter of 2024. Subsequent to the closing of the transaction, we will evaluate resuming share repurchases, consistent with our existing capital management strategy. The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, applicable laws and consideration of our general liquidity needs. See Note 11 -Stockholders’ Equity, within the notes to the condensed consolidated financial statements for additional information regarding our share repurchases.

Previous wording

The payment, timing and amount of any dividends are subject to approval by LPLFH’s Board of Directors (the “Board”), as well as certain limits under our Credit Agreement. See Note 11 -Stockholders’ Equity, within the notes to the condensed consolidated financial statements for additional information regarding our dividends.

Current wording

The payment, timing and amount of any dividends are subject to approval by LPLFH’s Board, as well as certain limits under our Credit Agreement. See Note 11 -Stockholders’ Equity, within the notes to the condensed consolidated financial statements for additional information regarding our dividends.

Previous wording

As of March 31, 2024, we were in compliancewith our Credit Agreement financial covenants, which include a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:

Current wording

As of June 30, 2024, we were in compliance with our Credit Agreement financial covenants, which include a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:

Previous wording

During the three months ended March 31, 2024, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2023 Annual Report on Form 10-K. See Note 9 -Corporate Debt and Other Borrowings, Netand Note 10 -Commitments and Contingencies, within the notes to the condensed consolidated financial statements, as well as the Contractual Obligations section within Part II,“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K, for further detail.

Current wording

During the six months ended June 30, 2024, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2023 Annual Report on Form 10-K. See Note 4 -Acquisitions, Note 9 -Corporate Debt and Other Borrowings, Netand Note 10 -Commitments and Contingencies, within the notes to the condensed consolidated financial statements, as well as the Contractual Obligations section within Part II,“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K, for further detail.