LPL Financial Holdings Inc.
LPL Financial Holdings Inc. (Form: 10-Q, Received: 04/30/2015 17:55:59)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-3717839
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

75 State Street, Boston, MA 02109
(Address of Principal Executive Offices) (Zip Code)

(617) 423-3644
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes      o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes      x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of April 27, 2015 was 96,103,531 .




TABLE OF CONTENTS
Item Number
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i



WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov .
On our internet site, http://www.lpl.com , we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email ( investor.relations@lpl.com ), telephone (617) 897-4574, or mail (LPL Financial Investor Relations at 75 State Street, 24th Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
When we use the terms “LPLFH,” “we,” “us,” “our” and the “Company,” we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Item 2 - “Management's Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding the Company's future financial and operating results, growth, business strategies, plans, liquidity, future share repurchases, and future dividends, including statements regarding future resolution of regulatory matters and related costs, income projections based on changes in interest rates, and projected savings and anticipated improvements to the Company's operating model, services, and technology as a result of its Service Value Commitment initiative or restructuring initiatives, 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 April 30, 2015 . The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “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 brokerage and advisory assets; fluctuations in levels of net new advisory assets and the related impact on fee revenue; effects of competition in the financial services industry; changes in the number of the Company's financial advisors and institutions, and their ability to market effectively financial products and services; 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; changes in the growth of the Company’s fee-based business; the effect of current, pending, and future legislation, regulation, and regulatory actions, including 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; the Company's success in integrating the operations of acquired businesses; execution of the Company's plans related to its Service Value Commitment initiative or restructuring initiatives, including the Company's ability to successfully transform and transition business processes to third-party service providers; the Company's success in negotiating and developing commercial arrangements with third-party service providers that will enable the Company to realize the service improvements and efficiencies expected to result from its Service Value Commitment initiative or restructuring initiatives; 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 2014 Annual Report on Form 10-K, as may be amended or updated in our Quarterly Reports on Form 10-Q. 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 quarterly report, even if its e

ii


stimates 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 quarterly report.

ii


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
 
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
  
 
 
Three Months Ended March 31,
 
 
2015
 
2014
REVENUES:
 
 
 
 
Commission
 
$
523,399

 
$
534,574

Advisory
 
342,112

 
327,253

Asset-based
 
120,632

 
114,674

Transaction and fee
 
101,695

 
89,985

Interest income, net of interest expense
 
4,578

 
4,761

Other
 
16,886

 
16,184

Total net revenues
 
1,109,302

 
1,087,431

EXPENSES:
 
 
 
 
Commission and advisory
 
741,247

 
744,543

Compensation and benefits
 
112,280

 
106,348

Promotional
 
35,692

 
27,183

Depreciation and amortization
 
26,066

 
22,281

Occupancy and equipment
 
20,882

 
22,081

Professional services
 
14,044

 
14,313

Brokerage, clearing and exchange
 
12,741

 
12,175

Communications and data processing
 
11,614

 
10,659

Restructuring charges
 
3,924

 
7,320

Other
 
32,122

 
20,141

Total operating expenses
 
1,010,612

 
987,044

Non-operating interest expense
 
14,015

 
12,840

Total expenses
 
1,024,627

 
999,884

INCOME BEFORE PROVISION FOR INCOME TAXES
 
84,675

 
87,547

PROVISION FOR INCOME TAXES
 
33,997

 
34,412

NET INCOME
 
$
50,678

 
$
53,135

EARNINGS PER SHARE (NOTE 12)
 
 
 
 
Earnings per share, basic
 
$
0.52

 
$
0.52

Earnings per share, diluted
 
$
0.52

 
$
0.51

Weighted-average shares outstanding, basic
 
96,551

 
101,279

Weighted-average shares outstanding, diluted
 
98,227

 
103,339

See notes to unaudited condensed consolidated financial statements.

1



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)


 
 
Three Months Ended March 31,
 
 
2015
 
2014
NET INCOME
 
$
50,678

 
$
53,135

Other comprehensive income, net of tax:
 
 
 
 
Unrealized gain on cash flow hedges, net of tax expense of $287 and $675 for the three months ended March 31, 2015 and 2014, respectively
 
452

 
1,062

Reclassification adjustment for realized gain on cash flow hedges included in net income, net of tax expense of $85 and $0 for the three months ended March 31, 2015 and 2014, respectively
 
(135
)
 

Total other comprehensive income, net of tax
 
317

 
1,062

TOTAL COMPREHENSIVE INCOME
 
$
50,995

 
$
54,197


See notes to unaudited condensed consolidated financial statements.


2



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except par value)

 
March 31,
2015
 
December 31, 2014
ASSETS
Cash and cash equivalents
$
484,694

 
$
412,332

Cash and securities segregated under federal and other regulations
516,350

 
568,930

Restricted cash
16,960

 
1,109

Receivables from:
 
 
 
Clients, net of allowance of $1,258 at March 31, 2015 and $1,245 at December 31, 2014
324,458

 
365,390

Product sponsors, broker-dealers and clearing organizations
172,713

 
177,470

Others, net of allowance of $9,520 at March 31, 2015 and $8,379 at December 31, 2014
318,199

 
291,449

Securities owned:
 

 
 

Trading — at fair value
16,290

 
13,466

Held-to-maturity
9,350

 
8,594

Securities borrowed
7,893

 
5,035

Income taxes receivable

 
84

Fixed assets, net of accumulated depreciation and amortization of $288,538 at March 31, 2015 and $288,834 at December 31, 2014
209,194

 
214,154

Debt issuance costs, net of accumulated amortization of $12,457 at March 31, 2015 and $11,724 at December 31, 2014
12,508

 
13,241

Goodwill
1,365,838

 
1,365,838

Intangible assets, net of accumulated amortization of $314,137 at March 31, 2015 and $305,154 at December 31, 2014
420,633

 
430,704

Other assets
183,639

 
183,197

Total assets
$
4,058,719

 
$
4,050,993

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable
$
170,212

 
$
180,099

Payables to clients
629,936

 
652,714

Payables to broker-dealers and clearing organizations
44,658

 
45,427

Accrued commission and advisory expenses payable
131,329

 
146,504

Accounts payable and accrued liabilities
291,248

 
289,426

Income taxes payable
25,308

 

Unearned revenue
80,262

 
64,482

Securities sold, but not yet purchased — at fair value
77

 
302

Senior secured credit facilities
1,641,548

 
1,634,258

Deferred income taxes, net
64,583

 
66,181

Total liabilities
3,079,161

 
3,079,393

Commitments and contingencies
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Common stock, $.001 par value; 600,000,000 shares authorized; 118,490,826 shares issued at March 31, 2015 and 118,234,552 shares issued at December 31, 2014
118

 
118

Additional paid-in capital
1,367,426

 
1,355,085

Treasury stock, at cost — 21,792,887 shares at March 31, 2015 and 21,089,882 shares at December 31, 2014
(811,895
)
 
(780,661
)
Accumulated other comprehensive income
1,254

 
937

Retained earnings
422,655

 
396,121

Total stockholders’ equity
979,558

 
971,600

Total liabilities and stockholders’ equity
$
4,058,719

 
$
4,050,993

See notes to unaudited condensed consolidated financial statements.

3



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)


 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
BALANCE — December 31, 2013
117,112

 
$
117

 
$
1,292,374

 
15,216

 
$
(506,205
)
 
$
115

 
$
313,570

 
$
1,099,971

Net income and other comprehensive income, net of tax expense
 
 
 
 
 
 
 
 
 
 
1,062

 
53,135

 
54,197

Issuance of common stock to settle restricted stock units, net
34

 
1

 


 
11

 
(585
)
 
 
 
 
 
(584
)
Treasury stock purchases
 
 
 
 
 
 
1,923

 
(100,000
)
 
 
 
 
 
(100,000
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(24,097
)
 
(24,097
)
Stock option exercises and other
545

 


 
13,747

 
(9
)
 
316

 
 
 
(3
)
 
14,060

Share-based compensation


 
 
 
8,287

 
 
 
 
 
 
 
 
 
8,287

Excess tax benefits from share-based compensation
 
 
 
 
4,415

 
 
 
 
 
 
 
 
 
4,415

BALANCE — March 31, 2014
117,691

 
$
118

 
$
1,318,823

 
17,141

 
$
(606,474
)
 
$
1,177

 
$
342,605

 
$
1,056,249

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE — December 31, 2014
118,235

 
$
118

 
$
1,355,085

 
21,090

 
$
(780,661
)
 
$
937

 
$
396,121

 
$
971,600

Net income and other comprehensive income, net of tax expense
 
 
 
 
 
 
 
 
 
 
317

 
50,678

 
50,995

Issuance of common stock to settle restricted stock units, net
110

 


 


 
38

 
(1,752
)
 
 
 
 
 
(1,752
)
Treasury stock purchases
 
 
 
 
 
 
680

 
(30,014
)
 
 
 
 
 
(30,014
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(24,156
)
 
(24,156
)
Stock option exercises and other
146

 


 
4,176

 
(15
)
 
532

 
 
 
12

 
4,720

Share-based compensation


 
 
 
7,193

 
 
 
 
 
 
 
 
 
7,193

Excess tax benefits from share-based compensation
 
 
 
 
972

 
 
 
 
 
 
 
 
 
972

BALANCE — March 31, 2015
118,491

 
$
118

 
$
1,367,426

 
21,793

 
$
(811,895
)
 
$
1,254

 
$
422,655

 
$
979,558

See notes to unaudited condensed consolidated financial statements.

4



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
50,678

 
$
53,135

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Noncash items:
 
 
 
 
Depreciation and amortization
 
26,066

 
22,281

Amortization of debt issuance costs
 
733

 
1,080

Share-based compensation
 
7,193

 
8,287

Excess tax benefits related to share-based compensation
 
(1,156
)
 
(4,444
)
Provision for bad debts
 
469

 
330

Deferred income tax provision
 
(1,800
)
 

Loan forgiveness
 
8,529

 
6,436

Other
 
4,761

 
175

Changes in operating assets and liabilities:
 
 
 
 
Cash and securities segregated under federal and other regulations
 
52,580

 
51,039

Receivables from clients
 
40,919

 
33,289

Receivables from product sponsors, broker-dealers and clearing organizations
 
4,757

 
27,950

Receivables from others
 
(35,723
)
 
(19,356
)
Securities owned
 
(2,875
)
 
(3,593
)
Securities borrowed
 
(2,858
)
 
(1,162
)
Other assets
 
(3,599
)
 
(27,431
)
Drafts payable
 
(9,887
)
 
(14,323
)
Payables to clients
 
(22,778
)
 
(555
)
Payables to broker-dealers and clearing organizations
 
(769
)
 
(12,533
)
Accrued commission and advisory expenses payable
 
(15,175
)
 
(9,909
)
Accounts payable and accrued liabilities
 
3,475

 
(55,701
)
Income taxes receivable/payable
 
26,548

 
24,889

Unearned revenue
 
15,780

 
5,578

Securities sold, but not yet purchased
 
(225
)
 
325

Net cash provided by operating activities
 
$
145,643

 
$
85,787

 
 
 
 
 
Continued on following page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5



LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited)
(In thousands)


 
 
Three Months Ended March 31,
 
 
2015
 
2014
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
$
(13,918
)
 
$
(23,012
)
Proceeds from disposal of fixed assets
 

 
1,000

Purchase of securities classified as held-to-maturity
 
(1,506
)
 

Proceeds from maturity of securities classified as held-to-maturity
 
750

 
2,000

Deposits of restricted cash
 
(15,908
)
 

Release of restricted cash
 
57

 
132

Net cash used in investing activities
 
(30,525
)
 
(19,880
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net proceeds from revolving credit facility
 
10,000

 

Repayment of senior secured credit facilities
 
(2,710
)
 
(2,709
)
Payment of contingent consideration
 

 
(3,300
)
Tax payments related to settlement of restricted stock units
 
(1,752
)
 
(584
)
Repurchase of common stock
 
(30,014
)
 
(100,000
)
Dividends on common stock
 
(24,156
)
 
(24,097
)
Excess tax benefits related to share-based compensation
 
1,156

 
4,444

Proceeds from stock option exercises and other
 
4,720

 
14,060

Net cash used in financing activities
 
(42,756
)
 
(112,186
)
NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS
 
72,362

 
(46,279
)
CASH AND CASH EQUIVALENTS — Beginning of period
 
412,332

 
516,584

CASH AND CASH EQUIVALENTS — End of period
 
$
484,694

 
$
470,305

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Interest paid
 
$
8,175

 
$
13,047

Income taxes paid
 
$
9,449

 
$
9,531

NONCASH DISCLOSURES:
 
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
 
$
6,535

 
$
9,526

Fixed assets acquired under build-to-suit lease
 
$

 
$
8,114

See notes to unaudited condensed consolidated financial statements.



6


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



1.    Organization and Description of the Company
LPL Financial Holdings Inc. ( LPLFH ), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the Company ) provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively advisors ) in the United States of America. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services enabling its advisors to offer independent financial advice and brokerage services to retail investors (their clients ).
2 .    Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2014 , contained in the Company’s Annual Report on Form 10-K as filed with the SEC.
The Company’s significant accounting policies are included in Note 2 . Summary of Significant Accounting Policies , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 . There have been no significant changes to these accounting policies during the first three months of 2015 .
Consolidation
These unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from these estimates.
Reportable Segment
The Company's internal reporting is organized into two service channels: Independent Advisor Services and Institution Services. These service channels are aggregated and viewed as one operating segment, and therefore, one reportable segment due to their similar economic characteristics, products and services, production and distribution processes, and regulatory environment.
Restricted Cash
Restricted cash primarily represents cash restricted for use by the Company’s captive insurance company.

7


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


Fair Value of Financial Instruments
The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and indebtedness. The Company carries its held-to-maturity securities and indebtedness at amortized cost. The Company measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider. Accordingly, the debt instruments qualify as Level 2 fair value measurements. See Note 4 . Fair Value Measurements , for additional detail regarding the Company’s fair value measurements. As of March 31, 2015 , the carrying amount and fair value of the Company’s indebtedness was approximately $1,641.5 million and $1,644.8 million , respectively. As of December 31, 2014 , the carrying amount and fair value was approximately $1,634.3 million and $1,620.8 million , respectively.
Recently Issued Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03,  Interest Imputation of Interest , which simplifies the presentation of debt issuance costs on the balance sheet by presenting debt issuance costs as a direct deduction from the carrying amount of the related debt liability. ASU 2015-03 will become effective for the Company beginning January 1, 2016 and early adoption is permitted. The Company does not anticipate the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.
3 .    Restructuring
In February 2013, the Company committed to an expansion of its Service Value Commitment initiative (the “Program”), an ongoing effort to position the Company's people, processes, and technology for sustainable long-term growth while improving the service experience of its advisors and delivering efficiencies in its operating model. The Program is expected to be completed in 2015.
The Company estimates total charges in connection with the Program will approach $68.0 million . These expenditures are comprised of outsourcing and other related costs, technology transformation costs, employee severance obligations and other related costs, as well as non-cash charges for impairment of certain fixed assets related to internally developed software.
The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the three months ended March 31, 2015 (in thousands):
 
Accrued Balance at December 31, 2014
 
Costs
Incurred
 
Payments
 
Accrued Balance at March 31, 2015
 
 
Cumulative Costs Incurred to Date
 
Total
Expected
Restructuring
Costs
Outsourcing and other related costs
$

 
$
755

 
$
(755
)
 
$

 
 
$
22,243

 
$
23,500

Technology transformation costs
4,458

 
117

 
(4,305
)
 
270

 
 
30,035

 
30,300

Employee severance obligations and other related costs
1,999

 
1,100

 
(147
)
 
2,952

 
 
9,985

 
13,400

Asset impairments

 

 

 

 
 
842

 
842

Total
$
6,457

 
$
1,972

 
$
(5,207
)
 
$
3,222

 
 
$
63,105

 
$
68,042

On February 24, 2015, the Company committed to a course of action to restructure the business of its subsidiary, Fortigent Holdings Company, Inc. (together with its subsidiaries, “Fortigent”). The Company acquired Fortigent, which provides outsourced wealth management solutions, in April 2012. The intention of the restructuring plan is to migrate Fortigent’s operations from Rockville, Maryland to the Company’s office in Charlotte, North Carolina, simplify and improve the efficiency of Fortigent’s existing service offerings, and position Fortigent to capitalize on the Company's future technology investments and service offerings for financial institutions and advisors focused on high-net-worth clients.
In connection with this restructuring, the Company estimates total charges in connection with this restructuring will approach $9.0 million . These expenditures are comprised of employee severance obligations and other related costs, relocation and related costs, lease restructuring charges, as well as non-cash charges for impairment of certain intangible assets.

8


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the three months ended March 31, 2015 (in thousands):
 
Costs
Incurred
 
Payments
 
Non-cash
 
Accrued Balance at March 31, 2015
 
 
Cumulative Costs Incurred to Date
 
Total
Expected
Restructuring
Costs
Employee severance obligations and other related costs
$
965

 
$
(69
)
 
$

 
$
896

 
 
$
965

 
$
4,500

Relocation and related costs
278

 

 

 
278

 
 
278

 
2,000

Lease restructuring charges

 

 

 

 
 

 
1,300

Asset impairments
433

 

 
(433
)
 

 
 
433

 
1,200

Total
$
1,676

 
$
(69
)
 
$
(433
)
 
$
1,174

 
 
$
1,676

 
$
9,000

4 .    Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1  — Quoted prices in active markets for identical assets or liabilities.
Level 2  — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3  — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications during the three months ended March 31, 2015 .
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At March 31, 2015 , the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents  — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased  — The Company's trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S. treasury obligations, mutual funds, certificates of deposit, and traded equity and debt securities.
The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices, and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At March 31, 2015 , the Company did not adjust prices received from the independent third-party pricing services.
Other Assets  — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for

9


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


identical or similar securities and other inputs that are observable or can be corroborated by observable market data; and (3) cash flow hedges, which are measured using quoted prices for similar cash flow hedges, taking into account counterparty credit risk and the Company's own non-performance risk.
Accounts Payable and Accrued Liabilities — The Company's accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at March 31, 2015 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
At March 31, 2015:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
13,463

 
$

 
$

 
$
13,463

Securities owned — trading:
 
 
 
 
 
 
 
Money market funds
262

 

 

 
262

Mutual funds
7,231

 

 

 
7,231

Equity securities
167

 

 

 
167

Debt securities

 
13

 

 
13

U.S. treasury obligations
8,617

 

 

 
8,617

Total securities owned — trading
16,277

 
13

 

 
16,290

Other assets
91,593

 
5,711

 

 
97,304

Total assets at fair value
$
121,333

 
$
5,724

 
$

 
$
127,057

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Equity securities
$
55

 
$

 
$

 
$
55

Debt securities

 
22

 

 
22

Total securities sold, but not yet purchased
55

 
22

 

 
77

Accounts payable and accrued liabilities

 

 
527

 
527

Total liabilities at fair value
$
55

 
$
22

 
$
527

 
$
604



10


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2014 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
At December 31, 2014:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
22,592

 
$

 
$

 
$
22,592

Securities owned — trading:
 

 
 

 
 

 
 

Money market funds
293

 

 

 
293

Mutual funds
7,570

 

 

 
7,570

Equity securities
224

 

 

 
224

Debt securities

 
1,379

 

 
1,379

U.S. treasury obligations
4,000

 

 

 
4,000

Total securities owned — trading
12,087

 
1,379

 

 
13,466

Other assets
75,540

 
5,058

 

 
80,598

Total assets at fair value
$
110,219

 
$
6,437

 
$

 
$
116,656

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
Mutual funds
$
13

 
$

 
$

 
$
13

Equity securities
279

 

 

 
279

Debt securities

 
10

 

 
10

Total securities sold, but not yet purchased
292

 
10

 

 
302

Accounts payable and accrued liabilities

 

 
527

 
527

Total liabilities at fair value
$
292

 
$
10

 
$
527

 
$
829

Level 3 Recurring Fair Value Measurements
The Company determines the fair value for its contingent consideration obligations using an income approach whereby the Company assesses the probability and timing of the achievement of the applicable milestones, which are based on contractually negotiated financial or operating targets that vary by acquisition transaction, such as revenues. The contingent payments are estimated using a probability weighted, multi-scenario analysis of expected future performance of the acquired businesses. The Company then discounts these expected payment amounts to calculate the fair value as of the valuation date. The Company's management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management's expectations.
5 .    Held-to-Maturity Securities
The Company holds certain investments in securities, primarily U.S. government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.
The amortized cost, gross unrealized gain or loss, and fair value of securities held-to-maturity were as follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Amortized cost
$
9,350

 
$
8,594

Gross unrealized gain (loss)
13

 
(14
)
Fair value
$
9,363

 
$
8,580


11


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


At March 31, 2015 , the securities held-to-maturity were scheduled to mature as follows (in thousands):
 
Within one year
 
After one but within five years
 
After five but within ten years
 
Total
U.S. government notes — at amortized cost
$
4,100

 
$
4,750

 
$
500

 
$
9,350

U.S. government notes — at fair value
$
4,102

 
$
4,753

 
$
508

 
$
9,363

6 .    Derivative Financial Instruments
In May 2013, in conjunction with its Service Value Commitment initiative, the Company entered into a long-term contractual obligation (the “Agreement”) with a third-party provider to enhance the quality, speed, and cost of processes by outsourcing certain functions. The Agreement enables the third-party provider to use the services of its affiliates in India to provide services to the Company and provides for the Company to settle the cost of its contractual obligation to the third-party provider in U.S. dollars each month. However, the Agreement provides that on each annual anniversary date of the signing of the Agreement, the price for services (denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar (“USD”) and the Indian rupee (“INR”). The Agreement provides that, once an annual adjustment is calculated, there are no further modifications to the amounts paid by the Company to the third-party provider for fluctuations in the exchange rate between the USD and the INR until the reset on the next anniversary date of the signing of the Agreement.
The third-party provider bore the risk of currency movement from the date of signing the Agreement until the reset on the first anniversary of its signing, and bears such risk during each period until the next annual reset date. The Company bears the risk of currency movement at each of the annual reset dates following the first anniversary.
To mitigate foreign currency risk arising from these annual anniversary events, the Company entered into four non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. The first cash flow hedge, with a notional amount of 560.4 million INR, or $8.5 million , settled in June 2014. The Company received a settlement of $1.0 million that will be reclassified out of accumulated other comprehensive income and recognized in net income ratably over a 12-month period ending May 31, 2015 to match the timing of the underlying hedged item.
The details related to the remaining non-deliverable foreign currency contracts at March 31, 2015 are as follows (in millions, except foreign exchange rate):
 
Settlement Date
 
Hedged Notional Amount (INR)
 
Contractual INR/USD Foreign Exchange Rate
 
Hedged Notional Amount (USD)
Cash flow hedge #2
6/2/2015
 
560.4

 
69.35

 
$
8.1

Cash flow hedge #3
6/2/2016
 
560.4

 
72.21

 
7.8

Cash flow hedge #4
6/2/2017
 
560.4

 
74.20

 
7.5

Total hedged amount
 
 
 
 
 
 
$
23.4

The fair value of the derivative instruments, included in other assets in the unaudited condensed consolidated statements of financial condition, were as follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Cash flow hedges
$
1,916

 
$
1,179

7 .    Goodwill and Other Intangible Assets
Goodwill and intangible assets were a result of various acquisitions. See Note 8 . Goodwill and Other Intangible Assets , in the Company's 2014 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information regarding intangible assets.

12


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


8 .    Debt
Senior Secured Credit Facilities — In October 2014, the Company entered into the Second Amendment, Extension and Incremental Assumption Agreement (“Credit Agreement”) with its wholly owned subsidiary, LPL Holdings, Inc., the other parties thereto. The Credit Agreement includes a term loan A (“Term Loan A”), a term loan B (“Term Loan B”), and a revolving credit facility (“Revolving Credit Facility”), which has a borrowing capacity of $400.0 million .
The Company’s outstanding borrowings were as follows (dollars in thousands):
 
 
 
 
March 31, 2015
 
December 31, 2014
Senior Secured Credit Facilities
 
Maturity
 
 
Balance
 
Interest
Rate    
 
 
Balance
 
Interest
Rate    
Revolving Credit Facility
 
9/30/2019
 
$
120,000

 
4.15
%
 
$
110,000

 
4.75
%
Senior secured term loans:
 
 
 
 
 
 
 
 
 
 
Term Loan A
 
9/30/2019
 
459,375

 
2.68
%
 
459,375

 
2.67
%
Term Loan B
 
3/29/2019
 
1,062,173

 
3.25
%
 
1,064,883

 
3.25
%
Total borrowings
 
 
 
1,641,548

 
 
 
1,634,258

 
 
Less current portion
 
 
 
130,839

 
 
 
120,839

 
 
Long-term borrowings — net of current portion
 
 
 
$
1,510,709

 
 
 
$
1,513,419

 
 
As of March 31, 2015 , the Company also had $21.5 million of irrevocable letters of credit, with an applicable interest rate margin of 2.50% , which were supported by the Revolving Credit Facility.
The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of March 31, 2015 , the Company was in compliance with such covenants.
Bank Loans Payable — The Company maintains three uncommitted lines of credit. Two of the lines have unspecified limits, which are primarily dependent on the Company’s ability to provide sufficient collateral. The third line has a $200.0 million limit, and allows for both collateralized and uncollateralized borrowings. The lines have not been utilized in 2015 and were not utilized in 2014 ; therefore, there were no balances outstanding at March 31, 2015 or December 31, 2014 .
9 .    Commitments and Contingencies
Leases  
The Company leases office space and equipment under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases. Total rental expense for all operating leases was approximately $6.6 million and $8.8 million for the three months ended March 31, 2015 and 2014 , respectively.
Service and Development Contracts  
The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings.
Guarantees  
The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.
The Company’s subsidiary, LPL Financial, provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the

13


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.
Loan Commitments  
From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These unfunded commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no such significant unfunded commitments at March 31, 2015 .
Legal & Regulatory Matters
Assessing the probability of a loss occurring and the amount of any loss related to a legal proceeding or regulatory matter is inherently difficult. The Company exercises significant and complex judgments to make certain estimates presented in its consolidated financial statements, and there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. The Company's assessment process considers a variety of factors and assumptions, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. The Company’s accruals at March 31, 2015, include estimated costs for regulatory matters generally relating to the adequacy of the Company’s compliance and supervisory systems and procedures and other controls, for which the Company believes losses are both probable and reasonably estimable. When it is not probable but at least reasonably possible that a loss has been incurred, a disclosure of fact is made when the underlying loss or range of losses can also be reasonably estimated. The Company estimates that, as of March 31, 2015 , exposure to those losses could range from $0 to $8 million in excess of the accrued liability, if any, related to those matters. Due to the inherent unpredictability of such matters, the Company may have exposure to losses that are not yet predictable or cannot yet be reasonably estimated in addition to those amounts that have been accrued or disclosed.
Third-Party Insurance
The Company maintains third-party insurance coverage for certain legal proceedings, including those involving client claims. With respect to client claims, the estimated losses on many of the pending matters are less than the applicable deductibles of the insurance policies. The Company is also subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests, and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which can include fines and other remediation.
Self-Insurance Liabilities
The Company has self-insurance for potential liabilities, including errors and omissions liabilities, through a wholly-owned captive insurance subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity factors, and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends. As of March 31, 2015, these self-insurance liabilities are included in accounts payable and accrued liabilities in the condensed consolidated balance sheet. Self-insurance related charges are included in other expenses in the condensed consolidated statement of income for the three months ended March 31, 2015.
Other Commitments
As of March 31, 2015 , the Company had received collateral primarily in connection with client margin loans with a market value of approximately $349.8 million , which it can re-pledge, loan, or sell. Of these securities, approximately $31.4 million were client-owned securities pledged to the Options Clearing Corporation as collateral

14


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


to secure client obligations related to options positions. As of March 31, 2015 there were no restrictions that materially limited the Company's ability to re-pledge, loan, or sell the remaining $318.4 million of client collateral.
Trading securities on the unaudited condensed consolidated statements of financial condition includes $4.3 million and $4.0 million pledged to clearing organizations at March 31, 2015 and December 31, 2014 , respectively.
10 .    Stockholders' Equity
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under the Company's credit facilities.
On February 18, 2015, the Board of Directors declared a cash dividend of $0.25 per share on the Company's outstanding common stock. The dividend of $24.2 million in the aggregate was paid on March 16, 2015 to all stockholders of record as of March 2, 2015.
On February 10, 2014, the Board of Directors declared a cash dividend of $0.24 per share on the Company's outstanding common stock. The dividend of $24.1 million in the aggregate was paid on March 10, 2014 to all stockholders of record as of February 24, 2014.
Share Repurchases
The Board of Directors has approved several share repurchase programs pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition. Purchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company's management within the constraints of the Credit Agreement and general liquidity needs.
For the three months ended March 31, 2015 and 2014 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2015
 
2014
Approval Date
 
Authorized Repurchase Amount
 
Amount Remaining at March 31, 2015
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost(1)
 
Shares Purchased
 
Weighted-Average Price Paid Per Share
 
Total Cost(1)
May 28, 2013
 
$
200.0

 
$

 

 
$

 
$

 
1,306,288

 
$
52.00

 
$
67.9

February 10, 2014
 
$
150.0

 

 

 

 

 
616,788

 
52.00

 
32.1

October 1, 2014
 
$
150.0

 
62.9

 
679,772

 
44.15

 
30.0

 

 

 

 
 
 
 
$
62.9

 
679,772

 
$
44.15

 
$
30.0

 
1,923,076

 
$
52.00

 
$
100.0

_________________________
(1)
Included in the total cost of shares purchased is a commission fee of $0.02 per share.

15


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


See Note 14 . Related Party Transactions , for details regarding the repurchase of shares from related parties.
11 .    Share-Based Compensation
Certain employees, advisors, institutions, officers, and directors of the Company participate in various long-term incentive plans, which provide for granting stock options, warrants, restricted stock awards, and restricted stock units. Stock options and warrants generally vest in equal increments over a three - to five -year period and expire on the ten th anniversary following the date of grant. Restricted stock awards and restricted stock units generally vest over a two - to four -year period.
In November 2010, the Company adopted a 2010 Omnibus Equity Incentive Plan (the “2010 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, and other equity-based compensation. The 2010 Plan serves as the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-qualified Stock Options, the 2008 Advisor and Institution Incentive Plan, the 2008 Stock Option Plan and the Director Restricted Stock Plan (collectively, the “Predecessor Plans”). Upon adoption of the 2010 Plan, awards were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor Plans remain outstanding until exercised or forfeited.
There are 12,055,945 shares authorized for grant under the 2010 Plan. As of March 31, 2015 , there were 5,241,049 shares reserved for issuance upon exercise or conversion of outstanding awards granted under the 2010 Plan.
Stock Options and Warrants
The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee, officer, and director stock options that have been granted during the three months ended March 31, 2015 :
Expected life (in years)
 
5.30

Expected stock price volatility
 
25.78
%
Expected dividend yield
 
2.30
%
Risk-free interest rate
 
1.58
%
Fair value of options
 
$
8.82

The fair value of each stock option or warrant awarded to advisors and financial institutions is estimated on the date of the grant and revalued at each reporting period using the Black-Scholes valuation model with the following weighted-average assumptions used during the three months ended March 31, 2015 :
Expected life (in years)
 
6.74

Expected stock price volatility
 
25.69
%
Expected dividend yield
 
2.27
%
Risk-free interest rate
 
1.69
%
Fair value of options
 
$
14.53

The following table summarizes the Company’s stock option and warrant activity for the three months ended March 31, 2015 :
 
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding — December 31, 2014
 
6,287,410

 
$
31.59

 
 
 
 
Granted
 
1,100,197

 
45.55

 
 
 
 
Exercised
 
(146,559
)
 
28.49

 
 
 
 
Forfeited
 
(179,731
)
 
37.65

 
 
 
 
Outstanding — March 31, 2015
 
7,061,317

 
$
33.68

 
6.70
 
$
71,898

Exercisable — March 31, 2015
 
4,101,683

 
$
29.24

 
5.45
 
$
59,952

The following table summarizes information about outstanding stock options and warrants at March 31, 2015 :
 
 
Outstanding
 
Exercisable
Range of Exercise Prices
 
Total
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Life
(Years)
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
$2.38
 
17,382

 
$
2.38

 
0.17
 
17,382

 
$
2.38

$15.84 - $23.02
 
1,255,407

 
21.41

 
4.20
 
1,255,407

 
21.41

$23.41 - $30.00
 
1,517,035

 
28.11

 
5.51
 
1,015,575

 
27.80

$31.60 - $32.33
 
1,431,890

 
31.89

 
7.40
 
773,151

 
31.93

$34.01 - $39.60
 
1,111,875

 
34.59

 
5.91
 
831,396

 
34.48

$45.55 - $54.81
 
1,727,728

 
48.70

 
9.58
 
208,772

 
54.81

 
 
7,061,317

 
$
33.68

 
6.70
 
4,101,683

 
$
29.24


16


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)


The Company recognizes share-based compensation for stock options awarded to employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of these awards of $4.1 million and $3.8 million during the three months ended March 31, 2015 and 2014 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of March 31, 2015 , total unrecognized compensation cost related to non-vested stock options granted to employees, officers, and directors was $24.1 million , which is expected to be recognized over a weighted-average period of 2.20 years.
The Company recognizes share-based compensation for stock options and warrants awarded to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.6 million and $3.2 million during the three months ended March 31, 2015 and 2014 , respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of March 31, 2015 , total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $6.4 million , which is expected to be recognized over a weighted-average period of 2.13 years.
Restricted Stock
The following summarizes the Company’s activity in its restricted stock awards and restricted stock units for the three months ended March 31, 2015 :
 
 
Restricted Stock Awards
 
Restricted Stock Units
 
 
Number of
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
Number of
Shares
 
Weighted-Average
Grant-Date
Fair Value
Nonvested at December 31, 2014
 
33,634

 
$
42.78

 
546,725

 
$
43.34

  Granted
 

 

 
180,121

 
43.50

  Vested
 
(7,910
)
 
31.60

 
(109,715
)
 
38.99

  Forfeited
 

 

 
(24,768
)
 
49.53

Nonvested at March 31, 2015
 
25,724

 
$
46.22

 
592,363

 
$
43.94

The Company recognizes share-based compensation for restricted stock awards and restricted stock units granted to its employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized $2.0 million and $1.2 million of share-based compensation related to the vesting of these restricted stock awards and restricted stock units during the three months ended March 31, 2015 and 2014 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of March 31, 2015 , total unrecognized compensation cost for restricted stock awards and restricted stock units granted to employees, officers, and directors was $15.5 million , which is expected to be recognized over a weighted-average remaining period of 2.35 years.
In the second quarter of 2014, the Company began granting restricted stock units to its advisors and to financial institutions. The Company recognizes share-based compensation for restricted stock units granted to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.4 million related to the vesting of these restricted stock units during the three months ended March 31, 2015 , which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of March 31, 2015 , total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $3.4 million , which is expected to be recognized over a weighted-average remaining period of 2.12 years.
12 .    Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014 is as follows (in thousands, except per share data):
 
Three Months Ended March 31,
 
2015
 
2014
Net income
$
50,678

 
$
53,135

 
 
 
 
Basic weighted-average number of shares outstanding
96,551

 
101,279

Dilutive common share equivalents
1,676

 
2,060

Diluted weighted-average number of shares outstanding
98,227

 
103,339

 
 
 
 
Basic earnings per share
$
0.52

 
$
0.52

Diluted earnings per share
$
0.52

 
$
0.51

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the three months ended March 31, 2015 and 2014 , stock options, warrants, and restricted stock units representing common share equivalents of 1,595,614 shares and 941,406 shares, respectively, were anti-dilutive.
13 .    Income Taxes
The Company’s effective income tax rate differs from the federal corporate tax rate of 35.0% , primarily as a result of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 40.1% and 39.3% for the three months ended March 31, 2015 and 2014 , respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
14 .    Related Party Transactions
The Company has related party transactions with TPG Capital, one of the Company's significant stockholders, as well as certain portfolio companies of TPG Capital. During the three months ended March 31, 2015 and 2014 the Company recognized revenue for services provided to these portfolio companies of $0.3 million and $0.1 million , respectively. During the three months ended March 31, 2015 and 2014 , the Company incurred expenses for services provided by TPG Capital or these portfolio companies of $1.2 million and $0.2 million , respectively. As of March 31, 2015 and 2014 , receivables from related parties were $0.2 million and $0.1 million , respectively. As of March 31, 2015 and 2014 , payables to related parties were $0.2 million and less than $0.1 million , respectively.
On February 12, 2014, the Company entered into a share repurchase agreement with an investment fund associated with TPG Capital, pursuant to which the Company repurchased 1.9 million shares of its common stock at a price of $52.00 per share, for total consideration of $100.0 million .
15 .    Net Capital and Regulatory Requirements
The Company operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments and require compliance with various financial and customer-related regulations. The consequences of noncompliance can include substantial monetary and non-monetary sanctions. In addition, the Company is also subject to comprehensive examinations and supervision by various governmental and self-regulatory agencies. These regulatory agencies generally have broad discretion to prescribe greater limitations on the operations of a regulated entity for the protection of investors or public interest. Furthermore, where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed.
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and had net capital of $153.0 million with a minimum net capital requirement of $6.5 million as of March 31, 2015 .
The Company's subsidiary, The Private Trust Company N.A. (“PTC”), operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to PTC's operations.
As of March 31, 2015 and December 31, 2014 , LPL Financial and PTC met all capital adequacy requirements to which they were subject.
16 .    Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor's client, subject to various regulatory and internal margin requirements, collateralized by cash or securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors' clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally three business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when, as, and if issued securities. When, as, and if issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order.
LPL Financial may at times hold equity securities that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.
17 .    Subsequent Events
On April 28, 2015 , the Board of Directors declared a cash dividend of $0.25 per share on the Company's outstanding common stock to be paid on May 21, 2015 to stockholders of record on May 11, 2015 .
On April 28, 2015, the Company's Board of Directors approved an increase in the Company's share repurchase plan by $200.0 million .

17


LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)



******

18


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview
We are the nation's largest independent broker-dealer, a top custodian for registered investment advisors (“RIAs”), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage and investment advisory services to more than 14,000 independent financial advisors, including financial advisors at more than 700 financial institutions (our “advisors”) across the country, enabling them to provide their retail investors (“clients”) with objective financial advice through a lower conflict model. We also support approximately 4,300 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions.
We believe that objective financial guidance is a fundamental need for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. We believe that LPL Financial is the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services, and open architecture access to leading financial products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, or market-making.
We are a leading financial services provider to independent advisors, RIAs, financial institutions, and retirement plan business. We are a market leader with the largest independent advisor base, and we believe we have the fourth-largest overall advisor base in the United States. Through our advisors, we are also one of the largest distributors of financial products and services in the United States.
Executive Summary
Asset Growth Trends
Net new advisory assets, which exclude the impact of market movement, were $5.2 billion for the three months ended March 31, 2015 , primarily driven by strong advisor productivity and the continued addition of hybrid registered investment advisors ("Hybrid RIAs").
Assets under custody on our Hybrid RIA platform, which provides an integrated offering of technology, clearing, compliance, and custody services to Hybrid RIAs grew 50.6% to $104.8 billion as of March 31, 2015 , representing 342 Hybrid RIA firms, compared to $69.6 billion and 265 Hybrid RIA firms as of March 31, 2014 .
Gross Profit Growth
Key contributors to growth of our first quarter gross profit included a $38.3 billion increase in total advisory and brokerage assets since March 31, 2014, and 372 net new advisors added since March 31, 2014.
Gross profit is calculated as net revenues less production expenses. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP measures that may not be comparable to those of others in our industry.
Cash Sweep Program Performance
Revenue generated from the Company's cash sweep programs declined 10.4% to $21.5 million in the first quarter of 2015 compared to $24.0 million in the prior year period. This decline was primarily driven by the insured cash account ("ICA") program fee decreasing by 13 basis points from the step-down in bank contracts, offset by 4 basis points of improvement in average effective federal funds rate and $1.0 billion increase in cash sweep balances.
Capital Management Activity
We spent $30.0 million in the first quarter of 2015 to buy back 0.7 million shares of our common stock, at an average price per share of $44.15 . Since our initial public offering in 2010, we have spent $812.4 million to repurchase 21.8 million shares, at an average price per share of $37.22, through March 31, 2015.
Our Board of Directors declared a quarterly cash dividend of $0.25 per share of the Company's common stock, to be paid on May 21, 2015 , to all shareholders of record as of May 11, 2015 .
The Company’s Board of Directors also approved an additional $200.0 million of share repurchase capacity.

19


Our Sources of Revenue
Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust, and reporting platforms. We also generate asset-based revenues through our platform of over 25,000 financial products from a broad range of product manufacturers. Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing, and ongoing account management. In return for these services, mutual funds, insurance companies, banks, and other financial product manufacturers pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We track recurring revenue, a characterization of net revenue and a statistical measure, which we define to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. These asset balances, specifically related to advisory and asset-based revenues, have a correlation of approximately 60% to the fluctuations of the overall market, as measured by the S&P 500 index. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful to us despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
The table below summarizes the sources of our revenue, the primary drivers of each revenue source, and the percentage of each revenue source that represents recurring revenue:
 
 
 
Three Months Ended March 31, 2015
 
Sources of Revenue
Primary Drivers
Total
(millions)
% of Total Net Revenue
% Recurring
Advisor-driven revenue with ~85%-90% payout ratio
Commission
- Transactions
- Brokerage asset levels
$523
47%
46%
Advisory
- Advisory asset levels
$342
31%
99%
Attachment revenue
 retained by us
Asset-Based
- Cash Sweep Fees
- Sponsorship Fees
- Record Keeping
- Cash balances
- Interest rates
- Client asset levels
- Number of accounts

$121
11%
98%
Transaction and Fee
- Transactions
- Client (Investor) Accounts
- Advisor Seat and Technology
- Client activity
- Number of clients
- Number of advisors
- Number of accounts
- Number of premium technology subscribers
$102
9%
62%
Other
- Margin account balances
- Alternative investment transactions
$21
2%
26%
 
Total Net Revenue
$1,109
100%
 
 
Total Recurring Revenue
$767
69%
 

20


How We Evaluate Our Business
We focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our business and key financial metrics are as follows:
 
March 31,
 
 
 
2015
 
2014
 
% Change
Business Metrics
 
 
 
 
 
Advisors(1)
14,098

 
13,726

 
2.7
 %
Advisory and brokerage assets (in billions)(2)
$
485.4

 
$
447.1

 
8.6
 %
Advisory assets under custody (in billions)(2)(3)
$
183.7

 
$
158.0

 
16.3
 %
Net new advisory assets (in billions)(4)
$
5.2

 
$
4.4

 
18.2
 %
Insured cash account balances (in billions)(2)
$
17.7

 
$
16.6

 
6.6
 %
Money market account balances (in billions)(2)
$
6.9

 
$
7.1

 
(2.8
)%
 
 
Three Months Ended March 31,
 
2015
 
2014
Financial Metrics
 
 
 
Revenue growth from prior period
2.0
%
 
11.6
%
Recurring revenue as a % of net revenue
69.2
%
 
66.6
%
Net income (in millions)
$
50.7

 
$
53.1

Earnings per share (diluted)
$
0.52

 
$
0.51

Non-GAAP Measures:
 
 
 
Gross profit (in millions)(5)
$
355.3

 
$
330.7

Gross profit growth from prior period
7.4
%
 
8.4
%
Gross profit as a % of net revenue
32.0
%
 
30.4
%
Adjusted EBITDA (in millions)
$
135.1

 
$
141.5

Adjusted EBITDA as a % of net revenue
12.2
%
 
13.0
%
Adjusted EBITDA as a % of gross profit
38.0
%
 
42.8
%
Adjusted Earnings (in millions)
$
63.2

 
$
71.0

Adjusted Earnings per share (diluted)
$
0.64

 
$
0.69

________________________________
(1)
Advisors are defined as those independent financial advisors and financial advisors at financial institutions who are licensed to do business with the Company's broker-dealer subsidiary.
(2)
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. Set forth below are other client assets at March 31, 2015 and 2014 , including retirement plan assets, and certain trust and high-net-worth assets, that are custodied with third-party providers and therefore excluded from advisory and brokerage assets (in billions):
 
March 31,
 
2015
 
2014
Retirement plan assets(a)
$
85.4

 
$
71.0

Trust assets(b)
$
2.5

 
$
11.2

High-net-worth assets(c)
$
94.3

 
$
74.9

_____________________________
(a)
Retirement plan assets are held in retirement plans that are supported by advisors licensed with LPL Financial. At March 31, 2015 and 2014 , our retirement plan assets represent assets that are custodied with 37 third-party providers and 34 third-party providers, respectively, of retirement plan administrative services who provide reporting feeds. We estimate the total assets in retirement plans supported to be between $120.0 billion and $130.0 billion at March 31, 2015 and between $105.0 billion and $115.0 billion at March 31, 2014 . If we receive reporting feeds in the future from providers for whom we do not currently receive feeds, we intend to include and identify such additional assets in this metric. Such

21


additional feeds since March 31, 2014 , accounted for $0.6 billion of the $14.4 billion increase in retirement plan assets.
(b)
Represents trust assets that are on the wealth management platform of the Concord Trust and Wealth Solutions division of LPL Financial.
(c)
Represents high-net-worth assets that are on the platform of performance reporting, investment research, and practice management services of Fortigent.
(3)
Advisory assets under custody are comprised of advisory assets under management in our corporate RIA platform and Hybrid RIA assets in advisory accounts custodied by us. See “Results of Operations” for a tabular presentation of advisory assets under custody.
(4)
Represents net new advisory assets consisting of funds from new accounts and additional funds deposited into existing advisory accounts that are custodied in our fee-based advisory platforms.
(5)
Gross profit is calculated as net revenues less production expenses. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP measures that may not be comparable to those of others in our industry.
Adjusted EBITDA
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 below. We present Adjusted EBITDA because we consider it an important measure of our performance. Adjusted EBITDA is a useful financial metric in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain material non-cash items and other adjustments.
We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported financial results under GAAP, provides useful information to investors regarding our performance and overall results of operations for the following reasons:
because non-cash equity grants made to employees, officers, and directors at a certain price and point in time do not necessarily reflect how our business is performing at any particular time, share-based compensation expense is not a key measure of our operating performance; and
because costs associated with acquisitions and the resulting integrations, debt refinancing, and restructuring and conversions costs can vary from period to period and transaction to transaction, expenses associated with these activities are not considered a key measure of our operating performance.
We use Adjusted EBITDA:
as a measure of operating performance;
for planning purposes, including the preparation of budgets and forecasts;
to allocate resources to enhance the financial performance of our business;
to evaluate the effectiveness of our business strategies;
in communications with our Board of Directors (the “Board”) concerning our financial performance; and
as a factor in determining employee and executive bonuses.
Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA is not a measure of net income, operating income, or any other performance measure derived in accordance with GAAP.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; 

22


Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
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, limiting its usefulness as a comparative measure.
Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA as supplemental information.
Set forth below is a reconciliation from our net income to Adjusted EBITDA, a non-GAAP measure, for the three months ended March 31, 2015 and 2014 (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Net income
$
50,678

 
$
53,135

Non-operating interest expense
14,015

 
12,840

Provision for income taxes
33,997

 
34,412

Amortization of intangible assets
9,637

 
9,716

Depreciation and amortization of fixed assets
16,429

 
12,565

EBITDA
124,756

 
122,668

EBITDA Adjustments:
 
 
 
Employee share-based compensation expense(1)
6,158

 
5,111

Acquisition and integration related expenses(2)
85

 
359

Restructuring and conversion costs(3)
3,888

 
7,271

Other(4)
206

 
6,068

Total EBITDA Adjustments
10,337

 
18,809

Adjusted EBITDA
$
135,093

 
$
141,477

__________________
(1)
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.
(2)
Represents acquisition and integration costs resulting from various acquisitions, including changes in the estimated fair value of future payments, or contingent consideration, required to be made to former shareholders of certain acquired entities.
(3)
Represents organizational restructuring charges, conversion, and other related costs primarily resulting from the expansion of our Service Value Commitment initiative. Results for the three months ended March 31, 2015 also include charges related to the restructuring of the business of the Company's subsidiary, Fortigent Holdings Company, Inc.
(4)
Results for the three months ended March 31, 2014 include approximately $5.3 million in parallel rent, property tax, common area maintenance expenses, and fixed asset disposals incurred in connection with our relocation to our San Diego office building.
Adjusted Earnings and Adjusted Earnings per share
Adjusted Earnings represents net income before: (a) employee share-based compensation expense, (b) amortization of intangible assets, (c) acquisition and integration related expenses, (d) restructuring and conversion costs, (e) debt extinguishment costs, and (f) other. Reconciling items are tax e