SEI INVESTMENTS COMPANY (In thousands, except asset balances and per share data) This discussion reviews and analyzes the consolidated financial condition, the consolidated results of operations and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements and the Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Overview
Consolidated Summary SEI is a leading global provider of technology-driven wealth and investment management solutions. We deliver comprehensive platforms, services and infrastructure - encompassing investment processing, investment operations and investment management - to help wealth managers, financial advisors, investment managers, institutional and private investors create and manage wealth. Investment processing fees are earned as either monthly fees for contracted services or as a percentage of the market value of our clients' assets processed on our platforms. Investment operations and investment management fees are earned as a percentage of assets under management, administration or advised assets (See Note 13 to the Consolidated Financial Statements for more information pertaining to our revenues). As ofJune 30, 2020 , through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer$1.0 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including$317.8 billion in assets under management and$692.5 billion in client assets under administration. Our affiliate,LSV Asset Management (LSV), manages$81.1 billion of assets which are included as assets under management. Our Condensed Consolidated Statements of Operations for the three and six months endedJune 30, 2020 and 2019 were: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Percent Change* 2020 2019 Percent Change* Revenues$ 400,646 $ 409,586 (2)%$ 815,408 $ 810,406 1% Expenses 300,334 289,450 4% 604,868 586,709 3% Income from operations 100,312 120,136 (17)% 210,540 223,697
(6)%
Net (loss) gain from investments 1,903 231 NM (2,086) 1,510
NM
Interest income, net of interest expense 1,219 4,147 (71)% 4,270 8,247
(48)%
Equity in earnings from unconsolidated affiliate 28,276 37,832 (25)% 58,183 75,149 (23)% Income before income taxes 131,710 162,346 (19)% 270,907 308,603 (12)% Income taxes 30,644 35,806 (14)% 60,599 68,082 (11)% Net income 101,066 126,540 (20)% 210,308 240,521 (13)% Diluted earnings per common share$ 0.68 $ 0.82 (17)% $ 1.39$ 1.54
(10)%
* Variances noted "NM" indicate the percent change is not meaningful. The following items had a significant impact on our financial results for the three and six months endedJune 30, 2020 and 2019: •Revenue from Asset management, administration and distribution fees in the first six months of 2020 increased primarily from higher average assets under administration from positive cash flows from new and existing clients in the Investment Managers segment. The market volatility beginning inMarch 2020 and continuing into the second quarter caused by the COVID-19 pandemic negatively impacted our revenues from assets under management, most notably in ourInvestment Advisors andInstitutional Investors segments. Our average assets under administration increased$67.1 billion , or 11%, to$676.0 billion in the first six months of 2020 as compared to$608.9 billion during the first six months of 2019. Our average assets under management, excluding LSV, increased$6.1 billion to$232.0 billion in the first six months of 2020 as compared to$225.9 billion during the first six months of 2019. •Information processing and software servicing fees in our Private Banks segment decreased by$10.1 million during the first six months of 2020 due to previously announced client losses and decreased non-recurring fees. •Our proportionate share in the earnings of LSV decreased to$58.2 million in the first six months of 2020 as compared to$75.1 million in the first six months of 2019 due to lower assets under management from negative cash flows from existing clients, market volatility caused by the COVID-19 pandemic and client losses. 29
-------------------------------------------------------------------------------- •We continue to invest in new business opportunities such as our One SEI strategy and IT Services offering. The majority of these costs are recorded in the Investments in New Businesses segment and are included in Consulting, outsourcing and professional fees on the accompanying Consolidated Statements of Operations. •Travel and promotional-related expenses declined by$7.4 million during the first six months of 2020 as our sales and client relationship personnel adapted to COVID-19 restrictions. •We capitalized$11.8 million in the first six months of 2020 for the SEI Wealth Platform as compared to$18.7 million in the first six months of 2019. Amortization expense related to SWP increased to$21.7 million during the first six months of 2020 as compared to$20.9 million during the first six months of 2019. •Our effective tax rate during the second quarter of 2020 was 23.3% as compared to 22.1% during the second quarter of 2019. Our tax rate was 22.4% during the first six months of 2020 as compared to 22.1% during the first six months of 2019. The increase in our tax rate for both periods was primarily due to an increase in our state effective tax rate. Our second quarter 2020 tax rate was also impacted by decreased tax benefits associated with stock option exercises. •We continued our stock repurchase program during 2020 and purchased 4.1 million shares for$216.9 million in the six month period. Impact of COVID-19 and Other Events The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency or concerns over the possibility of such an emergency, could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our business. InDecember 2019 , a novel strain of coronavirus (COVID-19) was identified inWuhan, China . COVID-19 quickly spread globally, leading theWorld Health Organization to declare the COVID-19 virus outbreak a global pandemic inMarch 2020 . Since that time, governmental authorities have implemented numerous and varying measures to stall the spread and ameliorate the impact of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place and safer-at-home orders, business shutdowns and closures, and have also implemented multi-step policies with the goal of re-opening domestic and global markets. Certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases. InMarch 2020 , we executed upon our business resiliency and contingency plans. To date, our remote capabilities have proven to be effective during the disruption caused by the COVID-19 pandemic with almost the entire workforce working remotely, with only a very limited number of on-site activities in our operational offices continuing to be performed. We continue to closely monitor the domestic and international landscape for changes in governmental measures both inthe United States and in the locations where we rely on critical outsourced services. We continue to be in regular contact with regulators, clients and vendors to confirm the measures taken to continue operating during this crisis, taking into consideration the latest announcements from state and federal authorities. We are also in continuous communication with our workforce to provide for the health and welfare of our employees working remotely and have implemented a return plan that is available for review on our website for those employees working in our operational offices. Currently, we have approximately 250 employees that routinely work out of our offices world-wide. We will monitor the ability of these individuals to work as safely as possible at our offices and make adjustments to the number of on-site personnel (either increases or decreases) accordingly. We expect that the individual circumstances of our employees regarding school, childcare, care-giving and underlying health concerns will significantly impact our ability to return staff to their primary office locations. The majority of our revenues are based on the value of assets invested in investment products that we manage or administer which are affected by changes in the capital markets and the portfolio strategy of our clients or their customers. The market volatility in response to measures taken to contain the spread of COVID-19 negatively impacted our asset-based fee revenues and partially offset our revenue growth. Additionally, changes in the portfolio strategy of our clients or their customers in response to market volatility resulted in asset flows into our lower margin liquidity products and negatively impacted our earnings. While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols designed to mitigate the potentially negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by market, including the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, the extent that critical public and private infrastructure functions upon which we rely are suspended and changes in investor and consumer behavior in response to 30 -------------------------------------------------------------------------------- the pandemic. The resulting market conditions may adversely affect our revenues and earnings derived from assets under management and administration. We are aware of a ransomware attack that occurred onMay 17, 2020 , atM.J. Brunner (Brunner), one of our third-party developers/vendors that provides development services and application management for two of our client applications. We are also aware that certain client data was illegally accessed and revealed by cybercriminal(s). The applications themselves were not compromised by this attack. We take our clients' security very seriously, and we are working with Brunner, theFBI and our impacted clients to understand the extent to which SEI's or our clients' data has been exposed. We are also working with the appropriate parties with respect to notification and remediation protocols. The root cause of the attack was not predicated on vulnerability within SEI's network, and neither SEI's network nor operations were compromised, attacked or otherwise affected as part of this incident. While there were direct and indirect expenses associated with the incident in the second-quarter 2020, and will be in the third-quarter 2020, it is not expected these will be material. OnJuly 1, 2020 , one of our storage arrays supported by our third party vendor, Dell-EMC, failed due to the operation of an application deployed by the vendor as part of our production infrastructure. As a consequence of the hardware failure, transactional activities on our platforms were extremely limited onJuly 1st and 2nd. All systems are currently on-line and 100% functional. This event was not caused by a third-party actor. While there will be direct and indirect expenses in the third-quarter 2020 associated with the outage, it is not expected these will be material. In response to the outage, we have launched a project internally, that will be supported by third-party experts, to identify tactical and strategic improvements that we should make across our enterprise technology footprint, including a review and improvement of our technical and operational resiliency plans and capabilities. We expect that this work will lead to recommendations that will result in additional investments of capital in hardware, software and personnel. We expect these costs will include both new investments as well as a reprioritization of current spend. Currently, we are not able to fully-estimate the total amount of additional expense as this will be part of an ongoing strategy around recovery and resiliency. 31 --------------------------------------------------------------------------------
Ending Asset Balances
(In millions)
As of June 30,
2020 2019 Percent Change
Private Banks:
Equity and fixed-income programs $ 22,974 $ 22,563 2%
Collective trust fund programs 5 4 25%
Liquidity funds 4,291 3,322 29%
Total assets under management $ 27,270 $ 25,889 5%
Client assets under administration 23,903 23,387 2%
Total assets $ 51,173 $ 49,276 4%
Investment Advisors :
Equity and fixed-income programs $ 59,958 $ 64,591 (7)%
Collective trust fund programs 3 6 (50)%
Liquidity funds 6,648 2,618 154%
Total assets under management $ 66,609 $ 67,215 (1)%
Institutional Investors :
Equity and fixed-income programs $ 80,257 $ 82,335 (3)%
Collective trust fund programs 103 78 32%
Liquidity funds 1,924 2,173 (11)%
Total assets under management $ 82,284 $ 84,586 (3)%
Client assets under advisement 3,326 3,598 (8)%
Total assets $ 85,610 $ 88,184 (3)%
Investment Managers:
Collective trust fund programs $ 58,178 $ 51,838 12%
Liquidity funds 664 472 41%
Total assets under management $ 58,842 $ 52,310 12%
Client assets under administration (A) 668,611 607,086 10%
Total assets $ 727,453 $ 659,396 10%
Investments in New Businesses:
Equity and fixed-income programs $ 1,498 $ 1,566 (4)%
Liquidity funds 194 141 38%
Total assets under management $ 1,692 $ 1,707 (1)%
Client assets under advisement 1,193 887 34%
Total assets $ 2,885 $ 2,594 11%
LSV:
Equity and fixed-income programs (B)$ 81,134 $ 103,575 (22)%
Total:
Equity and fixed-income programs (C)$ 245,821 $ 274,630 (10)% Collective trust fund programs 58,289 51,926 12% Liquidity funds 13,721 8,726 57% Total assets under management$ 317,831 $ 335,282 (5)% Client assets under advisement 4,519 4,485 1% Client assets under administration (D) 692,514 630,473 10%
Total assets under management, advisement and administration
5%
32-------------------------------------------------------------------------------- (A)Client assets under administration in the Investment Managers segment include$49.6 billion of assets that are at fee levels below our normal full service assets (as ofJune 30, 2020 ). (B) Equity and fixed-income programs include assets managed by LSV in which fees are based on performance only. The ending value of these assets as ofJune 30, 2020 was$1.6 billion . (C) Equity and fixed-income programs include$7.4 billion of assets invested in various asset allocation funds atJune 30, 2020 . (D) In addition to the numbers presented, SEI also administers an additional$11.3 billion in Funds of Funds assets (as ofJune 30, 2020 ) on which SEI does not earn an administration fee. 33 --------------------------------------------------------------------------------
Average Asset Balances
(In millions)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Percent Change 2020 2019 Percent Change
Private Banks:
Equity and fixed-income programs $ 22,229 $ 22,088 1% $ 23,443 $ 21,960 7%
Collective trust fund programs 5 4 25% 5 4 25% Liquidity funds 4,366 3,388 29% 3,974 3,547 12% Total assets under management$ 26,600 $ 25,480 4%$ 27,422 $ 25,511
7%
Client assets under administration 23,819 23,124 3% 24,330 22,611 8% Total assets$ 50,419 $ 48,604 4%$ 51,752 $ 48,122 8%Investment Advisors : Equity and fixed-income programs$ 57,429 $ 62,419 (8)%$ 61,181 $ 60,576
1%
Collective trust fund programs 3 6 (50)% 3 6 (50)% Liquidity funds 6,923 3,465 100% 5,104 4,382 16% Total assets under management$ 64,355 $ 65,890 (2)%$ 66,288 $ 64,964
2%
Institutional Investors : Equity and fixed-income programs$ 77,037 $ 82,597 (7)%$ 78,482 $ 82,161
(4)%
Collective trust fund programs 100 78 28% 93 79 18% Liquidity funds 2,476 2,342 6% 2,409 2,359 2% Total assets under management$ 79,613 $ 85,017 (6)%$ 80,984 $ 84,599
(4)%
Client assets under advisement 3,362 3,641 (8)% 3,561 3,568 -% Total assets$ 82,975 $ 88,658 (6)%$ 84,545 $ 88,167 (4)% Investment Managers: Collective trust fund programs$ 54,061 $ 50,108 8%$ 55,007 $ 48,715 13% Liquidity funds 482 497 (3)% 550 528 4% Total assets under management$ 54,543 $ 50,605 8%$ 55,557 $ 49,243
13%
Client assets under administration (A) 649,012 600,509 8% 651,699 586,287 11% Total assets$ 703,555 $ 651,114 8%$ 707,256 $ 635,530 11% Investments in New Businesses: Equity and fixed-income programs$ 1,468 $ 1,436 2%$ 1,566 $ 1,415 11% Liquidity funds 182 178 2% 175 190 (8)% Total assets under management$ 1,650 $ 1,614 2%$ 1,741 $ 1,605
8%
Client assets under advisement 1,148 917 25% 1,185 813 46% Total assets$ 2,798 $ 2,531 11%$ 2,926 $ 2,418 21% LSV: Equity and fixed-income programs (B)$ 80,395 $ 102,919 (22)%$ 84,227 $ 103,718
(19)%
Total:
Equity and fixed-income programs (C)$ 238,558 $ 271,459 (12)%$ 248,899 $ 269,830
(8)%
Collective trust fund programs 54,169 50,196 8% 55,108 48,804 13% Liquidity funds 14,429 9,870 46% 12,212 11,006 11% Total assets under management$ 307,156 $ 331,525 (7)%$ 316,219 $ 329,640
(4)%
Client assets under advisement 4,510 4,558 (1)% 4,746 4,381
8%
Client assets under administration (D) 672,831 623,633 8% 676,029 608,898
11%
Total assets under management, advisement and administration$ 984,497 $ 959,716 3%$ 996,994 $ 942,919 6% 34
-------------------------------------------------------------------------------- (A) Average client assets under administration in the Investment Managers segment for the three months endedJune 30, 2020 include$50.1 billion that are at fee levels below our normal full service assets. (B) Equity and fixed-income programs include assets managed by LSV in which fees are based on performance only. The average value of these assets for the three months endedJune 30, 2020 was$1.4 billion . (C) Equity and fixed-income programs include$7.4 billion of average assets invested in various asset allocation funds for the three months endedJune 30, 2020 . (D) In addition to the numbers presented, SEI also administers an additional$11.3 billion of average assets in Funds of Funds assets for the three months endedJune 30, 2020 on which SEI does not earn an administration fee. In the preceding tables, assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services through our subsidiaries and partnerships in which we have a significant interest. Assets under advisement include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. The assets presented in the preceding tables do not include assets processed on SWP and are not included in the accompanying Consolidated Balance Sheets because we do not own them. Business Segments Revenues, Expenses and Operating Profit (Loss) for our business segments for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 were as follows: Three Months Ended June 30, Percent Six Months Ended June 30, Percent 2020 2019 Change 2020 2019 Change Private Banks: Revenues$ 107,726 $ 116,092 (7)%$ 220,947 $ 234,351 (6)% Expenses 107,723 107,790 -% 218,376 218,752 -% Operating Profit $ 3$ 8,302 (100)%$ 2,571 $ 15,599 (84)% Operating Margin - % 7 % 1 % 7 %Investment Advisors : Revenues$ 93,708 $ 100,122 (6)%$ 196,029 $ 194,883 1% Expenses 50,149 50,558 (1)% 102,581 103,060 -% Operating Profit$ 43,559 $ 49,564 (12)%$ 93,448 $ 91,823 2% Operating Margin 46 % 50 % 48 % 47 %Institutional Investors : Revenues$ 76,523 $ 81,109 (6)%$ 155,726 $ 161,222 (3)% Expenses 36,937 39,361 (6)% 75,204 78,115 (4)% Operating Profit$ 39,586 $ 41,748 (5)%$ 80,522 $ 83,107 (3)% Operating Margin 52 % 51 % 52 % 52 % Investment Managers: Revenues$ 119,340 $ 109,202 9%$ 235,969 $ 213,851 10% Expenses 74,668 68,371 9% 148,957 137,437 8% Operating Profit$ 44,672 $ 40,831 9%$ 87,012 $ 76,414 14% Operating Margin 37 % 37 % 37 % 36 % Investments in New Businesses: Revenues$ 3,349 $ 3,061 9%$ 6,737 $ 6,099 10% Expenses 13,466 6,797 98% 24,376 12,737 91% Operating Loss$ (10,117) $ (3,736) NM$ (17,639) $ (6,638) NM
For additional information pertaining to our business segments, see Note 9 to the Consolidated Financial Statements.
35
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Private Banks
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
2020 2019 Change 2020 2019 Change
Revenues:
Information processing and software
servicing fees $ 76,655 $ 82,045 (7)% $ 156,288 $ 166,347 (6)%
Asset management, administration & distribution fees 31,071 34,047 (9)% 64,659 68,004 (5)% Total revenues$ 107,726 $ 116,092 (7)%$ 220,947 $ 234,351 (6)% Revenues decreased$8.4 million , or 7%, in the three month period and decreased$13.4 million , or 6%, in the six month period endedJune 30, 2020 and were primarily affected by: •Decreased investment processing fees from the loss of clients; •Decreased investment management fees from existing international clients due to negative cash flows and market volatility caused by the COVID-19 pandemic; and •Lower recurring investment processing fees earned on our mutual fund trading solution; partially offset by •Increased investment processing fees from new SWP client conversions and growth from existing SWP clients. Operating margins were essentially flat in the three and six month periods endedJune 30, 2020 as compared to 7% in the three and six month periods endedJune 30, 2019 . Operating income decreased by$8.3 million , or 100%, in the three month period and decreased$13.0 million , or 84%, in the six month period and was primarily affected by: •A decrease in revenues; and •Increased costs, mainly personnel and consulting costs, related to maintenance, support and client migrations to SWP; partially offset by •Decreased direct expenses associated with decreased investment management fees from existing international clients; and •Decreased promotion and travel costs due to COVID-19 restrictions.Investment Advisors Three Months Ended June 30, Percent Six Months Ended June 30, Percent 2020 2019 Change 2020 2019 Change Revenues: Investment management fees-SEI fund programs$ 62,251 $ 70,087 (11)%$ 132,431 $ 136,710 (3)% Separately managed account fees 26,545 25,448 4% 53,965 49,286 9% Other fees 4,912 4,587 7% 9,633 8,887 8% Total revenues$ 93,708 $ 100,122 (6)%$ 196,029 $ 194,883 1% Revenues decreased$6.4 million , or 6% in the three month period endedJune 30, 2020 and were primarily affected by: •The impact to investment management fees from the market volatility caused by the COVID-19 pandemic, negative cash flows and a decrease in average basis points earned on assets due to client-directed shifts into liquidity products and SEI's ETF program; partially offset by •Increased separately managed account program fees from positive cash flows into new and existing SEI-sponsored programs. Revenues increased$1.1 million , or 1%, in the six month period endedJune 30, 2020 and were primarily affected by: •Increased separately managed account program fees from positive cash flows into new and existing SEI-sponsored programs; partially offset by •The impact to investment management fees from the market volatility caused by the COVID-19 pandemic, negative cash flows and a decrease in average basis points earned on assets due to client-directed shifts into liquidity products and SEI's ETF program. 36
-------------------------------------------------------------------------------- Operating margin decreased to 46% compared to 50% in the three month period and increased to 48% compared to 47% in the six month period. Operating income decreased$6.0 million , or 12%, in the three month period and increased$1.6 million , or 2%, in the six month period and was primarily affected by: •An increase in revenues during the six month period; •Decreased costs associated with accounts formerly processed on TRUST 3000® due to client migrations to SWP; and •Decreased promotion and travel costs due to COVID-19 restrictions; partially offset by •Increased direct expenses associated with increased assets into our investment products; and •Increased sales compensation expense.Institutional Investors Revenues decreased$4.6 million , or 6%, in the three month period and decreased$5.5 million , or 3%, in the six month period endedJune 30, 2020 and were primarily affected by: •Defined benefit client losses, mainly resulting from acquisitions and plan curtailments; and •The impact to investment management fees from the market volatility caused by the COVID-19 pandemic; partially offset by •Asset funding from new sales of our investment management platforms. Operating margin increased to 52% compared to 51% in the three month period and remained at 52% in the six month period. Operating income decreased$2.2 million , or 5%, in the three month period and decreased$2.6 million , or 3%, in the six month period and was primarily affected by: •A decrease in revenues; partially offset by •Decreased direct expenses associated with investment management fees; and •Decreased travel costs due to COVID-19 restrictions. Investment Managers Revenues increased$10.1 million , or 9%, in the three month period and increased$22.1 million , or 10%, in the six month period endedJune 30, 2020 and were primarily affected by: •Positive cash flows into alternative, traditional and separately managed account offerings from new and existing clients; partially offset by •The impact from the market volatility caused by the COVID-19 pandemic to assets under administration; and •Client losses and fund closures. Operating margin remained at 37% in the three month period and increased to 37% compared to 36% in the six month period. Operating income increased$3.8 million , or 9%, in the three month period and increased$10.6 million , or 14%, in the six month period and was primarily affected by: •An increase in revenues; and •Decreased promotion and travel costs due to COVID-19 restrictions; partially offset by •Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; and •Increased non-capitalized investment spending, mainly consulting costs.
Other
Corporate overhead expenses Corporate overhead expenses primarily consist of general and administrative expenses and other costs not directly attributable to a reportable business segment. Corporate overhead expenses were$17.4 million and$16.6 million in the three months endedJune 30, 2020 and 2019, respectively, and$35.4 million and$36.6 million in the six months endedJune 30, 2020 , respectively. The decrease in corporate overhead expenses during the six month period is primarily due to a decrease in non-recurring personnel-related costs. 37 -------------------------------------------------------------------------------- Other income and expense Other income and expense items on the accompanying Consolidated Statements of Operations consists of: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Net gain (loss) from investments$ 1,903 $ 231 $ (2,086) $ 1,510 Interest and dividend income 1,370 4,313 4,573 8,570 Interest expense (151) (166) (303) (323) Equity in earnings of unconsolidated affiliate 28,276 37,832 58,183 75,149 Total other income and expense items, net$ 31,398
Net gain (loss) from investments Net gains from investments in the three months endedJune 30, 2020 were primarily due to unrealized gains recorded in current earnings related to LSV-sponsored investment funds and Company-sponsored mutual funds from market appreciation. Net loss from investments in the six months endedJune 30, 2020 were primarily due to unrealized losses recorded in current earnings related to LSV-sponsored investment funds and Company-sponsored mutual funds from the market volatility caused by the COVID-19 pandemic (See Note 5). Interest and dividend income Interest and dividend income is earned based upon the amount of cash that is invested daily. The decrease in interest and dividend income in the three and six months endedJune 30, 2020 was due to an overall decline in interest rates. Equity in earnings of unconsolidated affiliate Equity in earnings of unconsolidated affiliate reflects our less than 50% ownership in LSV. As ofJune 30, 2020 , our total partnership interest in LSV was 38.8%. The table below presents the revenues and net income of LSV and our proportionate share in LSV's earnings. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Percent Change 2020 2019 Percent Change Revenues of LSV$ 94,648 $ 123,017 (23)%$ 194,644 $ 243,932 (20)% Net income of LSV 72,847 97,271 (25)% 149,744 193,219 (23)% SEI's proportionate share in earnings of LSV$ 28,276 $ 37,832 (25)%$ 58,183 $ 75,149 (23)% The decline in our earnings from LSV in the three and six months endedJune 30, 2020 was due to lower assets under management from negative cash flows from existing clients, the market volatility caused by the COVID-19 pandemic and client losses. Average assets under management by LSV decreased$15.6 billion to$84.2 billion during the six months endedJune 30, 2020 as compared to$103.7 billion during the six months endedJune 30, 2019 , a decrease of 19%. Income Taxes Our effective income tax rates for the three and six months endedJune 30, 2020 and 2019 differs from the federal income tax statutory rate due to the following: Six Months Ended Three Months Ended June 30, June 30, 2020 2019 2020 2019 Statutory rate 21.0 % 21.0 % 21.0 % 21.0 % State taxes, net of federal tax benefit 3.3 2.6 3.2 2.6 Foreign tax expense and tax rate differential (0.2) (0.1) (0.1) (0.1) Tax benefit from stock option exercises (0.4) (1.1) (1.3) (1.1) Other, net (0.4) (0.3) (0.4) (0.3) 23.3 % 22.1 % 22.4 % 22.1 %
The increase in our tax rate for both periods was primarily due to an increase in our state effective tax rate. Our second quarter 2020 tax rate was also impacted by decreased tax benefits associated with stock option exercises.
38
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Stock-Based Compensation
We recognized $14.0 million and $10.1 million in stock-based compensation
expense during the six months ended June 30, 2020 and 2019, respectively. The
amount of stock-based compensation expense we recognize is based upon our
estimate of when financial vesting targets may be achieved. Any change in our
estimate could result in the amount of stock-based compensation expense to be
accelerated, spread out over a longer period, or reversed. This may cause
volatility in the recognition of stock-based compensation expense in future
periods and could materially affect our earnings.
Fair Value Measurements
The fair value of our financial assets and liabilities, except for the
investment funds sponsored by LSV, is determined in accordance with the fair
value hierarchy. The fair value of the investment funds sponsored by LSV is
measured using the net asset value per share (NAV) as a practical expedient. The
fair value of all other financial assets are determined using Level 1 or Level 2
inputs and consist mainly of investments in equity or fixed-income mutual funds
that are quoted daily and Government National Mortgage Association (GNMA) and
other U.S. government agency securities that are single issuer pools that are
valued based on current market data of similar assets. The Company's Level 3
financial liabilities at June 30, 2020 and December 31, 2019 consist entirely of
the estimated contingent consideration resulting from an acquisition (See Note
12 to the Consolidated Financial Statements). We did not have any other
financial liabilities at June 30, 2020 or December 31, 2019 that were required
to be measured at fair value on a recurring basis (See Note 4 to the
Consolidated Financial Statements).
Regulatory Matters
Like many firms operating within the financial services industry, we are
experiencing a difficult and increasingly complex regulatory environment across
our markets. Our current scale and reach as a provider to the financial services
industry, the introduction and implementation of new platforms for our financial
services industry clients, the increased regulatory oversight of the financial
services industry generally, new laws and regulations affecting the financial
services industry and ever-changing regulatory interpretations of existing laws
and regulations, and a greater propensity of regulators to pursue enforcement
actions and other sanctions against regulated entities, have made this an
increasingly challenging and costly regulatory environment in which to operate.
SEI and our regulated subsidiaries have undergone or been scheduled to undergo a
range of periodic or thematic reviews, examinations or investigations by
numerous regulatory authorities around the world, including the Office of the
Comptroller of the Currency , the Securities and Exchange Commission , the
Financial Industry Regulatory Authority, Inc. , the Financial Conduct Authority
of the United Kingdom , the Central Bank of Ireland and others. These regulatory
activities typically result in the identification of matters or practices to be
addressed by us or our subsidiaries and, in certain circumstances, the
regulatory authorities require remediation activities or pursue enforcement
proceedings against us or our subsidiaries. From time to time, the regulators in
different jurisdictions will elevate their level of scrutiny of our operations
as our business expands or is deemed critical to the operations of the relevant
financial markets. As described under the caption "Regulatory Considerations" in
our Annual Report on Form 10-K, the range of possible sanctions that are
available to regulatory authorities include limitations on our ability to engage
in business for specified periods of time, the revocation of registration,
censures and fines. The direct and indirect costs of responding to these
regulatory activities, implementation of any remediation actions, and of
complying with new or modified regulations, as well as the potential financial
costs and potential reputational impact against us of any enforcement
proceedings that might result, is uncertain but could have a material adverse
impact on our operating results or financial position.
Liquidity and Capital Resources
Six Months Ended
2020 2019
Net cash provided by operating activities $ 264,132 $ 217,645
Net cash used in investing activities (37,393) (30,306)
Net cash used in financing activities (299,364) (259,869)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(10,545) 277
Net decrease in cash, cash equivalents and restricted cash (83,170) (72,253)
Cash, cash equivalents and restricted cash, beginning of period 844,547 758,039
Cash, cash equivalents and restricted cash, end of period $ 761,377 $ 685,786
39-------------------------------------------------------------------------------- Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. AtJune 30, 2020 , our unused sources of liquidity consisted of cash and cash equivalents and the amount available under our credit facility. Our credit facility provides for borrowings of up to$300.0 million and is scheduled to expire inJune 2021 (See Note 6 to the Consolidated Financial Statements). As ofJuly 23, 2020 , we had outstanding letters of credit of$11.6 million which reduced our amount available under the credit facility to$288.4 million . These letters of credit were primarily issued for the expansion of our corporate headquarters and are due to expire in late 2020. The availability of the credit facility is subject to compliance with certain covenants set forth in the agreement. The credit facility contains covenants which restrict our ability to engage in mergers, consolidations, asset sales, investments, transactions with affiliates other than wholly-owned subsidiaries, or to incur liens or other indebtedness including contingent obligations or guarantees, as defined in the agreement. In the event of a default under the credit facility, we would also be restricted from paying dividends on, or repurchasing, our common stock. Currently, our ability to borrow from the credit facility is not limited by any covenant of the agreement. Our credit facility is provided throughWells Fargo Bank, National Association , and a syndicate of other well-established financial institutions. As ofJuly 23, 2020 , we are not aware of any issues related to the ability of the lenders to honor the borrowing terms in our credit facility agreement. Our credit facility contains terms that utilize the London InterBank Offered Rate (LIBOR) as a potential component of the interest rate to be applied to the borrowings we may undertake under the agreement (See Note 6 to the Consolidated Financial Statements). We are currently monitoring the actions of LIBOR's regulator and the implementation of alternative reference rates in advance of the expected discontinuation of LIBOR after 2021 to determine any potential impact to our current credit facility and negotiations for subsequent borrowing agreements. The majority of our excess cash reserves are primarily placed in accounts located inthe United States that invest entirely in SEI-sponsored money market mutual funds denominated in theU.S. dollar. We also utilize demand deposit accounts or money market accounts at several well-established financial institutions located inthe United States . Accounts used to manage these excess cash reserves do not impose any restrictions or limitations that would prevent us from being able to access such cash amounts immediately. As ofJuly 23, 2020 , the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was$370.6 million . Our cash and cash equivalents include accounts managed by our subsidiaries that are used in their operations or to cover specific business and regulatory requirements. The availability of this cash for other purposes beyond the operations of these subsidiaries may be limited. We therefore do not include accounts of our foreign subsidiaries in our calculation of free and immediately accessible cash for other general corporate purposes. A portion of the undistributed earnings of our foreign subsidiaries are deemed repatriated. Any subsequent transfer of available cash related to the repatriated earnings of our foreign subsidiaries could significantly increase our free and immediately accessible cash. Cash flows from operations increased$46.5 million in the first six months of 2020 compared to the first six months of 2019 primarily from the positive impact from the change in our working capital accounts and higher distribution payments received from our unconsolidated affiliate, LSV. The increase was partially offset by the decline in our net income. Net cash used in investing activities includes: •Purchases, sales and maturities of marketable securities. Our purchases, sales and maturities of marketable securities in the first six months of 2020 and 2019 were as follows: Six Months Ended June 30, 2020 2019 Purchases$ (60,764) $ (77,891) Sales and maturities 71,846 85,012 Net investing activities from marketable securities$ 11,082
•The capitalization of costs incurred in developing computer software. We capitalized$12.5 million of software development costs in the first six months of 2020 as compared to$19.2 million in the first six months of 2019. The majority of our software development costs are related to significant enhancements for the expanded functionality of the SEI Wealth Platform. •Capital expenditures. Our capital expenditures in the first six months of 2020 were$34.4 million as compared to$18.2 million in the first six months of 2019. Our expenditures in 2020 and 2019 primarily include purchased software, equipment for our data center operations and the expansion of our corporate headquarters which is 40
-------------------------------------------------------------------------------- scheduled to be completed by the fourth quarter 2020. Total expenditures related to the expansion for the remainder of 2020 are expected to be approximately$5.6 million . Net cash used in financing activities includes: •The repurchase of our common stock. Our Board of Directors has authorized the repurchase of our common stock through multiple authorizations. Currently, there is no expiration date for our common stock repurchase program. We had total capital outlays of$219.4 million during the first six months of 2020 and$183.4 million during the first six months of 2019 for the repurchase of our common stock. •Proceeds from the issuance of our common stock. We received$24.6 million in proceeds from the issuance of our common stock during the first six months of 2020 as compared to$24.3 million during the first six months of 2019. The increase in proceeds is primarily attributable to a higher level of stock option exercise activity. •Dividend payments. Cash dividends paid were$103.9 million in the first six months of 2020 as compared to$100.7 million in the first six months of 2019. We believe our operating cash flow, available borrowing capacity, and existing cash and cash equivalents should provide adequate funds for ongoing operations; continued investment in new products and equipment; our common stock repurchase program, expansion of our corporate headquarters and future dividend payments. Forward-Looking Information and Risk Factors The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements. Among the risks and uncertainties which may affect our future operations, strategies, financial results or other developments are those risks described in our latest Annual Report on Form 10-K in Part I, Item 1A. These risks include the following: •changes in capital markets that may affect our revenues and earnings; •product development risk; •risk of failure by a third-party service provider; •data and cyber security risks; •operational risks associated with the processing of investment transactions; •systems and technology risks; •pricing pressure from increased competition, disruptive technology and poor investment performance; •the affect on our earnings and cashflows from the performance ofLSV Asset Management ; •third party pricing services for the valuation of securities invested in our investment products; •external factors affecting the fiduciary management market; •the affect of extensive governmental regulation; •litigation and regulatory examinations and investigations; •our ability to capture the expected value from acquisitions, divestitures, joint ventures, minority stakes or strategic alliances; •increased costs and regulatory risks from the growth of our business; •fiduciary or other legal liability for client losses from our investment management operations; •consolidation within our target markets; •our ability to receive dividends or other payments in needed amounts from our subsidiaries; •the exit by theUnited Kingdom from theEuropean Union ; •third party approval of our investment products with advisors affiliated with independent broker-dealers or other networks; •the effectiveness of our business, risk management and business continuity strategies, models and processes; •financial and non-financial covenants which may restrict our ability to manage liquidity needs; 41
-------------------------------------------------------------------------------- •changes in, or interpretation of, accounting principles or tax rules and regulations; •fluctuations in foreign currency exchange rates; •fluctuations in interest rates affecting the value of our fixed-income investment securities; •our ability to hire and retain qualified employees; •the competence and integrity of our employees and third-parties; •stockholder activism efforts; •retention of executive officers and senior management personnel; and •unforeseen or catastrophic events, including the emergence of pandemic, terrorist attacks, extreme weather events or other natural disasters. We conduct our operations through many regulated wholly-owned subsidiaries. These subsidiaries are: •SEI Investments Distribution Co., or SIDCO, a broker-dealer registered with theSEC under the Securities Exchange Act of 1934 and a member of theFinancial Industry Regulatory Authority, Inc. , orFINRA ; •SEI Investments Management Corporation, or SIMC, an investment advisor registered with theSEC under the Investment Advisers Act of 1940 and with theCommodity Futures Trading Commission , or CFTC, under the Commodity Exchange Act; •SEI Private Trust Company, or SPTC, a limited purpose federal thrift chartered and regulated by theOffice of the Comptroller of the Currency ; •SEI Trust Company, or STC, aPennsylvania trust company, regulated by thePennsylvania Department of Banking and Securities ; •SEI Investments (Europe ) Limited, or SIEL, an investment manager and financial institution subject to regulation by theFinancial Conduct Authority of the United Kingdom ; •SEI Investments Canada Company, or SEI Canada, an investment fund manager that has various other capacities that is regulated by theOntario Securities Commission and various provincial authorities; •SEI Investments Global, Limited, or SIGL, a management company for Undertakings forCollective Investment inTransferable Securities , or UCITS, and for Alternative Investment Funds, or AIFs, that is regulated primarily by theCentral Bank of Ireland , or CBI; •SEI Investments -Global Fund Services, Ltd. , or GFSL, an authorized provider of administration services for Irish and non-Irish collective investment schemes that is regulated by the CBI; and •SEI Investments -Depositary and Custodial Services (Ireland) Limited , or D&C, an authorized provider of depositary and custodial services that is regulated by the CBI. In addition to the regulatory authorities listed above, our subsidiaries are subject to the jurisdiction of regulatory authorities in other foreign countries. In addition to our wholly-owned subsidiaries, we also own a minority interest of approximately 38.8 percent in LSV, which is also an investment advisor registered with theSEC . The Company, its regulated subsidiaries, their regulated services and solutions and their customers are all subject to extensive legislation, regulation and supervision that recently has been subject to, and continues to experience, significant change and increased regulatory activity. These changes and regulatory activities could have a material adverse effect on us and our clients. The various governmental agencies and self-regulatory authorities that regulate or supervise the Company and its subsidiaries have broad administrative powers. In the event of a failure to comply with laws, regulations and requirements of these agencies and authorities, the possible business process changes required or sanctions that may be imposed include the suspension of individual employees, limitations on our ability to engage in business for specified periods of time, the revocation of applicable registration as a broker-dealer, investment advisor or other regulated entity, and, as the case may be, censures and fines. Additionally, certain securities and banking laws applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business. Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to our regulated subsidiaries and their activities, services and solutions, our business practices, our past actions and other matters has increased dramatically in the past several years. Responding to these examinations, investigations, actions and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the 42
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time and effort of our senior management from our business. Penalties, fines and changes to business processes sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. We continue to be subject to inquiries from examinations and investigations by supervisory and enforcement divisions of regulatory authorities and expect this to continue in the future. We believe this is also the case with many of our regulated clients. Governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation, our relationship with clients and prospective clients, and on the morale and performance of our employees, which could adversely affect our businesses and results of operations. We are subject to theUSA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. Anti-money laundering laws outsidethe United States contain similar requirements. We offer investment and banking solutions that also are subject to regulation by the federal and state securities and banking authorities, as well as foreign regulatory authorities, where applicable. Existing or future regulations that affect these solutions could lead to a reduction in sales of these solutions or require modifications of these solutions. Compliance with existing and future regulations and responding to and complying with recent increased regulatory activity affecting broker-dealers, investment advisors, investment companies, financial institutions and their service providers could have a significant impact on us. We periodically undergo regulatory examinations and respond to regulatory inquiries and document requests. In addition, recent and continuing legislative activity inthe United States and in other jurisdictions (including theEuropean Union and theUnited Kingdom ) have made and continue to make extensive changes to the laws regulating financial services firms. As a result of these examinations, inquiries and requests, as a result of increased civil litigation activity, and as a result of these new laws and regulations, we engage legal counsel and other subject matter experts, review our compliance procedures, solution and service offerings, and business operations, and make changes as we deem necessary or as may be required by the applicable authority. These additional activities and required changes may result in increased expense or may reduce revenues. Our bank clients are subject to supervision by federal, state and foreign banking and financial services authorities concerning the manner in which such clients purchase and receive our products and services. Our plan sponsor clients and our subsidiaries providing services to those clients are subject to supervision by theDepartment of Labor and compliance with employee benefit regulations. Investment advisor and broker-dealer clients are regulated by theSEC , state securities authorities, orFINRA . Existing or future regulations applicable to our clients may affect our clients' purchase of our products and services. In addition, see the discussion of governmental regulations in Item 1A "Risk Factors" in our latest Annual Report on Form 10-K for a description of the risks that proposed regulatory changes may present for our business.
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