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MarketScreener Homepage  >  Equities  >  Nasdaq  >  SEI Investments Company    SEIC

SEI INVESTMENTS COMPANY

(SEIC)
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SEI INVESTMENTS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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02/24/2020 | 04:40pm EDT
(In thousands, except share and per-share data)
This discussion reviews and analyzes the consolidated financial condition at
December 31, 2019 and 2018, the consolidated results of operations for the years
ended December 31, 2019, 2018 and 2017, and other factors that may affect future
financial performance. This discussion should be read in conjunction with the
Selected Financial Data included in Item 6 of this Annual Report and the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements included in Item 8 of this Annual Report.
Certain information contained in this discussion is or may be considered
forward-looking. Forward-looking statements relate to future operations,
strategies, financial results, expenditures and other uses of capital or other
developments. Forward-looking statements are based upon estimates and
assumptions that involve certain judgments, 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.
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 monthly fees for contracted services,
including computer processing services, software licenses and investment
operations services, as well as transaction-based fees for providing securities
valuation and trade-execution. Investment operations and investment management
fees are earned as a percentage of assets under management, administration or
advised assets. As of December 31, 2019, 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 $352.0 billion in assets under management
and $683.3 billion in client assets under administration. Our affiliate, LSV
Asset Management (LSV), manages $107.5 billion of assets which are included as
assets under management.
Our Condensed Consolidated Statements of Operations for the years ended 2019,
2018 and 2017 were:
                                                                          Percent                    Percent
Year Ended December 31,                      2019            2018         Change*        2017         Change
Revenues                                 $ 1,649,885$ 1,624,167        2  %     $ 1,526,552         6  %
Expenses                                   1,189,461       1,182,179        1  %       1,129,608         5  %
Income from operations                       460,424         441,988        4  %         396,944        11  %
Net gain (loss) from investments               3,174            (325 )     NM              1,269        NM
Interest income, net of interest
expense                                       15,952          12,752       25  %           6,276       103  %
Equity in earnings of unconsolidated
affiliates                                   151,891         159,791       (5 )%         152,550         5  %
Income before income taxes                   631,441         614,206        3  %         557,039        10  %
Income taxes                                 130,015         108,338       20  %         152,650       (29 )%
Net income                                   501,426         505,868      

(1 )% 404,389 25 % Diluted earnings per common share $ 3.24$ 3.14 3 % $ 2.49 26 %



* Variances noted "NM" indicate the percent change is not meaningful.
Significant Items Impacting Our Financial Results in 2019
Revenues increased $25.7 million, or 2%, to $1.6 billion in 2019 compared to
2018. Net income decreased $4.4 million, or 1%, to $501.4 million and diluted
earnings per share increased to $3.24 per share in 2019 compared to $3.14 per
share in 2018. We believe the following items were significant to our business
results during 2019:
•    Revenue from Asset management, administration and distribution fees
     increased primarily from higher assets under administration in our
     Investment Managers segment due to sales of new business and market
     appreciation. Our average assets under administration increased $80.2

billion, or 14%, to $635.8 billion during 2019 as compared to $555.6 billion

during 2018.

• Information processing and software servicing fees in our Private Banks

segment decreased by $10.4 million during 2019 due to previously announced

     client losses and decreased non-recurring fees.



                                 Page 27 of 93
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• Revenues in our Institutional Investors segment declined $11.2 million

during 2019 due to acquisitions, plan curtailments and fee compression from

increased competition related to the continued contraction of the U.S.

corporate defined benefit market. Asset funding from new sales partially

offset the decline in revenues.

• Our proportionate share in the earnings of LSV decreased by $7.9 million, or

5%, in 2019 due to lower assets under management from negative cash flows

and lost clients. Market appreciation during 2019 partially offset the

decline in LSV's average assets under management. Lower performance fees

earned by LSV also negatively impacted our earnings.

• Our operating expenses were favorably impacted by cost containment measures

implemented in late 2018 and early 2019. These expenses primarily consist of

operational, technology and marketing costs and are mainly related to our

solutions offerings as well as servicing existing and acquiring new clients.

These operating expenses are primarily included in Compensation, benefits

     and other personnel costs on the accompanying Consolidated Statements of
     Operations.

• We capitalized $33.1 million in 2019 for SWP as compared to $43.4 million in

2018. Amortization expense related to SWP increased to $42.3 million during

2019 as compared to $39.9 million during 2018 due to continued development.

The proportion of our expenses related to maintenance and support of SWP,

which are not capitalized, has increased as compared to our costs related to

development and enhancements eligible for capitalization.

• Our effective tax rate during 2019 was 20.6% as compared to 17.6% during

2018. The increase in our effective tax rate was primarily due to reduced

tax benefits from a lower volume of stock option exercise activity (See the

caption "Income Taxes" later in this discussion for more information).

• We continued our stock repurchase program during 2019 and purchased

approximately 6,225,000 shares at an average price of $55.96 per share for a

total cost of $348.3 million.



Significant Items Impacting Our Financial Results in 2018
Revenues increased $97.6 million, or 6%, to $1.6 billion in 2018 compared to
2017. Net income increased $101.5 million, or 25%, to $505.9 million and diluted
earnings per share increased to $3.14 per share in 2018 compared to $2.49 per
share in 2017. We believe the following items were significant to our business
results during 2018:
•    Revenue growth was primarily driven by higher Asset management,

administration and distribution fees from market appreciation and positive

cash flows from new and existing clients throughout the majority of 2018.

Market volatility and negative cash flows occurring during the fourth

quarter 2018 negatively impacted our revenues from assets under management

and partially offset our revenue growth. Our average assets under

management, excluding LSV, increased $12.1 billion, or 6%, to $226.6 billion

during 2018 as compared to $214.5 billion during 2017.

• Our average assets under administration increased $58.0 billion, or 12%, to

$555.6 billion during 2018 as compared to $497.6 billion during 2017

primarily from positive cash flows from new and existing clients in our

Investment Managers segment. Assets under administration were also

positively impacted from our acquisition of SEI Archway during the third

quarter 2017 which resulted in an increase in asset administration fees in

our Investment Managers segment of $13.1 million during 2018.

• Information processing and software servicing fees in our Private Banks

segment increased in 2018 primarily due to increased assets from new and

existing clients processed on SWP; however, the adoption of new revenue

recognition guidance in 2018 partially offset this increase. The impact of

     this new guidance reduced our revenues from research services provided by
     our brokerage subsidiary, SIDCO, with a corresponding reduction in our
     expenses related to our amounts paid under soft dollar arrangements

reflected in Software royalties and other information processing costs.

• Our proportionate share in the earnings of LSV was $159.8 million in 2018 as

compared to $152.6 million in 2017, an increase of 5%. The increase was

primarily due to increased assets under management from LSV's existing

clients due to market appreciation. The market volatility during the fourth

quarter 2018 and lower performance fees partially offset the increase in our

     earnings from LSV.


•    Our operating expenses, primarily personnel costs, across all of our
     business segments increased. These expenses primarily consist of
     operational, technology and marketing costs and are mainly related to our

solutions offerings as well as servicing existing and acquiring new clients.

In addition, our Investment Managers segment includes costs related to SEI

Archway. These operating expenses are included in Compensation, benefits and

     other personnel costs on the accompanying Consolidated Statements of
     Operations.

• We capitalized $43.4 million in 2018 for SWP as compared to $51.4 million in

2017. Amortization expense related to SWP decreased to $39.9 million during

     2018 as compared to $46.5 million during 2017 due to the adjustment to the
     estimated useful life of certain components and functionality of SWP
     effective in the fourth quarter 2017 (See Note 1 to the Consolidated
     Financial Statements).



                                 Page 28 of 93
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• During 2018, we placed into service an application developed for the

Investment Managers segment. This new offering includes components that

leverage upon the current infrastructure and add significant enhancements

designed to aggregate, transact and process data. Amortization expense

related to the application was $5.2 million during 2018.

• Stock-based compensation expense decreased by $12.6 million during 2018

primarily due to the increase in expense associated with the achievement of

stock option vesting targets earlier than originally estimated in 2017.

• Our effective tax rate during 2018 was 17.6% and included the 21.0%

corporate tax rate and other impacts from the Tax Cut and Jobs Act (the Tax

Act). Our effective tax rate was 27.4% during 2017 and reflected the

estimated impact of the Tax Act and included a net tax benefit of $12.4

million from the re-measurement of our deferred tax liability net of the tax

associated with the deemed repatriation and withholding tax of our

previously undistributed foreign earnings. In addition, the rate for both

periods were favorably impacted by tax benefits from stock option exercise

activity.

• We continued our stock repurchase program during 2018 and purchased

approximately 6,744,000 shares at an average price of $60.02 per share for a

total cost of $404.8 million.



Sensitivity of our revenues and earnings to capital market fluctuations and
client portfolio strategy
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 capital market conditions during 2019 were marked by a broad
recovery following the steep correction during the fourth quarter of 2018. These
market conditions had a net positive impact on our asset-based fees thereby
increasing our base revenues. Additionally, changes in the portfolio strategy of
our clients or their customers in response to the market volatility and growing
industry trends towards passive investing resulted in asset flows into our lower
margin products. Macroeconomic factors such as U.S. Presidential politics, trade
relations between the United States and China, and mideast tensions, among
others, could have significant influence on capital markets in 2020 and beyond.
Any prolonged future downturns in general capital market conditions or long-term
client portfolio strategies directing significant assets into lower margin
products could have adverse effects on our revenues and earnings derived from
assets under management and administration.
Impact to our revenues due to client losses
Client losses during 2019 and 2018 in our Private Banks and Institutional
Investors segments have negatively impacted our revenue growth. For some of
these clients, the negative impact to our revenues and earnings are expected to
be fully recognized during the course of 2020.
Impact of Adopting Revenue Recognition Guidance
During 2018, we adopted new revenue guidance (ASC 606) which addresses the
recognition of revenues from contracts with customers and impacted the
presentation of certain revenues and expenses in our consolidated financial
statements. ASC 606 is applied prospectively from January 1, 2018 and reported
financial results for the prior comparable period were not revised.
ASC 606 did not change the accounting for the majority of our revenue
arrangements and did not have a material impact to our consolidated financial
statements. The impact from the adoption of ASC 606 to our financial results
during 2018 was primarily related to research services provided to customers in
soft-dollar arrangements by SIDCO, our broker-dealer subsidiary, and the
deferral of incremental contract acquisition costs. Under the new revenue
standard, fees received for research services by SIDCO were recorded net of
amounts paid for the soft dollar arrangement. The amounts we paid under these
arrangements were previously recorded as an expense. The impact of this change
in presentation was a decline in both revenues and expenses of $16.7 million
during 2018. There was no impact to our net income as a result of this change.
The corresponding amount paid for soft dollar arrangements recorded as expense
in 2017 was $14.6 million. Also under the new revenue standard, costs incurred
to acquire client contracts were deferred and recognized over the expected
client life. During 2018, we deferred $8.1 million in expenses related to sales
commissions costs and incurred $2.8 million of amortization expense (See Note 3
to the Consolidated Financial Statements).

                                 Page 29 of 93

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Ending Asset Balances
This table presents ending asset balances of our clients, or of our clients'
customers, for which we provide management or administrative services through
our subsidiaries and partnerships in which we have a significant interest.
Ending Asset Balances
(In millions)                                                     As of December 31,

                                       2019            2018        Percent Change        2017        Percent Change
Private Banks:
Equity and fixed-income programs   $    23,851$   20,453            17  %       $   22,764           (10 )%
Collective trust fund programs               4              4             -  %                4             -  %
Liquidity funds                          3,405          3,633            (6 )%            3,864            (6 )%
Total assets under management      $    27,260$   24,090            13  %       $   26,632           (10 )%
Client assets under
administration                          25,801         20,226            28  %           22,980           (12 )%
Total assets                       $    53,061$   44,316            20  %       $   49,612           (11 )%
Investment Advisors:
Equity and fixed-income programs   $    67,895$   55,395            23  %       $   61,908           (11 )%
Collective trust fund programs               4              7           (43 )%                5            40  %
Liquidity funds                          2,887          5,948           (51 )%            2,414           146  %
Total assets under management      $    70,786$   61,350            15  %       $   64,327            (5 )%
Institutional Investors:
Equity and fixed-income programs   $    84,291$   78,765             7  %       $   87,587           (10 )%
Collective trust fund programs              83             79             5  %               78             1  %
Liquidity funds                          1,746          2,234           (22 )%            2,937           (24 )%
Total assets under management      $    86,120$   81,078             6  %       $   90,602           (11 )%
Advised assets                           3,948          3,359            18  %            3,942           (15 )%
Total assets                       $    90,068$   84,437             7  %       $   94,544           (11 )%
Investment Managers:
Equity and fixed-income programs   $         -     $       89            NM          $       96            (7 )%
Collective trust fund programs          58,070         42,804            36  %           49,340           (13 )%
Liquidity funds                            479            336            43  %              743           (55 )%
Total assets under management      $    58,549$   43,229            35  %       $   50,179           (14 )%
Client assets under
administration (A)                     657,541        552,318            19  %          495,447            11  %
Total assets                       $   716,090$  595,547            20  %       $  545,626             9  %
Investments in New Businesses:
Equity and fixed-income programs   $     1,688$    1,257            34  %       $    1,104            14  %
Liquidity funds                            158            189           (16 )%               53            NM
Total assets under management      $     1,846$    1,446            28  %       $    1,157            25  %
Advised assets                           1,343            687            NM                  49            NM
Total assets                       $     3,189$    2,133            50  %       $    1,206            77  %
LSV:
Equity and fixed-income programs
(B)                                $   107,476$   96,114            12  %       $  107,690           (11 )%

Total:

Equity and fixed-income programs
(C)                                $   285,201$  252,073            13  %       $  281,149           (10 )%
Collective trust fund programs          58,161         42,894            36  %           49,427           (13 )%
Liquidity funds                          8,675         12,340           (30 )%           10,011            23  %
Total assets under management      $   352,037$  307,307            15  %       $  340,587           (10 )%
Advised assets                           5,291          4,046            31  %            3,991             1  %
Client assets under
administration (D)                     683,342        572,544            19  %          518,427            10  %
Total assets under management,
advisement and administration      $ 1,040,670$  883,897            18  %       $  863,005             2  %



                                 Page 30 of 93
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(A) Client assets under administration in the Investment Managers segment include

$50.8 billion of assets that are at fee levels below our normal full service

assets (as of December 31, 2019).

(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 of

December 31, 2019 was $2.5 billion.

(C) Equity and fixed-income programs include $6.0 billion of assets invested in

various asset allocation funds at December 31, 2019.

(D) In addition to the numbers presented, SEI also administers an additional

$13.1 billion in Funds of Funds assets (as of December 31, 2019) on which SEI

    does not earn an administration fee.



                                 Page 31 of 93
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Average Asset Balances
This table presents average asset balances of our clients, or of our clients'
customers, for which we provide management or administrative services through
our subsidiaries and partnerships in which we have a significant interest.
Average Asset Balances
(In millions)                                              For the Year Ended December 31,

                                       2019           2018        Percent Change        2017        Percent Change
Private Banks:
Equity and fixed-income programs   $   22,364$   22,545            (1 )%       $   20,139            12  %
Collective trust fund programs              4              4             -  %                4             -  %
Liquidity funds                         3,575          3,469             3  %            3,717            (7 )%
Total assets under management      $   25,943$   26,018             -  %       $   23,860             9  %
Client assets under
administration                         23,467         22,697             3  %           21,397             6  %
Total assets                       $   49,410$   48,715             1  %       $   45,257             8  %
Investment Advisors:
Equity and fixed-income programs   $   63,071$   62,223             1  %       $   57,475             8  %
Collective trust fund programs              5              5             -  %                5             -  %
Liquidity funds                         3,504          2,782            26  %            2,380            17  %
Total assets under management      $   66,580$   65,010             2  %       $   59,860             9  %
Institutional Investors:
Equity and fixed-income programs   $   82,506$   84,743            (3 )%       $   82,377             3  %
Collective trust fund programs             80             75             7  %               84           (11 )%
Liquidity funds                         2,278          2,611           (13 )%            2,995           (13 )%
Total assets under management      $   84,864$   87,429            (3 )%       $   85,456             2  %
Advised assets                          3,760          4,128            (9 )%            3,540            17  %
Total assets                       $   88,624$   91,557            (3 )%       $   88,996             3  %
Investment Managers:
Equity and fixed-income programs   $        -     $       99            NM          $       88            13  %
Collective trust fund programs         51,379         46,189            11  %           43,323             7  %
Liquidity funds                           540            630           (14 )%              898           (30 )%
Total assets under management      $   51,919$   46,918            11  %       $   44,309             6  %
Client assets under
administration (A)                    612,374        532,934            15  %          476,207            12  %
Total assets                       $  664,293$  579,852            15  %       $  520,516            11  %
Investments in New Businesses:
Equity and fixed-income programs   $    1,522$    1,135            34  %       $      990            15  %
Liquidity funds                           167            123            36  %               59           108  %
Total assets under management      $    1,689$    1,258            34  %       $    1,049            20  %
Advised assets                            878            650            35  %               70            NM
Total assets                       $    2,567$    1,908            35  %       $    1,119            71  %
LSV:
Equity and fixed-income programs
(B)                                $  103,086$  106,901            (4 )%       $   97,879             9  %

Total:

Equity and fixed-income programs
(C)                                $  272,549$  277,646            (2 )%       $  258,948             7  %
Collective trust fund programs         51,468         46,273            11  %           43,416             7  %
Liquidity funds                        10,064          9,615             5  %           10,049            (4 )%
Total assets under management      $  334,081$  333,534             -  %       $  312,413             7  %
Advised assets                          4,638          4,778            (3 )%            3,610            32  %
Client assets under
administration (D)                    635,841        555,631            14  %          497,604            12  %
Total assets under management,
advisement and administration      $  974,560$  893,943             9  %       $  813,627            10  %



                                 Page 32 of 93
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(A) Average client assets under administration in the Investment Managers
segment for the year ended December 31, 2019 include $50.8 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 year
ended December 31, 2019 was $2.4 billion.
(C) Equity and fixed-income programs include $6.0 billion of average assets

invested in various asset allocation funds for the year ended December 31,

2019.

(D) In addition to the numbers presented, SEI also administers an additional

$13.1 billion of average assets in Funds of Funds assets for the year ended

December 31, 2019 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. Advised assets 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 year ended 2019 compared to the year ended 2018, and for the year ended 2018
compared to the year ended 2017 were:
                                                              Percent                   Percent
Year Ended December 31,             2019          2018        Change        2017        Change
Private Banks:
Revenues                         $ 470,276$ 483,097       (3 )%     $ 474,272         2 %
Expenses                           443,136       457,894       (3 )%       455,119         1 %
Operating profit                 $  27,140$  25,203        8  %     $  19,153        32 %
Operating margin                         6 %           5 %                       4 %
Investment Advisors:
Revenues                           403,778       399,089        1  %       373,473         7 %
Expenses                           208,508       212,439       (2 )%       201,833         5 %
Operating profit                 $ 195,270$ 186,650        5  %     $ 171,640         9 %
Operating margin                        48 %          47 %                      46 %
Institutional Investors:
Revenues                           322,062       333,299       (3 )%       322,457         3 %
Expenses                           153,937       163,536       (6 )%       161,640         1 %
Operating profit                 $ 168,125$ 169,763       (1 )%     $ 160,817         6 %
Operating margin                        52 %          51 %                      50 %
Investment Managers:
Revenues                           440,796       398,076       11  %       349,444        14 %
Expenses                           282,024       259,693        9  %       226,504        15 %
Operating profit                 $ 158,772$ 138,383       15  %     $ 122,940        13 %
Operating margin                        36 %          35 %                      35 %
Investments in New Businesses:
Revenues                            12,973        10,606       22  %         6,906        54 %
Expenses                            29,660        22,971       29  %        20,678        11 %
Operating loss                   $ (16,687 )$ (12,365 )     NM        $ (13,772 )      NM

For additional information pertaining to our business segments, see Note 12 to the Consolidated Financial Statements.

                                 Page 33 of 93

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Private Banks
                                                                      Percent                   Percent
Year Ended December 31,                     2019          2018        Change        2017        Change
Revenues:
Investment processing and software
servicing fees                           $ 331,706$ 342,117       (3 )%     $ 335,675        2 %
Asset management, administration &
distribution fees                          138,570       140,980       (2 )%       138,597        2 %
Total revenues                           $ 470,276$ 483,097       (3 )%     $ 474,272        2 %


Revenues decreased $12.8 million, or 3%, in 2019 compared to the prior year.
Revenues during 2019 were primarily affected by:
•      Decreased investment processing fees from the loss of clients offset by

new client conversions and growth from existing clients;

• Decreased non-recurring professional services fees from existing clients

as well as clients scheduled for implementation;

• Decreased investment management fees from existing international clients

due to negative cash flows; and

• The negative impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations.

Revenues increased $8.8 million, or 2%, in 2018 compared to the prior year. Revenues during 2018 were primarily affected by: • Increased recurring investment processing fees from the growth in new and

existing client assets processed on SWP;

• The positive impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

and

• Increased investment management fees from existing international clients

due to increased net cash flows and higher average assets under management

       due to market appreciation during the first three quarters of 2018;
       partially offset by


•      The requirement of new accounting guidance to record revenues from trade
       execution fees net of $16.7 million in related costs; and

• Decreased non-recurring professional services fees from existing clients

as well as clients scheduled for implementation on SWP.



Operating margins were 6% in 2019 and 5% in 2018. Operating income increased
$1.9 million, or 8%, in 2019 compared to the prior year. Operating income in
2019 was primarily affected by:
•      Decreased costs, mainly personnel and consulting costs, related to
       maintenance, support and client migrations to SWP;

• Decreased direct expenses associated with decreased investment management

fees from existing international clients; and

• Decreased direct expenses associated with client losses; partially offset by



• A decrease in revenues;


• Increased amortization expense related to SWP due to continued

enhancements; and

• The net negative impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations.



Operating margins were 5% in 2018 and 4% in 2017. Operating income increased
$6.1 million, or 32%, in 2018 compared to the prior year. Operating income in
2018 was primarily affected by:
• An increase in revenues;


• Decreased amortization expense related to SWP due to the adjustment to the

       estimated useful life effective in the fourth quarter 2017;


•      Decreased sales compensation expense from the deferral of sales
       commissions costs due to the adoption of new accounting guidance;

• Decreased stock-based compensation costs of approximately $3.8 million

primarily due to the increase in expense associated with the achievement

of stock option vesting targets earlier than originally estimated during

       2017; and



                                 Page 34 of 93
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• The net positive impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

partially offset by

• Increased direct expenses associated with increased investment management

fees from existing international clients; and

• Increased non-capitalized costs, mainly personnel and consulting costs,

related to maintenance, support and client migrations to SWP.


Investment Advisors
                                                                      Percent                   Percent
Year Ended December 31,                     2019          2018        Change        2017        Change
Revenues:
Investment management fees-SEI fund
programs                                 $ 282,253$ 288,030       (2 )%     $ 278,819         3 %
Separately managed account fees            103,428        94,526        9  %        78,902        20 %
Other fees                                  18,097        16,533        9  %        15,752         5 %
Total revenues                           $ 403,778$ 399,089        1  %     $ 373,473         7 %

Revenues increased $4.7 million, or 1%, in 2019 compared to the prior year. Revenues during 2019 were primarily affected by: • Increased separately managed account program fees from market appreciation

and positive cash flows into SEI's ETF programs; partially offset by

• Decreased investment management fees as market appreciation was more than

offset by negative cash flows and a decrease in average basis points

earned on assets due to client-directed shifts into lower fee investment

products including SEI's ETF program.



Revenues increased $25.6 million, or 7%, in 2018 compared to the prior year.
Revenues during 2018 were primarily affected by:
•      Increased investment management fees and separately managed account

program fees due to higher assets under management caused by market

appreciation during 2017 and the first three quarters of 2018 and positive

net cash flows from new and existing advisors.



Operating margins were 48% in 2019 and 47% in 2018. Operating income increased
$8.6 million, or 5%, in 2019 compared to the prior year. Operating income in
2019 was primarily affected by:
• An increase in revenues;


•      Decreased costs, mainly personnel and consulting costs, related to
       maintenance, support and client migrations to SWP;

• Decreased sales compensation expense; and

• Decreased costs associated with accounts formerly processed on TRUST 3000®

due to client migrations to SWP; partially offset by

• Increased direct expenses associated with increased assets into our

investment products; and

• Increased amortization expense related to SWP due to continued enhancements.



Operating margins were 47% in 2018 and 2017. Operating income increased $15.0
million, or 9%, in 2018 compared to the prior year. Operating income in 2018 was
primarily affected by:
• An increase in revenues;

• Decreased amortization expense related to SWP due to the adjustment to the

estimated useful life effective in the fourth quarter 2017; and

• Decreased stock-based compensation costs of approximately $2.2 million

primarily due to the increase in expense associated with the achievement

of stock option vesting targets earlier than originally estimated during

       2017; partially offset by


•      Increased direct expenses associated with increased assets in our
       investment management programs;


• Increased personnel costs for marketing to and servicing new advisors; and


•      Increased non-capitalized costs, mainly personnel and consulting costs,
       related to maintenance, support and client migrations to SWP.



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Institutional Investors
Revenues decreased $11.2 million, or 3%, in 2019 compared to the prior year.
Revenues during 2019 were primarily affected by:
•      Defined benefit client losses, mainly resulting from acquisitions and plan

curtailments; and

• The negative impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

partially offset by

• Asset funding from new sales of our OCIO platform; and

• Increased investment management fees from market appreciation.



Revenues increased $10.8 million, or 3%, in 2018 compared to the prior year.
Revenues during 2018 were primarily affected by:
• Asset funding from new sales of our OCIO platform;


• Increased investment management fees from existing clients due to higher

assets under management caused by market appreciation during 2017 and the

       first three quarters of 2018; and


•      Performance fees of $3.4 million earned during the fourth quarter 2017
       from an SEI-sponsored investment product;

• The positive impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

       partially offset by


• Client losses.


Operating margins were 52% in 2019 and 51% in 2018. Operating income decreased
$1.6 million, or 1%, in 2019 compared to the prior year. Operating income during
2019 was primarily affected by:
• A decrease in revenues; and


• The net negative impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

partially offset by

• Decreased direct expenses associated with investment management fees.



Operating margins were 51% in 2018 and 50% in 2017. Operating income increased
slightly in 2018 compared to the prior year. Operating income during 2018 was
primarily affected by:
• An increase in revenues;


• Decreased stock-based compensation costs of approximately $1.9 million

primarily due to the increase in expense associated with the achievement

of stock option vesting targets earlier than originally estimated during

2017; and

• The positive impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the British pound on our foreign operations;

partially offset by

• Increased personnel compensation costs, mainly salary.



Investment Managers
Revenues increased $42.7 million, or 11%, in 2019 compared to the prior year.
Revenues during 2019 were primarily affected by:
•      Positive cash flows into alternative, traditional and separately managed

account offerings from new and existing clients;

• Higher valuations of existing client assets from market appreciation;

partially offset by

• Client losses and fund closures.



Revenues increased $48.6 million, or 14%, in 2018 compared to the prior year.
Revenues during 2018 were primarily affected by:
•      Positive cash flows into alternative, traditional and separately managed

account offerings from new and existing clients;

• Higher valuations of existing client assets from market appreciation

during 2017 and the first three quarters of 2018; and

• Added revenues from the acquisition of Archway during the third quarter

2017; partially offset by

• Client losses and fund closures.

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Operating margins were 36% in 2019 and 2018. Operating income increased $20.4
million, or 15%, in 2019 compared to the prior year. Operating income during
2019 was primarily affected by:
• An increase in revenues; and


• The net positive impact from foreign currency exchange rate fluctuations

between the U.S. dollar and the Euro on our foreign operations; partially

offset by

• Increased personnel expenses, technology and other operational costs to

service new and existing clients; and

• Increased non-capitalized investment spending, mainly consulting costs.



Operating margins were 35% in 2018 and 2017. Operating income increased $15.4
million, or 13%, in 2018 compared to the prior year. Operating income during
2018 was primarily affected by:
• An increase in revenues;


•      Decreased sales compensation expense from the deferral of sales
       commissions costs due to the adoption new accounting guidance; and

• Decreased stock-based compensation costs of approximately $2.7 million

primarily due to the increase in expense associated with the achievement

of stock option vesting targets earlier than originally estimated during

2017; partially offset by

• Increased personnel expenses, technology and other operational costs to

service new and existing clients;

• Increased operating and amortization expenses related to the Archway

acquisition;

• Increased non-capitalized investment spending, mainly consulting costs; and

• Increased amortization expense related to the Investment Manager platform

placed into service during the first quarter 2018.

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 $72.2 million, $65.6 million and $63.8
million in 2019, 2018 and 2017, respectively. The increase in corporate overhead
expenses in 2019 is primarily due to increased non-recurring personnel-related
costs, primarily severance costs. The increase in corporate overhead expenses in
2018 is primarily due to increased personnel-related costs which were partially
offset by lower stock-based compensation costs of approximately $1.7 million.
Other income and expense items
Other income and expense items on the accompanying Consolidated Statements of
Operations consist of:
Year Ended December 31,                              2019          2018     

2017

Net gain (loss) from investments                  $   3,174$    (325 )$   1,269
Interest and dividend income                         16,582        13,397         7,057
Interest expense                                       (630 )        (645 )        (781 )
Equity in earnings of unconsolidated affiliates     151,891       159,791   

152,550

Total other income and expense items, net $ 171,017$ 172,218

$ 160,095



Interest and dividend income
Interest and dividend income is earned based upon the amount of cash that is
invested daily. The increase in interest and dividend income in 2019 and 2018
was due to higher cash balances and an overall increase in interest rates.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliate reflects our 38.9% ownership
interest in LSV. The table below presents the revenues and net income of LSV and
our proportionate share in LSV's earnings.
                                            2019          2018       Percent Change       2017       Percent Change
Revenues                                 $ 491,700$ 517,203          (5 )%        $ 491,872           5 %
Net income                                 390,533       410,846          (5 )%          392,141           5 %

SEI's proportionate share in the
earnings of LSV                          $ 151,891$ 159,791          (5 )%        $ 152,550           5 %



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The decline in our earnings from LSV in 2019 was due to lower assets under
management from negative cash flows and lost clients. Market appreciation during
2019 partially offset the decline in LSV's assets under management. Lower
performance fees earned by LSV also negatively impacted our earnings. Average
assets under management by LSV decreased $3.8 billion to $103.1 billion during
2019 as compared to $106.9 billion during 2018, a decrease of 4%. The increase
in our earnings from LSV in 2018 was primarily due to increased assets under
management from LSV's existing clients due to market appreciation during the
first three quarters of 2018 and cash inflows from new clients. The increase in
our earnings was partially offset by a decline in performance fees and increased
personnel expenses of LSV.
Income Taxes
Our effective tax rate was 20.6% for 2019, 17.6% for 2018 and 27.4% for 2017.
Our effective tax rate is affected by recurring items, such as the U.S. federal
tax rates and tax rates in various states and foreign jurisdictions and the
relative amount of income we earned in those jurisdictions. The income earned by
jurisdiction has been fairly consistent. Our effective tax rate is also affected
by discrete items that may occur in any given year, but are not consistent from
year to year.
Below are the most significant recurring and discrete items (See Note 11 to the
Consolidated Financial Statements for more information):
Year Ended December 31,                                   2019         2018 

2017

Statutory rate                                            21.0  %      21.0  %      35.0  %
State taxes, net of federal tax benefit                    2.4          1.9 

1.3

Foreign tax expense and tax rate differential                -         (0.1 )       (1.1 )
Tax benefit from stock option exercises                   (1.9 )       (3.8 )       (3.9 )
Enactment of the Tax Cuts and Jobs Act:
Re-measurement of deferred taxes                             -            - 

(4.9 ) One-time transition tax on repatriation of foreign earnings and withholding tax

                                 -         (0.1 )        2.6
Research and development tax credit                       (1.1 )       (0.8 )       (0.9 )
Domestic Production Activities Deduction                     -            -         (0.5 )
Foreign-Derived Intangible Income Deduction (FDII)        (0.2 )       (0.2 )          -
Other, net                                                 0.4         (0.3 )       (0.2 )
                                                          20.6  %      17.6  %      27.4  %



The increase in our effective tax rate in 2019 was primarily due to reduced tax
benefits related to the lower volume of stock option exercises as compared to
2018 and the increase in our effective state tax rate.
Our effective income tax rate in 2018 included the 21.0 percent corporate tax
rate under the Tax Cut and Jobs Act (the Tax Act). The Tax Act also provided for
a Foreign-Derived Intangible Income (FDII) deduction. For 2019 and 2018, we
estimated a federal FDII deduction benefit of $1.3 million and $1.2 million,
respectively. The Tax Act also repealed the Section 199 deduction for businesses
that perform domestic manufacturing and certain other production activities
which had an favorable impact on our tax rate in 2017.
The impact to our effective tax rate in 2017 from the Tax Act was a combination
of a $27.2 million tax benefit from the re-measurement of the our estimated net
deferred tax liability as of December 31, 2017 based upon the 21.0 percent
corporate tax rate offset by expense of $14.7 million from the preliminary
estimate of the one-time transition tax relating to the impact of the deemed
repatriation and withholding tax of our previously undistributed foreign
earnings. The net impact to our tax rate in 2017 from the Tax Act was a net tax
benefit of $12.4 million, or $0.08 diluted earnings per share. The favorable
impact to our effective income tax rate in 2018 from the Tax Act related to the
finalization of the estimated one-time transition tax.
Stock-Based Compensation
During 2019, 2018 and 2017, we recognized approximately $24.6 million, $23.8
million and $36.4 million, respectively, in stock-based compensation expense.
Options do not vest due to the passage of time but as a result of the
achievement of financial vesting targets. Options granted included a service
condition which requires a minimum two or four year waiting period from the
grant date along with the attainment of the applicable financial vesting target.
The amount of stock-based compensation expense recognized is based upon an
estimate of when the financial vesting targets may be achieved. Any change in
our estimate could result in the remaining amount of stock-based compensation
expense to be accelerated,

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spread out over a longer period, or reversed. This may cause volatility in the
recognition of stock-based compensation expense and materially affect our
earnings.
During 2019, 2018 and 2017, we revised our estimate of when certain vesting
targets were expected to be achieved. These changes in estimate resulted in an
increase of $2.9 million, $1.9 million and $11.2 million in stock-based
compensation expense in 2019, 2018 and 2017, respectively. The change in our
estimate in 2017 resulted from the higher than expected growth in earnings from
the market appreciation of our assets under management and administration and
the estimated impact from the enactment of the Tax Act in December 2017.
There was approximately $73.3 million of unrecognized compensation cost related
to unvested employee stock options at December 31, 2019 and we expect to
recognize approximately $30.1 million in stock-based compensation costs in 2020.
The expected increase in our expense from 2019 is due to new options granted in
fourth-quarter 2019 that carry a higher per share cost valuation. These amounts
do not reflect any estimate of forfeitures or cancellations in future periods.
Actual forfeitures and cancellations occurring in a future period will reduce
our stock-based compensation expense.
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. Our Level 3 financial
liabilities at December 31, 2019 and December 31, 2018 consist of the contingent
consideration resulting from an acquisition (See Note 14 to the Consolidated
Financial Statements). We did not have any other financial liabilities at
December 31, 2019 or December 31, 2018 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 complex and changing regulatory environment across our markets.
Our current scale and reach as a provider to the financial services industry,
the introduction and implementation of new solutions 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 some of 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, the Financial Conduct Authority of the
United Kingdom (FCA), 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. As described under the caption
"Regulatory Considerations" in Item 1 of this report, 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 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
Year Ended December 31,                            2019            2018     

2017

Net cash provided by operating activities $ 545,122$ 588,401

    $   459,903
Net cash used in investing activities              (78,180 )      (123,370 )      (172,302 )
Net cash used in financing activities             (386,620 )      (443,720 )      (253,633 )
Effect of exchange rate changes on cash and
cash equivalents                                     6,186         (11,024 )        14,583
Net increase in cash and cash equivalents           86,508          10,287  

48,551

Cash, cash equivalents and restricted cash,
beginning of year                                  758,039         747,752  

699,201

Cash, cash equivalents and restricted cash,
end of year                                    $   844,547$   758,039$   747,752



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Cash requirements and liquidity needs are primarily funded through our cash flow
from operations and our capacity for additional borrowing. At December 31, 2019,
our unused sources of liquidity consisted of our cash and cash equivalents and
the amount available under our credit facility (See Note 6 to the Consolidated
Financial Statements).
Our credit facility provides for borrowings of up to $300.0 million and is
scheduled to expire in June 2021. As of January 31, 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, or to incur liens, 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. We currently have no borrowings under our credit
facility.
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 in the United States that invest in SEI-sponsored money market mutual
funds denominated in the U.S. dollar. We also utilize demand deposit accounts or
money market accounts at several well-established financial institutions located
in the 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 of January 31, 2020, the amount of cash
and cash equivalents considered free and immediately accessible for other
general corporate purposes was $316.8 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 decreased $43.3 million in 2019 compared to 2018
primarily from lower distribution payments received from our unconsolidated
affiliate, LSV, the net change in our working capital accounts and the decrease
in our net income. The decline in distribution payments from LSV was primarily
due to the timing of year-end payments related to LSV's working capital
accounts. Cash flows from operations increased $128.5 million in 2018 compared
to 2017 primarily from the increase in our net income, higher distribution
payments received from LSV and non-cash items. The increase was partially offset
by the net change in our working capital accounts, mainly receivables.
Net cash used in investing activities includes:
•Purchases, sales and maturities of marketable securities. Our purchases, sales
and maturities of marketable securities during 2019, 2018 and 2017 were as
follows:
                                                 2019            2018             2017
Purchases                                    $  (174,997 )$  (203,460 )$     (69,525 )
Sales and maturities                             171,450         167,876            65,830
Net investing activities from marketable
securities                                   $    (3,547 )$   (35,584 )

$ (3,695 )



Marketable securities purchased generally consisted of investments in short-term
U.S. government agency securities through SIDCO's cash management program,
additional GNMA securities to satisfy applicable regulatory requirements of SPTC
and investments for the start-up of new investment products. Proceeds received
from sales and maturities primarily included maturities of short-term securities
owned by SIDCO and principal prepayments related to the GNMA securities owned by
SPTC.
•     The capitalization of costs incurred in developing computer software. We

capitalized $34.1 million, $44.2 million and $61.0 million of software

development costs in 2019, 2018 and 2017, respectively. Amounts capitalized

      primarily include costs for significant enhancements and upgrades for the
      expanded functionality of SWP.



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• Capital expenditures. Our capital expenditures in 2019, 2018 and 2017

primarily include purchased software and equipment for our data center

operations. Our expenditures in 2019 and 2018 also include the expansion of

      our corporate headquarters, which is scheduled to be completed during the
      third quarter 2020. Total expenditures related to the expansion are
      expected to be approximately $25.0 million in 2020.


•     Cash paid for acquisition, net of cash acquired. We completed the

acquisition of Huntington Steele in April 2018. The purchase price included

a net cash payment of $5.8 million. During 2017, we acquired Archway. The

net cash payment included in the purchase price related to the acquisition

was $80.2 million.

Net cash used in financing activities includes: • Borrowings and principal repayments on revolving credit facility. We made

principal payments of $30.0 million and $10.0 million during 2018 and 2017,

      respectively, to fully repay the outstanding balance of our credit
      facility. Our borrowings in 2017 were related to the funding of an
      acquisition. We had no borrowings under our credit facility in 2019 or
      2018.

• 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. The following table lists information regarding repurchases of our

      common stock during 2019, 2018 and 2017:


         Total Number of        Average Price
Year   Shares  Repurchased     Paid per Share      Total Cost
2019             6,225,000    $          55.96    $    348,348
2018             6,744,000               60.02         404,759
2017             4,403,000               56.36         248,114

• Proceeds from the issuance of our common stock. We received $60.9 million,

$88.0 million and $53.6 million in proceeds from the issuance of our common

stock during 2019, 2018 and 2017, respectively. The proceeds we receive

from the issuance of our common stock is directly attributable to the

levels of stock option exercise activity.



•     Dividend payments. Our cash dividends paid during 2019, 2018 and 2017 were
      as follows:


                                 Cash Dividends
Year    Cash Dividends Paid      Paid per Share
2019   $             100,745    $           0.66
2018                  94,318                0.60
2017                  88,862                0.56


Our Board of Directors declared a semi-annual cash dividend of $0.35 per share
on December 9, 2019. The dividend was paid on January 8, 2020 for a total of
$52.5 million.
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.
Contractual Obligations and Contingent Obligations
As of December 31, 2019, the Company is obligated to make payments in connection
with its line of credit, operating leases, maintenance contracts and other
commitments in the amounts listed below. The Company has no unrecorded
obligations other than the items noted in the following table:
                                                                                                    2024 and
                                         Total         2020         2021        2022 to 2023       thereafter
Line of credit (a)                     $  1,066$    773$    293     $            -     $           -
Operating leases and maintenance
agreements (b)                           51,444        9,906        8,334             16,020            17,184
Contingent consideration from
acquisition (c)                          12,255          625        3,581              8,049                 -
Other commitments (d)                     5,699        4,896            -                  -               803
Total                                  $ 70,464$ 16,200$ 12,208$       24,069$      17,987


(a)   Amounts include estimated commitment fees and other fees related to

outstanding letters of credit and our credit facility. Our credit facility

is scheduled to expire in 2021. See Note 6 to the Consolidated Financial

Statements.

(b) See Note 16 to the Consolidated Financial Statements.

(c) See Note 14 to the Consolidated Financial Statements.

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(d) Amounts include the portion of uncertain tax liabilities classified as a

current liability and the estimated tax impact of the deemed repatriation

of our previously undistributed foreign earnings associated with the Tax

Act. The actual cash payment associated with these commitments may differ.

See Note 11 to the Consolidated Financial Statements.



Critical Accounting Policies
The accompanying consolidated financial statements and supplementary information
were prepared in accordance with accounting principles generally accepted in the
United States. Our significant accounting policies are discussed in Note 1 to
the Consolidated Financial Statements. Inherent in the application of many of
these accounting policies is the need for management to make estimates and
judgments in the determination of certain revenues, expenses, assets and
liabilities. Materially different financial results can occur as circumstances
change and additional information becomes known. We believe that the following
accounting policies require extensive judgment by our management to determine
the recognition and timing of amounts recorded in our financial statements.
Revenue Recognition:
Our revenues are based on contractual arrangements. Revenue is recognized when
the transfer of control of promised goods or services under the terms of a
contract with customers are satisfied in an amount that reflects the
consideration to which we expect to be entitled in exchange for those promised
goods or services. Certain portions of our revenues involve a third party in
providing goods or services to our customers. In such circumstances, we must
determine whether the nature of our promise to the customer is to provide the
underlying goods or services (we are the principal in the transaction and
reports the transaction gross) or to arrange for a third party to provide the
underlying goods or services (the entity is the agent in the transaction and
reports the transaction net).
Cash received by us in advance of the performance of services is deferred and
recognized as revenue when earned. Our principal sources of revenues are:
(1) asset management, administration and distribution fees calculated as a
percentage of net assets under management or administration; (2) information
processing and software servicing fees that are either recurring and primarily
earned based upon the number of trust accounts being serviced or a percentage of
the market value of our clients' assets processed on our platforms, or
non-recurring and based upon project-oriented contractual agreements related to
client implementations; and (3) transaction-based fees for providing
trade-execution services.
Computer Software Development Costs:
We utilize internally developed computer software as part of our product
offerings. In the development of a new software product, substantial
consideration must be given by management to determine whether costs incurred
are research and development costs, or internal software development costs
eligible for capitalization. Management must consider a number of different
factors during their evaluation of each computer software development project
that includes estimates and assumptions. Costs considered to be research and
development are expensed as incurred. After meeting specific requirements,
internal software development costs are capitalized as incurred. The
capitalization and ongoing assessment of recoverability of software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological and economic
feasibility, and estimated economic life. Amortization of capitalized software
development costs begins when the product is ready for its intended use.
Capitalized software development costs are amortized on a project basis using
the straight-line method over the estimated economic life of the product or
enhancement.
We evaluate the carrying value of our capitalized software when circumstances
indicate the carrying value may not be recoverable. The review of capitalized
software for impairment requires significant assumptions about operating
strategies, underlying technologies utilized, and external market factors. Our
capitalized software was developed using mainstream technologies that are
industry standards and are based on technology developed by multiple vendors
that are significant industry leaders. External market factors include, but are
not limited to, expected levels of competition, barriers to entry by potential
competitors, stability in the target market and governmental regulations.
Income Tax Accounting:
We use the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Management
must make assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities and
any valuation allowance to be recorded against a deferred tax asset.

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Our assumptions, judgments and estimates relative to the current provision for
income taxes take into account current tax laws, our interpretation of current
tax laws and possible outcomes of current and future audits conducted by foreign
and domestic tax authorities. We have established reserves for income taxes to
address potential exposures involving tax positions that could be challenged by
tax authorities. Although we believe our assumptions, judgments and estimates
are reasonable, changes in tax laws or our interpretation of tax laws and the
resolution of any future tax audits could significantly impact the amounts
provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax
asset take into account predictions of the amount and category of future taxable
income, such as income from operations or capital gains income. Actual operating
results and the underlying amount and category of income in future years could
render our current assumptions, judgments and estimates of recoverable net
deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause our actual income tax obligations to differ from our
estimates, thus materially impacting our financial position and results of
operations.
Stock-Based Compensation:
Stock-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over the requisite service
period, which is the vesting period. We currently use the Black-Scholes option
pricing model to determine the fair value of stock options. The determination of
the fair value of stock-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as various other
assumptions. These assumptions include our expected stock price volatility over
the term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends. We account for
forfeitures as they occur. The amount of stock-based compensation expense that
is recognized in a given period is dependent upon management's estimate of when
the financial vesting targets are expected to be achieved. If this estimate
proves to be inaccurate, the remaining amount of stock-based compensation
expense could be accelerated, spread out over a longer period, or reversed. We
currently base our expectations for these assumptions from historical data and
other applicable factors. These expectations are subject to change in future
periods.
The assessment of critical accounting policies is not meant to be an
all-inclusive discussion of the uncertainties to financial results that can
occur from the application of the full range of our accounting policies.
Materially different financial results could occur in the application of other
accounting policies as well. Also, materially different results can occur upon
the adoption of new accounting standards.

© Edgar Online, source Glimpses

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