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 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. A portion of investment processing fees are earned 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. As ofMarch 31, 2020 , through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer$920.2 billion in hedge, private equity, mutual fund and pooled or separately managed assets, including$283.4 billion in assets under management and$632.3 billion in client assets under administration. Our affiliate,LSV Asset Management (LSV), manages$70.9 billion of assets which are included as assets under management. Our Condensed Consolidated Statements of Operations for the three months endedMarch 31, 2020 and 2019 were: Three Months Ended March 31, Percent 2020 2019 Change* Revenues$ 414,762 $ 400,820 3% Expenses 304,534 297,259 2% Income from operations 110,228 103,561 6% Net (loss) gain from investments (3,989 ) 1,279 NM Interest income, net of interest expense 3,051 4,100 (26)% Equity in earnings from unconsolidated affiliate 29,907 37,317 (20)% Income before income taxes 139,197 146,257 (5)% Income taxes 29,955 32,276 (7)% Net income 109,242 113,981 (4)% Diluted earnings per common share $ 0.72
$ 0.73 (1)%
* Variances noted "NM" indicate the percent change is not meaningful. The following items had a significant impact on our financial results for the three months endedMarch 31, 2020 and 2019: • Revenue from Asset management, administration and distribution fees
increased primarily from higher average assets under administration from
market appreciation and positive cash flows from new and existing clients
during 2019 and early 2020. The sharp market volatility occurring during
and partially offset our revenue growth. Our average assets under
administration increased $85.0 billion , or 14%, to $679.2 billion in the
first three months of 2020 as compared to $594.2 billion during the first
three months of 2019. Our average assets under management, excluding LSV,
increased $14.0 billion to $237.2 billion in the first three months of
2020 as compared to $223.2 billion during the first three months of 2019.
• Information processing and software servicing fees in our Private Banks
segment decreased by $4.7 million during the first three months of 2020
due to decreased non-recurring fees and previously announced client
losses.
• Our proportionate share in the earnings of LSV decreased to
in the first three months of 2020 as compared to $37.3 million in the
first three months of 2019 due to lower assets under management from
negative cash flows from existing clients, negative markets during March
2020 and client losses.
26
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• We capitalized
Wealth Platform as compared to
2019. Amortization expense related to SWP increased to
during the first three months of 2020 as compared to
the first three months of 2019.
• Our effective tax rate during the first quarter of 2020 was 21.5% ascompared to 22.1% during the first quarter of 2019. The decline in our tax
rate was primarily due to increased tax benefits associated with stock
option exercises.
• We continued our stock repurchase program during 2020 and purchased 2.4
million shares for
Impact to our revenues due to COVID-19 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 . Since that time, it has spread globally, leading theWorld Health Organization to declare the COVID-19 virus outbreak a global pandemic inMarch 2020 . 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. To the extent that critical government or infrastructure functions upon which we rely are suspended, or in the event we are unable to have personnel onsite in our operational offices for an extended period, we would need to seek alternative arrangements to mitigate those issues. This could impair our ability to provide a number of services to our clients. We are closely monitoring the international landscape for changes in governmental measures both inthe United States and in the locations where we rely on critical outsourced services, includingIndia . Each location is interpreting 'essential services' somewhat differently and the restrictions on staff attending worksites are particularly stringent inIndia . We are closely monitoring our outsourced partners inIndia to assess and manage the impact of the current lockdown and we have executed plans to triage and prioritize offshore work for repatriation to our onshore locations. We have experienced very limited service disruption and there has not been a material impact on our operations to date. 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. 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 occurring inMarch 2020 in response to measures taken to contain the spread of the COVID-19 virus 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 the market volatility resulted in asset flows into our lower margin liquidity products and negatively impacted our earnings. The extent to which the spread of the COVID-19 virus impacts our business, financial condition, and results of operations will depend on future developments. Should the COVID-19 virus grow in scope or intensify in severity, or if the current measures taken by national and local authorities to contain the effects of COVID-19 are prolonged, the resulting market conditions may continue to adversely affect our revenues and earnings derived from assets under management and administration. 27
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Ending Asset Balances
(In millions)
As of March 31, Percent
2020 2019 Change
Private Banks:
Equity and fixed-income programs $ 21,160 $ 22,369 (5)%
Collective trust fund programs 5 4 25%
Liquidity funds 4,143 3,753 10%
Total assets under management $ 25,308 $ 26,126 (3)%
Client assets under administration 21,497 22,886 (6)%
Total assets $ 46,805 $ 49,012 (5)%
Investment Advisors :
Equity and fixed-income programs $ 54,856 $ 61,277 (10)%
Collective trust fund programs 2 5 (60)%
Liquidity funds 5,969 4,362 37%
Total assets under management $ 60,827 $ 65,644 (7)%
Institutional Investors :
Equity and fixed-income programs $ 72,399 $ 82,578 (12)%
Collective trust fund programs 94 79 19%
Liquidity funds 3,672 2,529 45%
Total assets under management $ 76,165 $ 85,186 (11)%
Client assets under advisement 3,406 3,694 (8)%
Total assets $ 79,571 $ 88,880 (10)%
Investment Managers:
Equity and fixed-income programs $ - $ - NM
Collective trust fund programs 48,226 49,232 (2)%
Liquidity funds 392 704 (44)%
Total assets under management $ 48,618 $ 49,936 (3)%
Client assets under administration (A) 610,794 585,997 4%
Total assets $ 659,412 $ 635,933 4%
Investments in New Businesses:
Equity and fixed-income programs $ 1,484 $ 1,466 1%
Liquidity funds 152 218 (30)%
Total assets under management $ 1,636 $ 1,684 (3)%
Client assets under advisement 1,056 729 45%
Total assets $ 2,692 $ 2,413 12%
LSV:
Equity and fixed-income programs (B) $ 70,851 $ 103,163 (31)%
Total:
Equity and fixed-income programs (C) $ 220,750 $ 270,853 (18)%
Collective trust fund programs 48,327 49,320 (2)%
Liquidity funds 14,328 11,566 24%
Total assets under management $ 283,405 $ 331,739 (15)%
Client assets under advisement 4,462 4,423 1%
Client assets under administration (D) 632,291 608,883 4%
Total assets under management, advisement and
administration $ 920,158 $ 945,045 (3)%
28
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(A) Client assets under administration in the Investment Managers segment include
assets (as of
(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
(C) Equity and fixed-income programs include
various asset allocation funds at
(D) In addition to the numbers presented, SEI also administers an additional
does not earn an administration fee.
29
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Average Asset Balances
(In millions)
Three Months Ended March 31, Percent
2020 2019 Change
Private Banks:
Equity and fixed-income programs $ 24,657 $ 21,831 13%
Collective trust fund programs 4 4 -%
Liquidity funds 3,581 3,706 (3)%
Total assets under management $ 28,242 $ 25,541 11%
Client assets under administration 24,840 22,098 12%
Total assets $ 53,082 $ 47,639 11%
Investment Advisors :
Equity and fixed-income programs $ 64,933 $ 58,732 11%
Collective trust fund programs 3 5 (40)%
Liquidity funds 3,284 5,298 (38)%
Total assets under management $ 68,220 $ 64,035 7%
Institutional Investors :
Equity and fixed-income programs $ 79,926 $ 81,725 (2)%
Collective trust fund programs 86 79 9%
Liquidity funds 2,342 2,375 (1)%
Total assets under management $ 82,354 $ 84,179 (2)%
Client assets under advisement 3,760 3,494 8%
Total assets $ 86,114 $ 87,673 (2)%
Investment Managers:
Equity and fixed-income programs $ - $ - NM
Collective trust fund programs 55,952 47,322 18%
Liquidity funds 617 559 10%
Total assets under management $ 56,569 $ 47,881 18%
Client assets under administration (A) 654,386 572,065 14%
Total assets $ 710,955 $ 619,946 15%
Investments in New Businesses:
Equity and fixed-income programs $ 1,663 $ 1,394 19%
Liquidity funds 168 202 (17)%
Total assets under management $ 1,831 $ 1,596 15%
Client assets under advisement 1,222 708 73%
Total assets $ 3,053 $ 2,304 33%
LSV:
Equity and fixed-income programs (B) $ 88,059 $ 104,517 (16)%
Total:
Equity and fixed-income programs (C) $ 259,238 $ 268,199 (3)%
Collective trust fund programs 56,045 47,410 18%
Liquidity funds 9,992 12,140 (18)%
Total assets under management $ 325,275 $ 327,749 (1)%
Client assets under advisement 4,982 4,202 19%
Client assets under administration (D) 679,226 594,163 14%
Total assets under management, advisement and
administration $ 1,009,483 $ 926,114 9%
30
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(A) Average client assets under administration in the Investment Managers segment
for the three months ended
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 ended
(C) Equity and fixed-income programs include
invested in various asset allocation funds for the three months ended
(D) In addition to the numbers presented, SEI also administers an additional
ended
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 months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 were as follows: Three Months Ended March 31, Percent 2020 2019 Change Private Banks: Revenues$ 113,221 $ 118,259 (4)% Expenses 110,653 110,962 -% Operating Profit$ 2,568 $ 7,297 (65)% Operating Margin 2 % 6 %Investment Advisors : Revenues$ 102,321 $ 94,761 8% Expenses 52,432 52,502 -% Operating Profit$ 49,889 $ 42,259 18% Operating Margin 49 % 45 %Institutional Investors : Revenues$ 79,203 $ 80,113 (1)% Expenses 38,267 38,754 (1)% Operating Profit$ 40,936 $ 41,359 (1)% Operating Margin 52 % 52 % Investment Managers: Revenues$ 116,629 $ 104,649 11% Expenses 74,289 69,066 8% Operating Profit$ 42,340 $ 35,583 19% Operating Margin 36 % 34 % Investments in New Businesses: Revenues$ 3,388 $ 3,038 12% Expenses 10,910 5,940 84% Operating Loss$ (7,522 ) $ (2,902 ) NM
For additional information pertaining to our business segments, see Note 9 to the Consolidated Financial Statements.
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Private Banks
Three Months Ended March 31, Percent
2020 2019 Change
Revenues:
Information processing and software servicing fees $ 79,633 $ 84,302 (6)%
Asset management, administration & distribution fees 33,588 33,957 (1)%
Total revenues $ 113,221 $ 118,259 (4)%
Revenues decreased
new client conversions and growth from existing clients; and
• Decreased investment management fees from existing international clients
due to negative cash flows and market volatility during
Operating margins decreased to 2% compared to 6% in the three month period. Operating income decreased by$4.7 million , or 65%, in the three 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.
Investment Advisors Three Months Ended March 31, Percent 2020 2019 Change Revenues: Investment management fees-SEI fund programs $ 70,180$ 66,623 5% Separately managed account fees 27,420 23,838 15% Other fees 4,721 4,300 10% Total revenues$ 102,321 $ 94,761 8%
Revenues increased
and early 2020; and
• Increased separately managed account program fees from positive cash flows
into SEI's strategist programs; partially offset by
• The impact to investment management fees from the market volatility during
earned on assets due to client-directed shifts into liquidity products and
SEI's ETF program.
Operating margin increased to 49% compared to 45% in the three month period. Operating income increased$7.6 million , or 18%, in the three month period and was primarily affected by: • An increase in revenues;
• Decreased costs, mainly personnel and consulting costs, related to
maintenance, support and client migrations to SWP; 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.
32
--------------------------------------------------------------------------------Institutional Investors Revenues decreased$900 thousand , or 1%, in the three month period and were primarily affected by: • Defined benefit client losses, mainly resulting from acquisitions and plan
curtailments; and
• The impact to investment management fees from negative markets during
• Asset funding from new sales of our investment management platforms; and
• Increased investment management fees from market appreciation during 2019
and early 2020.
Operating margin remained at 52% in the three month period. Operating income decreased slightly in the three month period and was primarily affected by: • A decrease in revenues; partially offset by
• Decreased direct expenses associated with investment management fees.
Investment Managers Revenues increased$12.0 million , or 11%, in the three month period 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 of negative markets duringMarch 2020 to assets under administration; and
• Client losses and fund closures.
Operating margin increased to 36% compared to 34% in the three month period. Operating income increased$6.8 million , or 19%, in the three month period and was primarily affected by: • An increase in revenues; 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$18.0 million and$20.0 million in the three months endedMarch 31, 2020 and 2019, respectively. The decrease in corporate overhead expenses is primarily due to a decrease in non-recurring personnel-related costs. Other income and expense Other income and expense items on the accompanying Consolidated Statements of Operations consists of: Three Months Ended March 31, 2020 2019 Net (loss) gain from investments$ (3,989 ) $ 1,279 Interest and dividend income 3,203 4,257 Interest expense (152 ) (157 ) Equity in earnings of unconsolidated affiliate 29,907
37,317
Total other income and expense items, net
Net (loss) gain from investments Net losses from investments in the three months endedMarch 31, 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 inMarch 2020 (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 months endedMarch 31, 2020 was due to an overall decline in interest rates. 33 -------------------------------------------------------------------------------- Equity in earnings of unconsolidated affiliate Equity in earnings of unconsolidated affiliate reflects our less than 50% ownership in LSV. As ofMarch 31, 2020 , our total partnership interest in LSV was 38.9%. The table below presents the revenues and net income of LSV and our proportionate share in LSV's earnings. Three Months Ended March 31, Percent 2020 2019 Change Revenues of LSV$ 99,996 $ 120,915 (17)% Net income of LSV 76,897 95,948 (20)% SEI's proportionate share in earnings of LSV$ 29,907 $
37,317 (20)%
The decline in our earnings from LSV in the three months endedMarch 31, 2020 was due to lower assets under management from negative cash flows from existing clients, the market volatility duringMarch 2020 and client losses. Average assets under management by LSV decreased$16.4 billion to$88.1 billion during the three months endedMarch 31, 2020 as compared to$104.5 billion during the three months endedMarch 31, 2019 , a decrease of 16%. Income Taxes Our effective income tax rates for the three months endedMarch 31, 2020 and 2019 differs from the federal income tax statutory rate due to the following: Three Months Ended March 31, 2020 2019 Statutory rate 21.0 % 21.0 % State taxes, net of federal tax benefit 3.1 2.6 Foreign tax expense and tax rate differential (0.1 ) (0.1 ) Tax benefit from stock option exercises (2.2 ) (1.1 ) Other, net (0.3 ) (0.3 ) 21.5 % 22.1 % The decrease in our effective tax rate for the three months endedMarch 31, 2020 was primarily due to increased tax benefits due to a higher volume of stock option exercise activity as compared to the prior year period. Stock-Based Compensation We recognized$6.9 million and$5.0 million in stock-based compensation expense during the three months endedMarch 31, 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 andGovernment National Mortgage Association (GNMA) and otherU.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 atMarch 31, 2020 andDecember 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 atMarch 31, 2020 orDecember 31, 2019 that were required to be measured at fair value on a recurring basis (See Note 4 to the Consolidated Financial Statements). 34 -------------------------------------------------------------------------------- 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 theOffice of the Comptroller of the Currency , theSecurities and Exchange Commission , theFinancial Industry Regulatory Authority, Inc. , theFinancial Conduct Authority of the United Kingdom , theCentral 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 Three
Months Ended
2020 2019
Net cash provided by operating activities $ 98,972 $ 59,899
Net cash used in investing activities (17,352 ) (15,726 )
Net cash used in financing activities (165,050 ) (132,644 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(11,146 ) 3,272
Net decrease in cash, cash equivalents and restricted cash (94,576 )
(85,199 )
Cash, cash equivalents and restricted cash, beginning of period
844,547 758,039
Cash, cash equivalents and restricted cash, end of period
Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. AtMarch 31, 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 ofApril 17, 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 ofApril 17, 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 35 -------------------------------------------------------------------------------- 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 ofApril 17, 2020 , the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was$354.5 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$39.1 million in the first three months of 2020 compared to the first three months of 2019 primarily from higher distribution payments received from our unconsolidated affiliate, LSV, and the positive impact from the change in our working capital accounts. Net cash used in investing activities includes: •Purchases, sales and maturities of marketable securities. Our purchases, sales and maturities of marketable securities in the first three months of 2020 and 2019 were as follows: Three Months Ended March 31, 2020 2019 Purchases$ (29,407 ) $ (43,672 ) Sales and maturities 37,687 45,200 Net investing activities from marketable securities$ 8,280 $ 1,528
• The capitalization of costs incurred in developing computer software. We
capitalized
months of 2020 as compared to
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 three months
of 2020 were
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 scheduled to be completed
during the fourth quarter 2020. Total expenditures related to the
expansion for the remainder of 2020 are expected to be approximately
million. Prolonged work restrictions due to the COVID-19 virus outbreak
may delay the planned completion date.
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 $130.6 million during the first
three months of 2020 and $90.8 million during the first three months of
2019 for the repurchase of our common stock.
• Proceeds from the issuance of our common stock. We received
in proceeds from the issuance of our common stock during the first three
months of 2020 as compared to
of 2019. The increase in proceeds is primarily attributable to a higher
level of stock option exercise activity.
• Dividend payments. Cash dividends paid were
three months of 2020 as compared to
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.
36
-------------------------------------------------------------------------------- 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 of LSV 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 the
• 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;
• 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:
•
with the
•
registered with the
the Commodity Futures Trading Commission , or CFTC, under the Commodity
Exchange Act;
37
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•
chartered and regulated by the
•
Pennsylvania 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 ;
•
that has various other capacities that is regulated by the Ontario
Securities Commission and various provincial authorities;
• SEI Investments Global, Limited , or SIGL, a management company for
Undertakings for Collective Investment in Transferable Securities , orUCITS, and for Alternative Investment Funds, or AIFs, that is regulated
primarily by the
•
provider of administration services for Irish and non-Irish collective
investment schemes that is regulated by the CBI; and
•
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 38.9 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 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 38
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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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