SEI INVESTMENTS COMPANY (In thousands, except share and per-share data) This discussion reviews and analyzes the consolidated financial condition atDecember 31, 2019 and 2018, the consolidated results of operations for the years endedDecember 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 ofDecember 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
* 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
during 2018.
• Information processing and software servicing fees in our Private Banks
segment decreased by
client losses and decreased non-recurring fees.
Page 27 of 93
--------------------------------------------------------------------------------
• Revenues in our
during 2019 due to acquisitions, plan curtailments and fee compression from
increased competition related to the continued contraction of the
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
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
2018. Amortization expense related to SWP increased to
2019 as compared to
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
total cost of
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
during 2018 as compared to
• Our average assets under administration increased
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
• 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 arrangementsreflected in Software royalties and other information processing costs.
• Our proportionate share in the earnings of LSV was
compared to
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 oursolutions 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
2017. Amortization expense related to SWP decreased to
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
--------------------------------------------------------------------------------
• 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
• Stock-based compensation expense decreased by
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
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
total cost of
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 asU.S. Presidential politics, trade relations betweenthe United States andChina , 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 andInstitutional 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 fromJanuary 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$2.8 million of amortization expense (See Note 3 to the Consolidated Financial Statements). Page 29 of 93 -------------------------------------------------------------------------------- Ending Asset Balances This table presents ending asset balances of our clients, or of our clients' customers, for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest. Ending Asset Balances (In millions) As of December 31, 2019 2018 Percent Change 2017 Percent Change Private Banks: Equity and fixed-income programs$ 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
--------------------------------------------------------------------------------
(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.
Page 31 of 93
--------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------- (A) Average client assets under administration in the Investment Managers segment for the year endedDecember 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 endedDecember 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
2019.
(D) In addition to the numbers presented, SEI also administers an additional
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
--------------------------------------------------------------------------------
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
Revenues increased
existing client assets processed on SWP;
• The positive impact from foreign currency exchange rate fluctuations
between the
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
Operating margins were 5% in 2018 and 4% in 2017. Operating income increased$6.1 million , or 32%, in 2018 compared to the prior year. Operating income in 2018 was primarily affected by: • An increase in revenues;
• Decreased amortization expense related to SWP due to the adjustment to the
estimated useful life effective in the fourth quarter 2017;
• Decreased sales compensation expense from the deferral of sales
commissions costs due to the adoption of new accounting guidance;
• Decreased stock-based compensation costs of approximately
primarily due to the increase in expense associated with the achievement
of stock option vesting targets earlier than originally estimated during
2017; and
Page 34 of 93
--------------------------------------------------------------------------------
• The net positive impact from foreign currency exchange rate fluctuations
between the
partially offset by
• Increased direct expenses associated with increased investment management
fees from existing international clients; and
• Increased non-capitalized costs, mainly personnel and consulting costs,
related to maintenance, support and client migrations to SWP.
Investment Advisors Percent Percent Year Ended December 31, 2019 2018 Change 2017 Change Revenues: Investment management fees-SEI fund programs$ 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
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
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.
Page 35 of 93
--------------------------------------------------------------------------------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
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
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
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
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
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.
Page 36 of 93
--------------------------------------------------------------------------------
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
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
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
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 %
Page 37 of 93
-------------------------------------------------------------------------------- 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 theU.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,
Page 38 of 93
-------------------------------------------------------------------------------- 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 inDecember 2017 . There was approximately$73.3 million of unrecognized compensation cost related to unvested employee stock options atDecember 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 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. Our Level 3 financial liabilities atDecember 31, 2019 andDecember 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 atDecember 31, 2019 orDecember 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 theOffice of the Comptroller of the Currency , theSecurities and Exchange Commission , theFinancial Industry Regulatory Authority , theFinancial Conduct Authority of the United Kingdom (FCA), 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. 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
$ 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 Page 39 of 93
-------------------------------------------------------------------------------- Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. AtDecember 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 inJune 2021 . As ofJanuary 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 inthe United States that invest 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 ofJanuary 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 )
Marketable securities purchased generally consisted of investments in short-termU.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
development costs in 2019, 2018 and 2017, respectively. Amounts capitalized
primarily include costs for significant enhancements and upgrades for the
expanded functionality of SWP.
Page 40 of 93
--------------------------------------------------------------------------------
• 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
a net cash payment of
net cash payment included in the purchase price related to the acquisition
was
Net cash used in financing activities includes: • Borrowings and principal repayments on revolving credit facility. We made
principal payments of
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
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.
Page 41 of 93
--------------------------------------------------------------------------------(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 inthe 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. Page 42 of 93
--------------------------------------------------------------------------------
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
