SEI INVESTMENTS COMPANY 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, 2021 .
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 technology, operational, and investment management services-to help wealth managers, financial advisors, investment managers, family offices, institutional and private investors create and manage wealth. Investment processing fees are earned as either monthly fees for contracted services or as a percentage of the market value of our clients' assets processed on our platforms. Investment operations and investment management fees are earned as a percentage of assets under management, administration or advised assets. As ofSeptember 30, 2022 , through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer$1.2 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including$378.2 billion in assets under management and$785.4 billion in client assets under administration. Our affiliate,LSV Asset Management (LSV), manages$75.4 billion of assets which are included as assets under management.
Condensed Consolidated Statements of Operations for the three and nine months
ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Percent Change* 2022 2021 Percent Change*
Revenues $ 471,334 $ 485,322 (3)% $ 1,534,447 $ 1,416,659 8%
Expenses 420,288 344,197 22% 1,152,742 1,006,676 15%
Income from operations 51,046 141,125 (64)% 381,705 409,983 (7)%
Net (loss) gain from investments (1,406) (575) NM (4,515) 134 NM
Interest income, net of interest expense 3,819 791 383% 6,059 2,361
157%
Equity in earnings from unconsolidated affiliate 26,654 35,005 (24)% 88,926 103,420 (14)% Income before income taxes 80,113 176,346 (55)% 472,175 515,898 (8)% Income taxes 18,454 38,301 (52)% 108,932 114,605 (5)% Net income 61,659 138,045 (55)% 363,243 401,293 (9)%
Diluted earnings per common share
(54)% $ 2.63$ 2.79
(6)%
* Variances noted "NM" indicate the percent change is not meaningful.
The following items had a significant impact on our financial results for the
three and nine months ended
•Revenue growth in the first nine months of 2022 was primarily driven by higher Information processing and software servicing fees from early termination fees of$88.0 million recorded during the first quarter 2022 and new client conversions. •Revenue from Asset management, administration and distribution fees increased slightly in the first nine months of 2022 from higher average assets under administration from market appreciation during 2021 and positive cash flows from new and existing clients despite the significant decline in market conditions in 2022, most notably in the third quarter. Average assets under administration decreased$69.1 billion , or 8%, to$786.6 billion in the third quarter of 2022 as compared to$855.7 billion during the third quarter of 2021. Average assets under administration increased$14.0 billion , or 2%, to$859.2 billion in the first nine months of 2022 as compared to$845.2 billion during the first nine months of 2021.
•Revenue from Asset management, administration and distribution fees was
negatively impacted from the loss of a significant client of the
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•Revenues from our acquisitions of SEI Novus and Atlas Master Trust were $8.7
million and $3.7 million , respectively, during the first nine months of 2022.
SEI Novus and Atlas Master Trust were acquired during the fourth quarter of 2021
and are reported in the Institutional Investors segment (See Note 12 to the
Consolidated Financial Statements).
•Earnings from LSV decreased to $88.9 million in the first nine months of 2022
as compared to $103.4 million in the first nine months of 2021 due to negative
cash flows from existing clients, market depreciation and client losses.
•Operating expenses also increased from higher personnel and consulting costs
due to business growth and competitive labor markets. Operational expenses also
increased due to personnel costs and investments in compliance infrastructure to
meet new regulatory requirements.The increase was partially offset by lower
direct costs related to asset management revenues and lower amortization
expense.
•We initiated a Voluntary Separation Program (VSP) to long-tenured employees as
part of our commitment to professional development and expanded responsibilities
for current and new employees by increasing advancement opportunities. We
recognized one-time costs of $57.0 million during the third quarter 2022 from
the program. These costs are primarily included in Compensation, benefits and
other personnel costs on the accompanying Consolidated Statements of Operations
(See Note 14 to the Consolidated Financial Statements).
•The Institutional Investors segment includes personnel, professional fees,
amortization and other costs related to SEI Novus and Atlas Master Trust . These
expenses are primarily included in Compensation, benefits and other personnel
costs, Consulting, outsourcing and professional fees, and Amortization on the
accompanying Consolidated Statements of Operations.
•We capitalized $19.5 million in the first nine months of 2022 for the SEI
Wealth Platform as compared to $19.4 million in the first nine months of 2021.
Amortization expense related to SWP was $29.7 million during the first nine
months of 2022 as compared to $35.8 million during the first nine months of
2021. The decline in amortization expense was due to the amortization period of
the initial development costs related to SWP which ended during the second
quarter 2022 (See the caption "Capitalized software development costs" later in
this discussion for more information).
•We continued the stock repurchase program during 2022 and purchased 4.6 million
shares for
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Ending Asset Balances
(In millions)
As of September 30,
2022 2021 Percent Change
Private Banks:
Equity and fixed-income programs $ 20,131 $ 25,618 (21)%
Collective trust fund programs 7 6
17%
Liquidity funds 3,778 3,988
(5)%
Total assets under management$ 23,916 $ 29,612
(19)%
Client assets under administration 4,161 4,675
(11)%
Total assets$ 28,077 $ 34,287
(18)%
Investment Advisors : Equity and fixed-income programs$ 62,579 $ 78,560
(20)%
Liquidity funds 5,200 3,477
50%
Total Platform assets under management
(17)% Platform-only assets 12,609 13,728 (8)% Total Platform assets$ 80,388 $ 95,765 (16)%Institutional Investors : Equity and fixed-income programs$ 69,621 $ 89,441
(22)%
Collective trust fund programs 6 5
20%
Liquidity funds 1,640 2,599
(37)%
Total assets under management$ 71,267 $ 92,045
(23)%
Client assets under advisement 4,204 4,698
(11)%
Total assets$ 75,471 $ 96,743
(22)%
Investment Managers: Collective trust fund programs (A)$ 137,538 $ 87,488
57%
Liquidity funds 248 568
(56)%
Total assets under management$ 137,786 $ 88,056
56%
Client assets under administration 781,246 861,605
(9)%
Total assets$ 919,032 $ 949,661
(3)%
Investments in New Businesses: Equity and fixed-income programs$ 1,813 $ 1,964
(8)%
Liquidity funds 221 202
9%
Total assets under management$ 2,034 $ 2,166
(6)%
Client assets under advisement 1,026 1,378
(26)%
Total assets$ 3,060 $ 3,544
(14)%
LSV:
Equity and fixed-income programs (B)
(23)%
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Total:
Equity and fixed-income programs (C)
137,551 87,499 57%
Liquidity funds 11,087 10,834
2%
Total assets under management$ 378,162 $ 391,520
(3)%
Client assets under advisement 5,230 6,076
(14)%
Client assets under administration (D) 785,407 866,280
(9)% Platform-only assets 12,609 13,728 (8)% Total assets$ 1,181,408 $ 1,277,604 (8)% (A)Collective trust fund program assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs. (B) Equity and fixed-income programs include$1.7 billion of assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee (as ofSeptember 30, 2022 ). (C) Equity and fixed-income programs include$6.2 billion of assets invested in various asset allocation funds (as ofSeptember 30, 2022 ). (D) In addition to the assets presented, SEI also administers an additional$12.5 billion in Funds of Funds assets on which SEI does not earn an administration fee (as ofSeptember 30, 2022 ). 31
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Average Asset Balances
(In millions)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Percent Change 2022 2021 Percent Change
Private Banks:
Equity and fixed-income programs $ 22,115 $ 26,232 (16)% $ 23,822 $ 25,809 (8)%
Collective trust fund programs 7 6 17% 7 6 17% Liquidity funds 3,742 3,916 (4)% 3,980 3,875 3% Total assets under management$ 25,864 $ 30,154 (14)%$ 27,809 $ 29,690
(6)%
Client assets under administration 4,026 4,476 (10)% 4,230 4,399 (4)% Total assets$ 29,890 $ 34,630 (14)%$ 32,039 $ 34,089 (6)%Investment Advisors : Equity and fixed-income programs$ 67,464 $ 79,602 (15)%$ 71,825 $ 76,560 (6)% Liquidity funds 5,380 3,403 58% 5,867 3,464 69%
Total Platform assets under management
(12)%$ 77,692 $ 80,024 (3)% Platform-only assets 13,271 13,863 (4)% 13,464 13,120 3% Total Platform assets$ 86,115 $ 96,868 (11)%$ 91,156 $ 93,144 (2)%Institutional Investors : Equity and fixed-income programs$ 74,859 $ 91,965 (19)%$ 81,693 $ 92,257
(11)%
Collective trust fund programs 6 5 20% 5 56 (91)% Liquidity funds 1,717 2,742 (37)% 2,012 2,681 (25)% Total assets under management$ 76,582 $ 94,712 (19)%$ 83,710 $ 94,994
(12)%
Client assets under advisement 4,194 4,658 (10)% 4,357 4,440 (2)% Total assets$ 80,776 $ 99,370 (19)%$ 88,067 $ 99,434 (11)% Investment Managers: Collective trust fund programs (A)$ 143,817 $ 89,441 61%$ 120,628 $ 84,010 44% Liquidity funds 250 532 (53)% 322 497 (35)% Total assets under management$ 144,067 $ 89,973 60%$ 120,950 $ 84,507
43%
Client assets under administration 782,559 851,183 (8)% 854,925 840,774 2% Total assets$ 926,626 $ 941,156 (2)%$ 975,875 $ 925,281 5% Investments in New Businesses: Equity and fixed-income programs$ 1,939 $ 1,958 (1)%$ 1,993 $ 1,857 7% Liquidity funds 231 205 13% 260 203 28% Total assets under management$ 2,170 $ 2,163 -%$ 2,253 $ 2,060
9%
Client assets under advisement 1,126 1,423 (21)% 1,229 1,385 (11)% Total assets$ 3,296 $ 3,586 (8)%$ 3,482 $ 3,445 1% LSV:
Equity and fixed-income programs (B)
(19)%$ 88,503 $ 100,328 (12)% 32
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Total:
Equity and fixed-income programs (C)$ 247,618 $ 299,681 (17)%$ 267,836 $ 296,811 (10)% Collective trust fund programs 143,830 89,452 61% 120,640 84,073 43% Liquidity funds 11,320 10,798 5% 12,441 10,720 16%
Total assets under management
1%$ 400,917 $ 391,604 2% Client assets under advisement 5,320 6,081 (13)% 5,586 5,825 (4)% Client assets under administration (D) 786,585 855,659 (8)% 859,155 845,173 2% Platform-only assets 13,271 13,863 (4)% 13,464 13,120 3% Total assets$ 1,207,944 $ 1,275,534 (5)%$ 1,279,122 $ 1,255,722 2% (A) Collective trust fund program average assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs. (B) Equity and fixed-income programs include assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee. The average value of these assets for the three months endedSeptember 30, 2022 was$1.8 billion . (C) Equity and fixed-income programs include$6.3 billion of average assets invested in various asset allocation funds for the three months endedSeptember 30, 2022 . (D) In addition to the assets presented, SEI also administers an additional$12.7 billion of average assets in Funds of Funds assets for the three months endedSeptember 30, 2022 on which SEI does not earn an administration fee. In the preceding tables, assets under management are total assets of our clients or their customers invested in equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services through our subsidiaries and partnerships in which we have a significant interest. Assets under advisement include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. Platform-only assets include total assets of our clients or their customers which are not invested in any SEI-sponsored investment products. The assets presented in the preceding tables do not include assets processed on SWP and are not included in the accompanying Consolidated Balance Sheets because we do not own them. 33
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Business Segments
Revenues, Expenses and Operating Profit (Loss) for our business segments for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 were as follows: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2022 2021 Change 2022 2021 Change Private Banks: Revenues$ 122,660 $ 123,018 -%$ 460,392 $ 364,302 26% Expenses 116,661 116,679 -% 359,676 345,057 4% Operating Profit $ 5,999$ 6,339 (5)%$ 100,716 $ 19,245 NM Operating Margin 5 % 5 % 22 % 5 %Investment Advisors : Revenues$ 109,565 $ 124,768 (12)%$ 341,989 $ 357,458 (4)% Expenses 61,150 62,107 (2)% 189,045 176,267 7% Operating Profit$ 48,415 $ 62,661 (23)%$ 152,944 $ 181,191 (16)% Operating Margin 44 % 50 % 45 % 51 %Institutional Investors : Revenues$ 78,260 $ 85,759 (9)%$ 248,582 $ 255,957 (3)% Expenses 42,149 41,643 1% 131,432 122,696 7% Operating Profit$ 36,111 $ 44,116 (18)%$ 117,150 $ 133,261 (12)% Operating Margin 46 % 51 % 47 % 52 % Investment Managers: Revenues$ 156,015 $ 147,412 6%$ 468,842 $ 426,639 10% Expenses 100,876 89,594 13% 300,520 257,609 17% Operating Profit$ 55,139 $ 57,818 (5)%$ 168,322 $ 169,030 -% Operating Margin 35 % 39 % 36 % 40 % Investments in New Businesses: Revenues $ 4,834$ 4,365 11%$ 14,642 $ 12,303 19% Expenses 9,915 12,820 (23)% 34,709 39,855 (13)% Operating Loss$ (5,081) $ (8,455) NM$ (20,067) $ (27,552) 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 September 30, Percent Nine Months Ended September 30, Percent
2022 2021 Change 2022 2021 Change
Revenues:
Information processing and software
servicing fees $ 93,580 $ 88,340 6% $ 367,820 $ 261,907 40%
Asset management, administration &
distribution fees 29,080 34,678 (16)% 92,572 102,395 (10)%
Total revenues $ 122,660 $ 123,018 -% $ 460,392 $ 364,302 26%
Revenues decreased slightly in the three month period and increased
•Early termination fees of
•Increased investment processing fees from new client conversions; partially offset by
•The negative impact from foreign currency exchange rate fluctuations between
the
•Decreased investment management fees from existing international clients due to market depreciation during 2022;
•Decreased investment processing fees from lost clients and market depreciation during 2022; and
•One-time early termination fees from a TRUST 3000® client recorded in the second quarter 2021.
Operating margins were 5% in the three month periods and increased to 22% compared to 5% in the nine month period. Operating income decreased slightly in the three month period and increased$81.5 million in the nine month period and was primarily affected by:
•An increase in revenues; and
•Decreased direct expenses associated with lower investment management fees from existing international clients; partially offset by
•Increased personnel costs due to competitive labor markets;
•Increased costs, mainly personnel and consulting costs, primarily related to maintenance, support and client migrations to SWP;
•The negative impact from foreign currency exchange rate fluctuations between
the
•Increased amortization expense related to deferred sales commissions.
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
2022 2021 Change 2022 2021 Change
Revenues:
Investment management fees-SEI fund
programs $ 63,688 $ 77,123 (17)% $ 203,171 $ 224,816 (10)%
Separately managed account fees 39,915 41,688 (4)% 122,321 114,747 7%
Other fees 5,962 5,957 -% 16,497 17,895 (8)%
Total revenues $ 109,565 $ 124,768 (12)% $ 341,989 $ 357,458 (4)%
Revenues decreased
•Decreased investment management fees from SEI fund programs resulting from negative cash flows from a significant client loss during the third-quarter 2022 and the significant decline in market conditions during 2022; partially offset by
•Increased separately managed account program fees from positive cash flows into our Strategist programs and market appreciation occurring during 2021.
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Operating margin decreased to 44% compared to 50% in the three month period and
decreased to 45% compared to 51% in the nine month period. Operating income
decreased $14.2 million , or 23%, in the three month period and decreased $28.2
million , or 16%, in the nine month period and was primarily affected by:
•A decrease in revenues;
•Increased direct expenses associated with increased assets into our separately managed account program; and
•Increased personnel and technology costs as well as increased promotion costs; partially offset by
•Decreased direct expenses related to a significant client loss during third-quarter 2022.
Revenues decreased$7.5 million , or 9%, in the three month period and decreased$7.4 million , or 3%, in the nine month period endedSeptember 30, 2022 and were primarily affected by:
•Decreased investment management fees from defined benefit client losses and the significant decline in market conditions during 2022; and
•The negative impact from foreign currency exchange rate fluctuations between
the
•Added revenues from the acquisitions of
Operating margin decreased to 46% compared to 51% in the three month period and decreased to 47% compared to 52% in the nine month period. Operating income decreased$8.0 million , or 18%, in the three month period and decreased$16.1 million , or 12%, in the nine month period and was primarily affected by:
•A decrease in revenues;
•Increased personnel, professional fees, amortization and other costs related to
the acquisitions of
•Decreased direct expenses associated with investment management fees.
Investment Managers
Revenues increased$8.6 million , or 6%, in the three month period and increased$42.2 million , or 10%, in the nine month period endedSeptember 30, 2022 and were primarily affected by:
•Higher valuations of existing client assets from market appreciation in 2021 which impacted revenues in early 2022; and
•Positive cash flows into alternative, traditional and separately managed account offerings from new and existing clients; partially offset by
•Client losses and fund closures.
Operating margin decreased to 35% compared to 39% in the three month period and decreased to 36% compared to 40% in the nine month period. Operating income decreased$2.7 million , or 5%, in the three month period and decreased slightly in the nine month period and was primarily affected by:
•Increased personnel costs due to competitive labor markets;
•Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; and
•Increased non-capitalized investment spending, mainly consulting costs; partially offset by
•An increase in revenues; 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$89.5 million and$21.4 million in the three months endedSeptember 30, 2022 and 2021, respectively, and$137.4 million and$65.2 million in the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in corporate overhead expenses in the three and nine month periods is primarily due to personnel costs associated with the VSP of$57.0 million (See Note 14 to the Consolidated Financial Statements). Corporate overhead expenses in the three and nine month periods also increased due to higher personnel costs, consulting and professional fees and severance costs unrelated to the VSP of$5.2 million . 36 --------------------------------------------------------------------------------
Other income and expense
Other income and expense items on the accompanying Consolidated Statements of
Operations consists of:
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Net (loss) gain from investments $ (1,406) $ (575) $ (4,515) $ 134
Interest and dividend income 3,962 892 6,663 2,715
Interest expense (143) (101) (604) (354)
Equity in earnings of unconsolidated affiliate 26,654 35,005 88,926 103,420
Total other income and expense items, net $ 29,067 $
35,221
Net (loss) gain from investments
Net losses from investments in the three and nine months endedSeptember 30, 2022 were primarily due to unrealized mark-to-market losses recorded in current earnings associated with Company-sponsored mutual funds and LSV-sponsored investment funds from the significant decline in market conditions in 2022 (See Note 5). 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 the three and nine months endedSeptember 30, 2022 was due to an overall increase in interest rates.
Equity in earnings of unconsolidated affiliate
Equity in earnings of unconsolidated affiliate reflects our ownership interest
in LSV. As of
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 Percent Change 2022 2021 Percent Change
Revenues of LSV $ 91,588 $ 115,728 (21)% $ 299,852 $ 342,957 (13)%
Net income of LSV 69,013 90,365 (24)% 229,997 266,805 (14)%
SEI's proportionate share in earnings
of LSV $ 26,654 $ 35,005 (24)% $ 88,926 $ 103,420 (14)%
The decrease in earnings from LSV in the three and nine months ended
September 30, 2022 was primarily due to negative cash flows from existing
clients, market depreciation and client losses. Average assets under management
by LSV decreased $11.8 billion to $88.5 billion during the nine months ended
September 30, 2022 as compared to $100.3 billion during the nine months ended
September 30, 2021 , a decrease of 12%.
Amortization
Amortization expense on the accompanying Consolidated Statements of Operations
consists of:
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 Percent Change 2022 2021 Percent Change
Capitalized software development
costs $ 7,287 $ 13,408 (46)% $ 34,045 $ 40,183 (15)%
Intangible assets acquired through
acquisitions and asset purchases 3,038 1,196 154% 9,534 3,312 188%
Other 118 70 69% 198 254 (22)%
Total amortization expense $ 10,443 $ 14,674 (29)% $ 43,777 $ 43,749 -%
Capitalized software development costs
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. The capitalization of the initial development work related to SWP began in mid-2007 when the platform was determined to be ready for its intended use. The amortization expense related to the initial software development costs ended in the second quarter of 2022. As a result, amortization expense related to capitalized software development costs declined in the three and nine months endedSeptember 30, 2022 (See Note 1 to the Consolidated Financial Statements). 37
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Intangible assets acquired through acquisitions and asset purchases
The increase in amortization expense in the three and nine month periods was due to the acquisitions of Finomial,SEI Novus andAtlas Master Trust during the fourth quarter 2021. Through these transactions, we acquired intangible assets related to technology, trade names and client relationships which are amortized over the estimated useful life of the assets (See Note 12 to the Consolidated Financial Statements). Income Taxes The effective income tax rates for the three and nine months endedSeptember 30, 2022 and 2021 differ from the federal income tax statutory rate due to the following: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Statutory rate 21.0 % 21.0 % 21.0 % 21.0 % State taxes, net of federal tax benefit 3.4 2.5 2.9 3.0 Foreign tax expense and tax rate differential (0.2) (0.1) (0.1) (0.1) Tax benefit from stock option exercises (1.1) (0.6) (0.5) (1.0) State settlements - (0.3) - (0.2) Provision-to-return adjustment - (0.5) - (0.2) Other, net (0.1) (0.3) (0.2) (0.3) 23.0 % 21.7 % 23.1 % 22.2 % The increase in the effective tax rate for the three months endedSeptember 30, 2022 was primarily due to an increase in the state effective tax rate and one-time state settlements which reduced the effective rate in 2021. Provision-to-return adjustments and statutory limitations which lowered the 2021 effective rate are expected to be realized in the fourth quarter of 2022. The increase was partially offset by increased tax benefits related to the stock option exercises as a percentage of net income in the third quarter of 2022 compared to the third quarter of 2021. The increase in the effective tax rate for the nine months endedSeptember 30, 2022 was primarily due to decreased tax benefits related to the lower volume of stock option exercises in 2022 compared to the prior year period as well as the timing of one-time state settlements which reduced the effective rate in 2021. Provision-to-return adjustments and statutory limitations which lowered the 2021 effective rate for the nine month period are expected to be realized in the fourth quarter of 2022.
Stock-Based Compensation
We recognized$31.3 million and$31.2 million in stock-based compensation expense during the nine months endedSeptember 30, 2022 and 2021, respectively. The amount of stock-based compensation expense we recognize is primarily based upon management's estimate of when the financial vesting targets of outstanding stock options may be achieved. Any change in the 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 earnings.
We revised our estimate of when some vesting targets are expected to be
achieved. This change in estimate resulted in a decrease of
Fair Value Measurements
The fair value of 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. Level 3 financial liabilities atSeptember 30, 2022 andDecember 31, 2021 consist entirely of the estimated contingent consideration resulting from an acquisition (See Note 12 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
38
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oversight of the financial services industry generally, new laws and regulations
affecting the financial services industry and ever-changing regulatory
interpretations of existing laws and regulations, and a greater propensity of
regulators to pursue enforcement actions and other sanctions against regulated
entities, have made this an increasingly challenging and costly regulatory
environment in which to operate.
SEI and some of our regulated subsidiaries have undergone or been scheduled to
undergo a range of periodic or thematic reviews, examinations or investigations
by numerous regulatory authorities around the world, including the Office of the
Comptroller of the Currency , the Securities and Exchange Commission , the
Financial Industry Regulatory Authority , the Financial Conduct Authority of the
United Kingdom (FCA), the Central Bank of Ireland and others. These regulatory
activities typically result in the identification of matters or practices to be
addressed by us or our subsidiaries and, in certain circumstances, the
regulatory authorities require remediation activities or pursue enforcement
proceedings against us or our subsidiaries. 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 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
Nine
Months Ended
2022 2021
Net cash provided by operating activities $ 428,519 $ 483,881
Net cash used in investing activities (60,342) (87,542)
Net cash used in financing activities (381,338) (387,390) Effect of exchange rate changes on cash, cash equivalents and restricted cash
(26,809) (2,442)
Net (decrease) increase in cash, cash equivalents and restricted cash (39,970)
6,507
Cash, cash equivalents and restricted cash, beginning of period 831,758
787,727
Cash, cash equivalents and restricted cash, end of period $
791,788
Our credit facility provides for borrowings up to
As ofOctober 20, 2022 , we had outstanding letters of credit of$6.0 million which reduced the amount available under the credit facility. These letters of credit were primarily issued for the expansion of the corporate headquarters and are due to expire in late 2022. As ofOctober 20, 2022 , the amount of the credit facility available for corporate purposes was$319.0 million . 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 transactions with affiliates other than wholly-owned subsidiaries or to incur liens or certain types of indebtedness 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 (See Note 6 to the Consolidated Financial Statements). The credit facility contains terms that utilize the London InterBank Offered Rate (LIBOR) as a potential component of the interest rate to be applied to any borrowings; however, an alternative reference rate is included under the agreement which provides for a specified replacement rate upon a LIBOR cessation event. At the time of a LIBOR cessation event, the replacement rate, the Secured Overnight Financing Rate (SOFR), self-executes without the need for negotiations or a formal amendment process. The majority of 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 39
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access such cash amounts immediately. As of
Cash and cash equivalents include accounts managed by 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 foreign subsidiaries in the calculation of free and immediately accessible cash for other general corporate purposes. A portion of the undistributed earnings of foreign subsidiaries are deemed repatriated. Any subsequent transfer of available cash related to the repatriated earnings of foreign subsidiaries could significantly increase free and immediately accessible cash. Cash flows from operations decreased$55.4 million in the first nine months of 2022 compared to the first nine months of 2021 primarily from the decline in net income. The positive impact from the change in the Company's working capital accounts partially offset the decrease in cash flows from operations.
Net cash used in investing activities includes:
•Purchases, sales and maturities of marketable securities. Purchases, sales and
maturities of marketable securities in the first nine months of 2022 and 2021
were as follows:
Nine Months Ended September 30,
2022 2021
Purchases $ (124,454) $ (168,333)
Sales and maturities 124,219 134,222
Net investing activities from marketable
securities $ (235) See Note 5 to the Consolidated Financial Statements for more information related to marketable securities.
•The capitalization of costs incurred in developing computer software. We capitalized$24.8 million of software development costs in the first nine months of 2022 as compared to$19.5 million in the first nine months of 2021. The majority of our software development costs are related to significant enhancements for the expanded functionality of the SEI Wealth Platform. We capitalized$5.3 million of software development costs in the first nine months of 2022 for a new platform for the Investment Managers segment. •Capital expenditures. Capital expenditures in the first nine months of 2022 were$32.3 million as compared to$22.5 million in the first nine months of 2021. Expenditures in 2022 and 2021 include capital outlays for purchased software and equipment for data center operations. We continue to evaluate improvements to our information technology infrastructure which, if implemented, will result in additional expenditures for purchased software and equipment for data center operations.
Net cash used in financing activities includes:
•Principal repayments on revolving credit facility. In
•The repurchase of common stock. Our Board of Directors has authorized the repurchase of common stock through multiple authorizations. Currently, there is no expiration date for the common stock repurchase program. We had total capital outlays of$266.5 million during the first nine months of 2022 and$315.8 million during the first nine months of 2021 for the repurchase of common stock.
•Proceeds from the issuance of common stock. We received
•Dividend payments. Cash dividends paid were
Cash Requirements
Cash requirements and liquidity needs are primarily funded through cash flow from operations and our capacity for additional borrowing. AtSeptember 30, 2022 , unused sources of liquidity consisted of cash and cash equivalents and the amount available under our credit facility. We are obligated to make payments in connection with the credit facility, operating leases, maintenance contracts and other commitments. We believe our operating cash flow, available borrowing capacity, and existing cash and cash equivalents will provide adequate funds for these obligations and ongoing operations. We currently anticipate that our 40 -------------------------------------------------------------------------------- available funds and cash flow from operations will be sufficient to meet our operational cash needs and fund our stock repurchase program for at least the next 12 months and for the foreseeable future.
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;
•pricing pressure from increased competition, disruptive technology and poor investment performance;
•the affect on our earnings and cashflows from the performance of
•consolidation within our target markets;
•external factors affecting the fiduciary management market;
•software defects, development delays or installation difficulties, which would harm our business and reputation and expose us to potential liability;
•data and cyber security risks;
•risk of the disclosure and misuse of personal data;
•risk of outages, data losses, and disruptions of services;
•intellectual property risks;
•third-party service providers in our operations;
•poor investment performance of our investment products or a client preference for products other than those which we offer or for products that generate lower fees;
•investment advisory contracts which may be terminated or may not be renewed on favorable terms;
•operational risks associated with the processing of investment transactions;
•systems and technology risks;
•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;
•our ability to receive dividends or other payments in needed amounts from our subsidiaries;
•the exit by the
•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;
41
--------------------------------------------------------------------------------•retention of executive officers and senior management personnel;
•unforeseen or catastrophic events, including the emergence of pandemic, extreme weather events or other natural disasters; and
•geopolitical unrest and other events.
We conduct operations through many regulated wholly-owned subsidiaries. These subsidiaries include:
•SEI Investments Distribution Co., or SIDCO, a broker-dealer registered with the
•SEI Investments Management Corporation, or SIMC, an investment advisor
registered with the
•SEI Private Trust Company, or SPTC, a limited purpose federal thrift chartered
and regulated by the
•SEI Trust Company, or STC, a
•SEI Institutional Transfer Agent, Inc., or SITA, a transfer agent registered
with the
•SEI Investments (
•SEI Investments Canada Company, or SEI Canada, an investment fund manager that
has various other capacities that is regulated by the
•SEI Investments Global, Limited, or SIGL, a management company for Undertakings
for
•SEI Investments -Global Fund Services, Ltd. , or GFSL, an authorized provider of administration services for Irish and non-Irish collective investment schemes that is regulated by the CBI; •SEI Investments -Depositary and Custodial Services (Ireland) Limited , or D&C, an authorized provider of depositary and custodial services that is regulated by the CBI;
•SEI Investments -
•SEI Investments Global (Cayman), Ltd., a full mutual fund administrator that is
regulated by the
•SEI Investments (South Africa ) (PTY) Limited, aPrivate Company that is a licensed Financial Service Provider regulated by theFinancial Sector Conduct Authority . 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 38.6% 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, 42 -------------------------------------------------------------------------------- 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 toU.S. and foreign anti-money laundering and financial transparency laws that require implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. 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. We must comply with economic sanctions and embargo programs administered by theOffice of Foreign Assets Control (OFAC) and similar national and multinational bodies and governmental agencies outsidethe United States , as well as anti-corruption and anti-money laundering laws and regulations throughout the world. We can incur higher costs and face greater compliance risks in structuring and operating our businesses to comply with these requirements. Furthermore, a violation of a sanction or embargo program or anti-corruption or anti-money laundering laws and regulations could subject us and our subsidiaries, and individual employees, to regulatory enforcement actions as well as significant civil and criminal penalties. Our businesses are also subject to privacy and data protection information security legal requirements concerning the use and protection of certain personal information. These include those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act of 2003 inthe United States , the General Data Protection Regulation (GDPR) in the EU,Canada's Personal Information Protection and Electronic Documents Act, theCayman Islands' Data Protection Law, and various other laws. Privacy and data security legislation is a priority issue in many states and localities inthe United States , as well as foreign jurisdictions outside of the EU. For example,California enacted the California Consumer Privacy Act (CCPA) which broadly regulates the sale of the consumer information ofCalifornia residents and grantsCalifornia residents certain rights to, among other things, access and delete data about them in certain circumstances. Other states are considering similar proposals. Such attempts by the states to regulate have the potential to create a patchwork of differing and/or conflicting state regulations. Ensuring compliance under ever-evolving privacy legislation, such as GDPR and CCPA, is an ongoing commitment, which involves substantial costs. Compliance with existing and future regulations and responding to and complying with recent increased regulatory activity affecting broker-dealers, investment advisors, investment companies, financial institutions, and their service providers could have a significant impact on us. We periodically undergo regulatory examinations and respond to regulatory inquiries and document requests. In addition, recent and continuing legislative activity inthe United States and in other jurisdictions (including theEuropean Union and theUnited Kingdom ) have made and continue to make extensive changes to the laws regulating financial services firms. As a result of these examinations, inquiries, and requests, as a result of increased civil litigation activity, and as a result of these new laws and regulations, we engage legal counsel and other subject matter experts, review our compliance procedures, solution and service offerings, and business operations, and make changes as we deem necessary or as may be required by the applicable authority. These additional activities and required changes may result in increased expense or may reduce revenues. Our bank clients are subject to supervision by federal, state, and foreign banking and financial services authorities concerning the manner in which such clients purchase and receive our products and services. Our plan sponsor clients and our subsidiaries providing services to those clients are subject to supervision by theDepartment of Labor and compliance with employee benefit regulations. Investment advisor and broker-dealer clients are regulated by theSEC , state securities authorities, orFINRA . Existing or future regulations applicable to our clients may affect our clients' purchase of our products and services. In addition, see the discussion of governmental regulations in Item 1A "Risk Factors" in our latest Annual Report on Form 10-K for a description of the risks that the current regulatory regimes and proposed regulatory changes may present for our business. 43
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