SEI INVESTMENTS COMPANY (In thousands, except asset balances and per share data) This discussion reviews and analyzes the consolidated financial condition, the consolidated results of operations and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements and the Annual Report on Form 10-K for the year endedDecember 31, 2020 .
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 (See Note 13 to the Consolidated Financial Statements for more information pertaining to our revenues). As ofSeptember 30, 2021 , through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer$1.3 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including$391.5 billion in assets under management and$866.3 billion in client assets under administration. Our affiliate,LSV Asset Management (LSV), manages$97.6 billion of assets which are included as assets under management. Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2021 and 2020 were: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Percent Change* 2021 2020 Percent Change* Revenues$ 485,322 $ 424,927 14%$ 1,416,659 $ 1,240,335 14% Expenses 344,197 313,590 10% 1,006,676 918,458 10% Income from operations 141,125 111,337 27% 409,983 321,877 27% Net (loss) gain from investments (575) 776 NM 134 (1,310)
NM
Interest income, net of interest expense 791 856 (8)% 2,361 5,126
(54)%
Equity in earnings from unconsolidated affiliate 35,005 28,305 24% 103,420 86,488 20% Income before income taxes 176,346 141,274 25% 515,898 412,181 25% Income taxes 38,301 30,178 27% 114,605 90,777 26% Net income 138,045 111,096 24% 401,293 321,404 25%
Diluted earnings per common share
29% $ 2.79$ 2.14
30%
* 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 endedSeptember 30, 2021 and 2020: •Revenue from Asset management, administration and distribution fees increased from higher average assets under administration from market appreciation and positive cash flows from new and existing clients. Average assets under administration increased$148.2 billion , or 21%, to$845.2 billion in the first nine months of 2021 as compared to$697.0 billion during the first nine months of 2020. •Average assets under management, excluding LSV, increased$54.6 billion , or 23%, to$291.3 billion in the first nine months of 2021 as compared to$236.7 billion during the first nine months of 2020. The increase was primarily due to market appreciation from the recovery of the capital markets during the later half of 2020 and first half of 2021. Defined benefit plan client losses in theInstitutional Investors segment partially offset the increase and negatively impacted our asset-based revenues. •Information processing and software servicing fees in the Private Banks segment increased$23.8 million during the first nine months of 2021 due to higher asset balances processed on SWP. •Earnings from LSV increased to$103.4 million in the first nine months of 2021 as compared to$86.5 million in the first nine months of 2020 due to higher assets under management from market appreciation and new clients. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV. 28
-------------------------------------------------------------------------------- •Operating expenses increased primarily from direct costs related to increased revenues and higher personnel costs due to business growth and competitive labor markets. •Stock-based compensation expense increased$10.7 million during the first nine months of 2021 due to equity awards in late 2020 and from a change in estimate of the timing of when stock-option vesting targets would be achieved. •We capitalized$19.4 million in the first nine months of 2021 for the SEI Wealth Platform as compared to$17.2 million in the first nine months of 2020. Amortization expense related to SWP increased to$35.8 million during the first nine months of 2021 as compared to$32.6 million during the first nine months of 2020 due to additional enhancements placed in service. •We continued the stock repurchase program during 2021 and purchased 5.2 million shares for$316.1 million in the nine month period. Impact of COVID-19 and Other Events The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency or concerns over the possibility of such an emergency, could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our business. InDecember 2019 , a novel strain of coronavirus (COVID-19) was identified inWuhan, China . COVID-19 quickly spread globally, leading theWorld Health Organization to declare the COVID-19 virus outbreak a global pandemic inMarch 2020 . Since that time, governmental authorities have implemented numerous and varying measures to stall the spread and ameliorate the impact of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place and safer-at-home orders, business shutdowns and closures, and have also implemented multi-step policies with the goal of re-opening domestic and global markets. Certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases. Recent developments include the phased re-opening of domestic and global markets to varying degrees. InMarch 2020 , we executed upon our business resiliency and contingency plans. To date, our remote capabilities have proven to be effective during the disruption caused by the COVID-19 pandemic with almost the entire workforce working remotely, with only a very limited number of on-site activities in our operational offices continuing to be performed. We continue to closely monitor the domestic and international landscape for changes in governmental measures both inthe United States and in the locations where we rely on critical outsourced services. We continue to be in regular contact with regulators, clients and vendors to confirm the measures taken to continue operating during this crisis, taking into consideration the latest announcements from state and federal authorities. We are also in continuous communication with our workforce to provide for the health and welfare of our employees working remotely and have implemented a return plan that is available for review on our website for those employees working in our operational offices. We will monitor the ability of these individuals to work as safely as possible at our offices and make adjustments to the number of on-site personnel (either increases or decreases) accordingly. We expect that the individual circumstances of our employees regarding school, childcare, care-giving and underlying health concerns will significantly impact our ability to return staff to their primary office locations. The majority of our revenues are based on the value of assets invested in investment products that we manage or administer which are affected by changes in the capital markets and the portfolio strategy of our clients or their customers. The strong recovery of the capital markets after the widespread economic shutdowns in response to the emergence of the pandemic has had a positive impact on our asset-based fees thereby increasing our base revenues. 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. While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols designed to mitigate the potentially negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by market, including the duration and scope of the pandemic, the effectiveness of vaccinations, the implications arising out of the emerging and potentially yet to be identified variants of COVID-19, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, the extent that critical public and private infrastructure functions upon which we rely are suspended and changes in investor and consumer behavior in response to the pandemic. The resulting market conditions may adversely affect our revenues and earnings derived from assets under management and administration. 29 -------------------------------------------------------------------------------- OnMay 17, 2020 ,M.J. Brunner (Brunner), one of our third-party developers/vendors that provides development services and application management for two of our client applications experienced a ransomware attack. We are aware that certain client data was illegally accessed and revealed by cybercriminal(s). The applications themselves were not compromised by this attack. The root cause of the attack was not predicated on vulnerability within SEI's network, and neither SEI's network nor operations were compromised, attacked or otherwise affected as part of this incident. While there were direct and indirect expenses associated with the incident in each fiscal quarter since the incident, and we expect there will continue to be costs associated with the incident going-forward, we do not expect these will be material. We note that several regulatory bodieswho routinely review our operations, including theSEC and theUnited States Federal Financial Institutions Examination Council (FFIEC), have requested information with respect to, and are investigating the facts and circumstances surrounding, the ransomware attack on Brunner. We have produced information in connection with and continue to cooperate in the ongoing investigation being conducted by theSEC's Division of Enforcement relating to this matter. Additionally, theSEC's Division of Examinations concluded its examination of our regulated entities and found limited and discrete deficiencies in the execution of our third-party vendor management program as it pertained to Brunner. While we have identified no causal connection between the Examination findings and the Brunner ransomware attack, we take our clients' security very seriously and have responded to the Staff's Examination findings and are documenting further enhancements to our third-party vendor management program. One SEISM Strategy In 2020, we invested in our One SEI strategy. The One SEI strategy is a company-wide initiative to open business opportunities across the entire company by leveraging existing and new SEI platforms and making them accessible to all types of clients, adjacent markets and other non-SEI platforms. As we execute on our strategy, we have incurred significant costs during 2020 and throughout 2021 to integrate, modularize and leverage these technologies in our service offerings for the front, middle and back-office. The majority of these costs have been recognized in the Investments in New Businesses segment. To date, we have not capitalized any software development costs related to the One SEI strategy. We expect these investments will continue during the fourth quarter of 2021 and into 2022 as we continue to deliver on our One SEI strategy. 30
--------------------------------------------------------------------------------
Ending Asset Balances
(In millions)
As of September 30,
2021 2020 Percent Change
Private Banks:
Equity and fixed-income programs $ 25,618 $ 23,499 9%
Collective trust fund programs 6 6
-%
Liquidity funds 3,988 3,718
7%
Total assets under management$ 29,612 $ 27,223
9%
Client assets under administration 4,675 24,174
(81)%
Total assets$ 34,287 $ 51,397
(33)%
Investment Advisors : Equity and fixed-income programs$ 78,560 $ 65,581
20%
Collective trust fund programs - 3
(100)%
Liquidity funds 3,477 3,866
(10)%
Total Platform assets under management
18% Platform-only assets (E) 13,728 10,506 31% Total Platform assets (E)$ 95,765 $ 79,956 20%Institutional Investors : Equity and fixed-income programs$ 89,441 $ 83,846
7%
Collective trust fund programs 5 101
(95)%
Liquidity funds 2,599 2,096
24%
Total assets under management$ 92,045 $ 86,043
7%
Client assets under advisement 4,698 3,618
30%
Total assets$ 96,743 $ 89,661
8%
Investment Managers: Collective trust fund programs$ 87,488 $ 63,277
38%
Liquidity funds 568 389
46%
Total assets under management$ 88,056 $ 63,666
38%
Client assets under administration (A) 861,605 730,369
18%
Total assets$ 949,661 $ 794,035
20%
Investments in New Businesses: Equity and fixed-income programs$ 1,964 $ 1,572
25%
Liquidity funds 202 169
20%
Total assets under management$ 2,166 $ 1,741
24%
Client assets under advisement 1,378 1,179
17%
Total assets$ 3,544 $ 2,920
21%
LSV:
Equity and fixed-income programs (B)
19%
31--------------------------------------------------------------------------------
Total:
Equity and fixed-income programs (C)
87,499 63,387 38%
Liquidity funds 10,834 10,238
6%
Total assets under management$ 391,520 $ 330,174
19%
Client assets under advisement 6,076 4,797
27%
Client assets under administration (D) 866,280 754,543 15% Platform-only assets 13,728 10,506 31% Total assets$ 1,277,604 $ 1,100,020 16% (A)Client assets under administration in the Investment Managers segment include$12.3 billion of assets that are at fee levels below our normal full service assets (as ofSeptember 30, 2021 ). (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 ofSeptember 30, 2021 was$2.3 billion . (C) Equity and fixed-income programs include$7.8 billion of assets invested in various asset allocation funds atSeptember 30, 2021 . (D) In addition to the numbers presented, SEI also administers an additional$13.7 billion in Funds of Funds assets (as ofSeptember 30, 2021 ) on which SEI does not earn an administration fee. (E) Platform assets under management and Platform-only assets combined are total Platform assets in theInvestment Advisors segment. 32
--------------------------------------------------------------------------------
Average Asset Balances
(In millions)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Percent Change 2021 2020 Percent Change
Private Banks:
Equity and fixed-income programs $ 26,232 $ 23,740 10% $ 25,809 $ 23,542 10%
Collective trust fund programs 6 7 (14)% 6 5 20% Liquidity funds 3,916 3,948 (1)% 3,875 3,965 (2)% Total assets under management$ 30,154 $ 27,695 9%$ 29,690 $ 27,512
8%
Client assets under administration 4,476 25,295 (82)% 4,399 24,651 (82)% Total assets$ 34,630 $ 52,990 (35)%$ 34,089 $ 52,163 (35)%Investment Advisors : Equity and fixed-income programs$ 79,602 $ 64,479 23%$ 76,560 $ 62,280
23%
Collective trust fund programs - 3 (100)% 1 3 (67)% Liquidity funds 3,403 4,569 (26)% 3,464 4,925 (30)%
Total Platform assets under management
20%$ 80,025 $ 67,208 19% Platform-only assets (E) 13,863 10,501 32% 13,120 9,481 38% Total Platform assets (E)$ 96,868 $ 79,552 22%$ 93,145 $ 76,689 21%Institutional Investors : Equity and fixed-income programs$ 91,965 $ 82,830 11%$ 92,257 $ 79,931
15%
Collective trust fund programs 5 102 (95)% 56 96 (42)% Liquidity funds 2,742 2,120 29% 2,681 2,313 16% Total assets under management$ 94,712 $ 85,052 11%$ 94,994 $ 82,340
15%
Client assets under advisement 4,658 3,565 31% 4,440 3,562 25% Total assets$ 99,370 $ 88,617 12%$ 99,434 $ 85,902 16% Investment Managers: Collective trust fund programs$ 89,441 $ 62,028 44%$ 84,010 $ 57,347 46% Liquidity funds 532 565 (6)% 497 555 (10)% Total assets under management$ 89,973 $ 62,593 44%$ 84,507 $ 57,902
46%
Client assets under administration (A) 851,183 713,528 19% 840,774 672,309 25% Total assets$ 941,156 $ 776,121 21%$ 925,281 $ 730,211 27% Investments in New Businesses: Equity and fixed-income programs$ 1,958 $ 1,560 26%$ 1,857 $ 1,564 19% Liquidity funds 205 180 14% 203 177 15% Total assets under management$ 2,163 $ 1,740 24%$ 2,060 $ 1,741
18%
Client assets under advisement 1,423 1,206 18% 1,385 1,192 16% Total assets$ 3,586 $ 2,946 22%$ 3,445 $ 2,933 17% LSV:
Equity and fixed-income programs (B)
20%$ 100,328 $ 83,997 19% 33
--------------------------------------------------------------------------------
Total:
Equity and fixed-income programs (C)$ 299,681 $ 256,145 17%$ 296,811 $ 251,314 18% Collective trust fund programs 89,452 62,140 44% 84,073 57,451 46% Liquidity funds 10,798 11,382 (5)% 10,720 11,935 (10)%
Total assets under management
21%$ 391,604 $ 320,700 22% Client assets under advisement 6,081 4,771 27% 5,825 4,754 23% Client assets under administration (D) 855,659 738,823 16% 845,173 696,960 21% Platform-only assets 13,863 10,501 32% 13,120 9,481 38% Total assets$ 1,275,534 $ 1,083,762 18%$ 1,255,722 $ 1,031,895 22% (A) Average client assets under administration in the Investment Managers segment for the three months endedSeptember 30, 2021 include$12.5 billion that are at fee levels below our normal full service assets. (B) Equity and fixed-income programs include assets managed by LSV in which fees are based on performance only. The average value of these assets for the three months endedSeptember 30, 2021 was$2.4 billion . (C) Equity and fixed-income programs include$7.8 billion of average assets invested in various asset allocation funds for the three months endedSeptember 30, 2021 . (D) In addition to the numbers presented, SEI also administers an additional$13.6 billion of average assets in Funds of Funds assets for the three months endedSeptember 30, 2021 on which SEI does not earn an administration fee. (E) Platform assets under management and Platform-only assets combined are total Platform assets in theInvestment Advisors segment. In the preceding tables, assets under management are total assets of our clients or their customers invested in equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services through our subsidiaries and partnerships in which we have a significant interest. Assets under advisement include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. Platform-only assets include total assets of our clients or their customers which are not invested in any SEI-sponsored investment products. The assets presented in the preceding tables do not include assets processed on SWP and are not included in the accompanying Consolidated Balance Sheets because we do not own them. 34
-------------------------------------------------------------------------------- Business Segments Revenues, Expenses and Operating Profit (Loss) for our business segments for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were as follows: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2021 2020 Change 2021 2020 Change Private Banks: Revenues$ 123,018 $ 114,792 7%$ 364,302 $ 335,739 9% Expenses 116,679 113,066 3% 345,057 331,442 4% Operating Profit $ 6,339$ 1,726 NM$ 19,245 $ 4,297 NM Operating Margin 5 % 2 % 5 % 1 %Investment Advisors : Revenues$ 124,768 $ 103,189 21%$ 357,458 $ 299,218 19% Expenses 62,107 51,519 21% 176,267 154,100 14% Operating Profit$ 62,661 $ 51,670 21%$ 181,191 $ 145,118 25% Operating Margin 50 % 50 % 51 % 48 %Institutional Investors : Revenues$ 85,759 $ 79,583 8%$ 255,957 $ 235,309 9% Expenses 41,643 37,812 10% 122,696 113,016 9% Operating Profit$ 44,116 $ 41,771 6%$ 133,261 $ 122,293 9% Operating Margin 51 % 52 % 52 % 52 % Investment Managers: Revenues$ 147,412 $ 123,846 19%$ 426,639 $ 359,815 19% Expenses 89,594 79,838 12% 257,609 228,795 13% Operating Profit$ 57,818 $ 44,008 31%$ 169,030 $ 131,020 29% Operating Margin 39 % 36 % 40 % 36 % Investments in New Businesses: Revenues $ 4,365$ 3,517 24%$ 12,303 $ 10,254 20% Expenses 12,820 13,315 (4)% 39,855 37,691 6% Operating Loss$ (8,455) $ (9,798) NM$ (27,552) $ (27,437) NM For additional information pertaining to our business segments, see Note 9 to the Consolidated Financial Statements. Private Banks Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2021 2020 Change 2021 2020 Change Revenues: Information processing and software servicing fees$ 88,340 $ 81,811 8%$ 261,907 $ 238,099 10% Asset management, administration & distribution fees 34,678 32,981 5% 102,395 97,640 5% Total revenues$ 123,018 $ 114,792 7%$ 364,302 $ 335,739 9% Revenues increased$8.2 million , or 7%, in the three month period and increased$28.6 million , or 9%, in the nine month period endedSeptember 30, 2021 and were primarily affected by: •Increased investment processing fees from new SWP client conversions and growth from existing SWP clients, partially due to market appreciation; •Increased investment management fees from existing international clients due to market appreciation; •Increased non-recurring professional service fees from existing clients and one-time early termination fees from an existing TRUST 3000® client; and •The positive impact from foreign currency exchange rate fluctuations between theU.S. dollar and the British 35 -------------------------------------------------------------------------------- pound on our foreign operations; partially offset by •Decreased investment processing fees from the loss of clients; and •Decreased investment management fees from liquidity products. Operating margins increased to 5% in the three and nine month periods. Operating margins in the prior year comparable periods were essentially flat. Operating income increased by$4.6 million in the three month period and increased by$14.9 million in the nine month period and was primarily affected by: •An increase in revenues; •Decreased non-capitalized costs, mainly personnel and consulting costs, related to maintenance, support and client migrations to SWP; and •The net positive impact from foreign currency exchange rate fluctuations between theU.S. dollar and the British pound on our foreign operations; partially offset by •Increased direct expenses associated with increased investment management fees from existing international clients; •Increased amortization expense related to SWP; and •Increased personnel and stock-based compensation costs.Investment Advisors Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2021 2020 Change 2021 2020 Change Revenues: Investment management fees-SEI fund programs$ 77,123 $ 68,287 13%$ 224,816 $ 200,718 12% Separately managed account fees 41,688 29,761 40% 114,747 83,726 37% Other fees 5,957 5,141 16% 17,895 14,774 21% Total revenues$ 124,768 $ 103,189 21%$ 357,458 $ 299,218 19% Revenues increased$21.6 million , or 21%, in the three month period and increased$58.2 million , or 19%, in the nine month period endedSeptember 30, 2021 and were primarily affected by: •Increased separately managed account program fees from positive cash flows into new and existing SEI-sponsored programs; and •The positive impact to investment management fees from market appreciation; partially offset by •Negative cash flows from SEI-sponsored mutual funds. Operating margin remained at 50% in the three month period and increased to 51% compared to 48% in the nine month period. Operating income increased$11.0 million , or 21%, in the three month period and increased$36.1 million , or 25%, in the nine month period and was primarily affected by: •An increase in revenues; partially offset by •Increased direct expenses associated with increased assets into our separately managed account program; and •Increased promotion costs as well as increased personnel and stock-based compensation costs. 36
--------------------------------------------------------------------------------Institutional Investors Revenues increased$6.2 million , or 8%, in the three month period and increased$20.6 million , or 9%, in the nine month period endedSeptember 30, 2021 and were primarily affected by: •Increased investment management fees from market appreciation; •Asset funding from new sales of our OCIO platform; •Performance fees associated with an SEI-sponsored investment product during the third-quarter 2021; and •The positive impact from foreign currency exchange rate fluctuations between theU.S. dollar and the British pound on our foreign operations; partially offset by •Defined benefit client losses. Operating margin decreased to 51% compared to 52% in the three month period and remained at 52% in the nine month period. Operating income increased$2.3 million , or 6%, in the three month period and increased$11.0 million , or 9%, in the nine month period and was primarily affected by: •An increase in revenues; partially offset by •Increased direct expenses associated with investment management fees; and •Increased personnel and stock-based compensation costs. Investment Managers Revenues increased$23.6 million , or 19%, in the three month period and increased$66.8 million , or 19%, in the nine month period endedSeptember 30, 2021 and were primarily affected by: •Higher valuations of existing client assets from market appreciation; 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 increased to 39% compared to 36% in the three month period and increased to 40% compared to 36% in the nine month period. Operating income increased$13.8 million , or 31%, in the three month period and increased$38.0 million , or 29%, in the nine month period and was primarily affected by: •An increase in revenues; partially offset by •Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; •Increased non-capitalized investment spending, mainly consulting costs; and •Increased stock-based compensation costs
Other
Corporate overhead expenses Corporate overhead expenses primarily consist of general and administrative expenses and other costs not directly attributable to a reportable business segment. Corporate overhead expenses were$21.4 million and$18.0 million in the three months endedSeptember 30, 2021 and 2020, respectively, and$65.2 million and$53.4 million in the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in corporate overhead expenses is primarily due to an increase in personnel costs, stock-based compensation, consulting and professional fees. Other income and expense Other income and expense items on the accompanying Consolidated Statements of Operations consists of: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net (loss) gain from investments$ (575) $ 776 $ 134 $ (1,310) Interest and dividend income 892 1,009 2,715 5,582 Interest expense (101) (153) (354) (456) Equity in earnings of unconsolidated affiliate 35,005 28,305 103,420 86,488 Total other income and expense items, net$ 35,221 $ 29,937 $ 105,915 $ 90,304 37
-------------------------------------------------------------------------------- Interest and dividend income Interest and dividend income is earned based upon the amount of cash that is invested daily. The decrease in interest and dividend income in the three and nine months endedSeptember 30, 2021 was due to an overall decline in interest rates. Equity in earnings of unconsolidated affiliate Equity in earnings of unconsolidated affiliate reflects our ownership interest in LSV. As ofSeptember 30, 2021 , our total partnership interest in LSV was 38.7%. The table below presents the revenues and net income of LSV and the proportionate share in LSV's earnings. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Percent Change 2021 2020 Percent Change Revenues of LSV$ 115,728 $ 94,902 22%$ 342,957 $ 289,546 18% Net income of LSV 90,365 70,440 28% 266,805 220,184 21% SEI's proportionate share in earnings of LSV$ 35,005 $ 28,305 24%$ 103,420 $ 86,488 20% The increase in earnings from LSV in the three and nine months endedSeptember 30, 2021 was primarily due to higher assets under management from market appreciation. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV. Average assets under management by LSV increased$16.3 billion to$100.3 billion during the nine months endedSeptember 30, 2021 as compared to$84.0 billion during the nine months endedSeptember 30, 2020 , an increase of 19%. Income Taxes The effective income tax rates for the three and nine months endedSeptember 30, 2021 and 2020 differ from the federal income tax statutory rate due to the following: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Statutory rate 21.0 % 21.0 % 21.0 % 21.0 % State taxes, net of federal tax benefit 2.5 3.3 3.0 3.2 Foreign tax expense and tax rate differential (0.1) (0.2) (0.1) (0.1) Tax benefit from stock option exercises (0.6) (0.4) (1.0) (1.0) Expiration of the statute of limitations - (1.3) - (0.5) Provision-to-return adjustment (0.5) (0.4) (0.2) (0.1) Other, net (0.3) (0.6) (0.3) (0.5) 21.7 % 21.4 % 22.2 % 22.0 % Stock-Based Compensation We recognized$31.2 million and$20.5 million in stock-based compensation expense during the nine months endedSeptember 30, 2021 and 2020, respectively. The amount of stock-based compensation expense we recognize is based upon management's estimate of when financial vesting targets 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 an increase of$3.2 million in stock-based compensation expense during the nine months endedSeptember 30, 2021 . We expect to recognize$13.1 million in stock-based compensation expense during the remainder of 2021. 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 38 -------------------------------------------------------------------------------- issuer pools that are valued based on current market data of similar assets. Level 3 financial liabilities atSeptember 30, 2021 andDecember 31, 2020 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 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. 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
2021 2020
Net cash provided by operating activities $ 483,881 $ 396,524
Net cash used in investing activities (87,542) (64,243)
Net cash used in financing activities (387,390) (401,833) Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,442) (4,196)
Net increase (decrease) in cash, cash equivalents and restricted cash 6,507
(73,748)
Cash, cash equivalents and restricted cash, beginning of period 787,727
844,547
Cash, cash equivalents and restricted cash, end of period $
794,234
Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. AtSeptember 30, 2021 , our unused sources of liquidity consisted of cash and cash equivalents and the amount available under our credit facility. OnApril 23, 2021 , we replaced our credit facility with a new five-year credit facility agreement which provides for borrowings up to$325.0 million (See Note 6 to the Consolidated Financial Statements). The new credit facility is a revolving line of credit withWells Fargo Bank, N.A. , and a syndicate of other lenders and is scheduled to expire inApril 2026 . 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, 39 -------------------------------------------------------------------------------- the replacement rate, the Secured Overnight Financing Rate (SOFR), self-executes without the need for negotiations or a formal amendment process. We had outstanding letters of credit of$5.8 million as ofOctober 21, 2021 which reduced our amount available under the credit facility to$319.2 million . These letters of credit were primarily issued for the expansion of our corporate headquarters completed in 2020 and are due to expire in late 2021. 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 access such cash amounts immediately. As ofOctober 21, 2021 , the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was$376.1 million . 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 increased$87.4 million in the first nine months of 2021 compared to the first nine months of 2020 primarily from the increase in net income and increased repayments from LSV related to their working capital accounts. The negative impact from the change in the Company's working capital accounts and lower distribution payments received from LSV partially offset the increase. Net cash used in investing activities includes: •Purchases, sales and maturities of marketable securities. Purchases, sales and maturities of marketable securities in the first nine months of 2021 and 2020 were as follows: Nine Months Ended September 30, 2021 2020 Purchases$ (168,333) $ (114,407) Sales and maturities 134,222 113,417 Net investing activities from marketable securities$ (34,111)
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$19.5 million of software development costs in the first nine months of 2021 as compared to$18.6 million in the first nine months of 2020. The majority of our software development costs are related to significant enhancements for the expanded functionality of the SEI Wealth Platform. •Capital expenditures. Capital expenditures in the first nine months of 2021 were$22.5 million as compared to$43.1 million in the first nine months of 2020. Expenditures in 2021 include capital outlays for purchased software and equipment for data center operations. Expenditures in 2020 include the expansion of our corporate headquarters completed in the fourth quarter 2020 as well as purchased software and equipment. 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. •Other investing activities. We made a payment of$11.0 million in the first nine months of 2021 to purchase a technology platform providing digital collaboration tools for financial advisors. InOctober 2021 , we made a payment related to the acquisition of an investor lifecycle management fintech firm. The cash payment associated with this acquisition was not material. InNovember 2021 , pending regulatory approval, we expect to make a payment for the acquisition of a defined contribution master trust in theUnited Kingdom . The cash payment related to this acquisition is not expected to be material. Net cash used in financing activities includes: •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$315.8 million during the first nine months of 2021 and$327.1 million during the first nine months of 2020 for the repurchase of common stock. 40
-------------------------------------------------------------------------------- •Proceeds from the issuance of common stock. We received$37.9 million in proceeds from the issuance of common stock during the first nine months of 2021 as compared to$29.8 million during the first nine months of 2020. The increase in proceeds is primarily attributable to a higher level of stock option exercise activity. •Dividend payments. Cash dividends paid were$105.5 million in the first nine months of 2021 as compared to$103.9 million in the first nine months of 2020. 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; the common stock repurchase program and future dividend payments. Forward-Looking Information and Risk Factors The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements. Among the risks and uncertainties which may affect our future operations, strategies, financial results or other developments are those risks described in our latest Annual Report on Form 10-K in Part I, Item 1A. These risks include the following: •changes in capital markets that may affect our revenues and earnings; •product development risk; •risk of failure by a third-party service provider; •data and cyber security risks; •operational risks associated with the processing of investment transactions; •systems and technology risks; •intellectual property risks; •pricing pressure from increased competition, disruptive technology and poor investment performance; •the affect on our earnings and cashflows from the performance ofLSV Asset Management ; •third-party pricing services for the valuation of securities invested in our investment products; •external factors affecting the fiduciary management market; •the affect of extensive governmental regulation; •litigation and regulatory examinations and investigations; •our ability to capture the expected value from acquisitions, divestitures, joint ventures, minority stakes or strategic alliances; •increased costs and regulatory risks from the growth of our business; •fiduciary or other legal liability for client losses from our investment management operations; •consolidation within our target markets; •our ability to receive dividends or other payments in needed amounts from our subsidiaries; •the exit by theUnited Kingdom from theEuropean Union ; •third-party approval of our investment products with advisors affiliated with independent broker-dealers or other networks; •the effectiveness of our business, risk management and business continuity strategies, models and processes; •financial and non-financial covenants which may restrict our ability to manage liquidity needs; •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; 41 -------------------------------------------------------------------------------- •stockholder activism efforts; •retention of executive officers and senior management personnel; and •unforeseen or catastrophic events, including the emergence of pandemic, terrorist attacks, extreme weather events or other natural disasters. We conduct operations through many regulated wholly-owned subsidiaries. These subsidiaries include: •SEI Investments Distribution Co., or SIDCO, a broker-dealer registered with theSEC under the Securities Exchange Act of 1934 and a member of theFinancial Industry Regulatory Authority, Inc. , orFINRA ; •SEI Investments Management Corporation, or SIMC, an investment advisor registered with theSEC under the Investment Advisers Act of 1940 and with theCommodity Futures Trading Commission , or CFTC, under the Commodity Exchange Act; •SEI Private Trust Company, or SPTC, a limited purpose federal thrift chartered and regulated by theOffice of the Comptroller of the Currency ; •SEI Trust Company, or STC, aPennsylvania trust company, regulated by thePennsylvania Department of Banking and Securities ; •SEI Investments (Europe ) Limited, or SIEL, an investment manager and financial institution subject to regulation by theFinancial Conduct Authority of the United Kingdom ; •SEI Investments Canada Company, or SEI Canada, an investment fund manager that has various other capacities that is regulated by theOntario Securities Commission and various provincial authorities; •SEI Investments Global, Limited, or SIGL, a management company for Undertakings forCollective Investment inTransferable Securities , or UCITS, and for Alternative Investment Funds, or AIFs, that is regulated primarily by theCentral Bank of Ireland , or CBI; •SEI Investments -Global Fund Services, Ltd. , or GFSL, an authorized provider of administration services for Irish and non-Irish collective investment schemes that is regulated by the CBI; and •SEI Investments -Depositary and Custodial Services (Ireland) Limited , or D&C, an authorized provider of depositary and custodial services that is regulated by the CBI. In addition to the regulatory authorities listed above, our subsidiaries are subject to the jurisdiction of regulatory authorities in other foreign countries. In addition to our wholly-owned subsidiaries, we also own a minority interest of approximately 38.7 percent in LSV, which is also an investment advisor registered with theSEC . The Company, its regulated subsidiaries, their regulated services and solutions and their customers are all subject to extensive legislation, regulation and supervision that recently has been subject to, and continues to experience, significant change and increased regulatory activity. These changes and regulatory activities could have a material adverse effect on us and our clients. The various governmental agencies and self-regulatory authorities that regulate or supervise the Company and its subsidiaries have broad administrative powers. In the event of a failure to comply with laws, regulations and requirements of these agencies and authorities, the possible business process changes required or sanctions that may be imposed include the suspension of individual employees, limitations on our ability to engage in business for specified periods of time, the revocation of applicable registration as a broker-dealer, investment advisor or other regulated entity, and, as the case may be, censures and fines. Additionally, certain securities and banking laws applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business. Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to our regulated subsidiaries and their activities, services and solutions, our business practices, our past actions and other matters has increased dramatically in the past several years. Responding to these examinations, investigations, actions and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business. Penalties, fines and changes to business processes sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. We continue to be subject to inquiries from examinations and investigations by supervisory and enforcement divisions of regulatory authorities and expect this to continue in the future. We believe this is also the case with many of our regulated clients. Governmental scrutiny and legal and enforcement proceedings can also have a 42
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negative impact on our reputation, our relationship with clients and prospective clients, and on the morale and performance of our employees, which could adversely affect our businesses and results of operations. We are subject to theUSA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. Anti-money laundering laws outsidethe United States contain similar requirements. We offer investment and banking solutions that also are subject to regulation by the federal and state securities and banking authorities, as well as foreign regulatory authorities, where applicable. Existing or future regulations that affect these solutions could lead to a reduction in sales of these solutions or require modifications of these solutions. Compliance with existing and future regulations and responding to and complying with recent increased regulatory activity affecting broker-dealers, investment advisors, investment companies, financial institutions and their service providers could have a significant impact on us. We periodically undergo regulatory examinations and respond to regulatory inquiries and document requests. In addition, recent and continuing legislative activity inthe United States and in other jurisdictions (including theEuropean Union and theUnited Kingdom ) have made and continue to make extensive changes to the laws regulating financial services firms. As a result of these examinations, inquiries and requests, as a result of increased civil litigation activity, and as a result of these new laws and regulations, we engage legal counsel and other subject matter experts, review our compliance procedures, solution and service offerings, and business operations, and make changes as we deem necessary or as may be required by the applicable authority. These additional activities and required changes may result in increased expense or may reduce revenues. Our bank clients are subject to supervision by federal, state and foreign banking and financial services authorities concerning the manner in which such clients purchase and receive our products and services. Our plan sponsor clients and our subsidiaries providing services to those clients are subject to supervision by theDepartment of Labor and compliance with employee benefit regulations. Investment advisor and broker-dealer clients are regulated by theSEC , state securities authorities, orFINRA . Existing or future regulations applicable to our clients may affect our clients' purchase of our products and services. In addition, see the discussion of governmental regulations in Item 1A "Risk Factors" in our latest Annual Report on Form 10-K for a description of the risks that proposed regulatory changes may present for our business.
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