SEI Investments Earnings 2018-09-30

SEIC 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q

________________________________________

(Mark One)*



ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2018



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

0-10200

(Commission File Number)

________________________________________

SEI INVESTMENTS COMPANY

(Exact name of registrant as specified in its charter)

________________________________________



Pennsylvania		23-1707341
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100

(Address of principal executive offices)

(Zip Code)

(610) 676-1000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the registrant’s common stock as of October 18, 2018 was 155,540,268.

SEI Investments Company TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.	2
	Consolidated Balance Sheets (Unaudited) -- September 30, 2018 and December 31, 2017	2
	Consolidated Statements of Operations (Unaudited) -- For the Three and Nine Months Ended September 30, 2018 and 2017	4
	Consolidated Statements of Comprehensive Income (Unaudited) -- For the Three and Nine Months Ended September 30, 2018 and 2017	5
	Consolidated Statements of Cash Flows (Unaudited) -- For the Nine Months Ended September 30, 2018 and 2017	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	40
Item 4.	Controls and Procedures.	40

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	41
Item 1A.	Risk Factors.	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	42
Item 6.	Exhibits.	42
	Signatures	43

Page 1 of 43

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

SEI Investments Company

Consolidated Balance Sheets

(unaudited)

(In thousands, except par value)



	September 30, 2018		December 31, 2017
Assets
Current Assets:
Cash and cash equivalents	$	741,965	$	744,247
Restricted cash	3,511		3,505
Receivables from investment products	54,403		56,666
Receivables, net of allowance for doubtful accounts of $666 and $695	327,614		282,706
Securities owned	28,945		21,526
Other current assets	37,113		31,158
Total Current Assets	1,193,551		1,139,808
Property and Equipment, net of accumulated depreciation of $331,138 and $309,955	145,865		146,428
Capitalized Software, net of accumulated amortization of $383,675 and $350,045	310,146		310,405
Investments Available for Sale	84,298		87,983
Investments in Affiliated Funds, at fair value	5,736		6,034
Investment in Unconsolidated Affiliate	44,682		59,492
Goodwill	64,489		52,990
Intangible Assets, net of accumulated amortization of $4,169 and $1,552	32,591		28,578
Deferred Contract Costs	22,104		—
Deferred Income Taxes	2,224		2,767
Other Assets, net	33,642		18,884
Total Assets	$	1,939,328	$	1,853,369

The accompanying notes are an integral part of these consolidated financial statements.

Page 2 of 43

SEI Investments Company

Consolidated Balance Sheets

(unaudited)

(In thousands, except par value)



	September 30, 2018			December 31, 2017
Liabilities and Equity
Current Liabilities:
Accounts payable	$	9,161		$	5,268
Accrued liabilities	207,675			265,058
Deferred revenue	5,054			4,723
Total Current Liabilities	221,890			275,049
Borrowings Under Revolving Credit Facility	—			30,000
Long-term Income Taxes Payable	770			10,629
Deferred Income Taxes	60,158			48,472
Other Long-term Liabilities	26,000			12,380
Total Liabilities	308,818			376,530
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 750,000 shares authorized; 155,475 and 157,069 shares issued and outstanding	1,555			1,571
Capital in excess of par value	1,101,237			1,027,709
Retained earnings	556,581			467,467
Accumulated other comprehensive loss, net	(28,863		)	(19,908		)
Total Shareholders' Equity	1,630,510			1,476,839
Total Liabilities and Shareholders' Equity	$	1,939,328		$	1,853,369

The accompanying notes are an integral part of these consolidated financial statements.

Page 3 of 43

SEI Investments Company

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Asset management, administration and distribution fees	$	322,778		$	300,417		$	955,495		$	869,560
Information processing and software servicing fees	85,904			85,601			263,615			248,773
Total revenues	408,682			386,018			1,219,110			1,118,333
Expenses:
Subadvisory, distribution and other asset management costs	45,276			46,014			135,690			133,073
Software royalties and other information processing costs	7,767			11,005			24,462			34,295
Compensation, benefits and other personnel	127,480			118,421			379,132			336,919
Stock-based compensation	5,878			7,088			16,396			19,527
Consulting, outsourcing and professional fees	51,758			46,507			150,906			137,991
Data processing and computer related	21,754			19,792			63,478			57,107
Facilities, supplies and other costs	16,689			17,261			52,085			50,761
Amortization	12,405			13,745			36,420			38,332
Depreciation	7,255			6,948			21,515			20,347
Total expenses	296,262			286,781			880,084			828,352
Income from operations	112,420			99,237			339,026			289,981
Net gain (loss) from investments	89			645			(460		)	1,036
Interest and dividend income	3,482			1,899			9,146			4,928
Interest expense	(122		)	(345		)	(511		)	(571		)
Equity in earnings of unconsolidated affiliate	41,726			39,333			123,406			109,213
Income before income taxes	157,595			140,769			470,607			404,587
Income taxes	29,276			39,030			80,773			122,342
Net income	$	128,319		$	101,739		$	389,834		$	282,245
Basic earnings per common share	$	0.82		$	0.64		$	2.48		$	1.78
Shares used to compute basic earnings per share	156,283			157,902			157,086			158,439
Diluted earnings per common share	$	0.80		$	0.63		$	2.41		$	1.74
Shares used to compute diluted earnings per share	160,511			161,148			162,053			161,866
Dividends declared per common share	$	—		$	—		$	0.30		$	0.28

The accompanying notes are an integral part of these consolidated financial statements.

Page 4 of 43

SEI Investments Company

Consolidated Statements of Comprehensive Income

(unaudited)

(In thousands)



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018					2017			2018					2017
Net income			$	128,319			$	101,739			$	389,834			$	282,245
Other comprehensive (loss) gain, net of tax:
Foreign currency translation adjustments			(435		)		7,318				(7,261		)		17,028
Unrealized (loss) gain on investments:
Unrealized (losses) gains during the period, net of income taxes of $91, $(116), $463 and $(148)	(337	)				294			(1,662	)				435
Less: reclassification adjustment for losses (gains) realized in net income, net of income taxes of $(29), $(41), $(75) and $(84)	130		(207		)	105	399		(32	)	(1,694		)	194	629
Total other comprehensive (loss) gain, net of tax			(642		)		7,717				(8,955		)		17,657
Comprehensive income			$	127,677			$	109,456			$	380,879			$	299,902

The accompanying notes are an integral part of these consolidated financial statements.

Page 5 of 43

SEI Investments Company

Consolidated Condensed Statements of Cash Flows

(unaudited)

(In thousands)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	389,834		$	282,245
Adjustments to reconcile net income to net cash provided by operating activities (See Note 1)	28,064			34,142
Net cash provided by operating activities	417,898			316,387
Cash flows from investing activities:
Additions to property and equipment	(21,652		)	(20,318		)
Additions to capitalized software	(33,371		)	(48,573		)
Purchases of marketable securities	(122,259		)	(50,235		)
Prepayments and maturities of marketable securities	116,568			52,644
Cash paid for acquisition, net of cash acquired	(5,794		)	(80,131		)
Other investing activities	(10,900		)	(1,450		)
Net cash used in investing activities	(77,408		)	(148,063		)
Cash flows from financing activities:
Borrowings under revolving credit facility	—			40,000
Repayments under revolving credit facility	(30,000		)	—
Purchase and retirement of common stock	(290,563		)	(186,494		)
Proceeds from issuance of common stock	78,667			41,626
Payment of dividends	(94,318		)	(88,862		)
Net cash used in financing activities	(336,214		)	(193,730		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(6,552		)	14,679
Net decrease in cash, cash equivalents and restricted cash	(2,276		)	(10,727		)
Cash, cash equivalents and restricted cash, beginning of period	747,752			699,201
Cash, cash equivalents and restricted cash, end of period	$	745,476		$	688,474

The accompanying notes are an integral part of these consolidated financial statements.

Page 6 of 43

Notes to Consolidated Financial Statements

(all figures are in thousands except share and per share data)

Note 1. Summary of Significant Accounting Policies

Nature of Operations

SEI Investments Company (the Company), a Pennsylvania corporation, provides investment processing, investment management, and investment operations platforms to financial institutions, financial advisors, institutional investors, investment managers and ultra-high-net-worth families in the United States, Canada, the United Kingdom, continental Europe and various other locations throughout the world.

Investment processing platforms consist of application and business process outsourcing services, professional services and transaction-based services. Revenues from investment processing platforms are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations.

Investment management programs consist of mutual funds, alternative investments and separate accounts. These include a series of money market, equity, fixed-income and alternative investment portfolios, primarily in the form of registered investment companies. The Company serves as the administrator and investment advisor for many of these products. Revenues from investment management programs are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.

Investment operations platforms consist of outsourcing services including fund and investment accounting, administration, reconciliation, investor servicing and client reporting. Revenues from investment operations platforms are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain financial information and accompanying note disclosure normally included in the Company’s Annual Report on Form 10-K have been condensed or omitted. The interim financial information is unaudited but reflects all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position of the Company as of September 30, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine-month periods ended September 30, 2018 and 2017. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Accounting Standards Codification (ASC) 606 (ASC 606)) using the modified retrospective method during the nine months ended September 30, 2018. As a result of the adoption of ASC 606, the Company recorded a cumulative effect adjustment of $14,402 to retained earnings as of January 1, 2018. Prior period information has not been restated (see following caption "Revenue Recognition"). The Company also adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (see Note 6) and ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) (see following caption "Statements of Cash Flows"). All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.

Revenue Recognition

Revenue is recognized when the transfer of control of promised goods or services under the terms of a contract with customers are satisfied in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services. Certain portions of the Company’s revenues involve a third party in providing goods or services to its customers. In such circumstances, the Company must determine whether the nature of its promise to the customer is to provide the underlying goods or services (the Company is the principal in the transaction and reports the transaction gross) or to arrange for a third party to provide the underlying goods or services (the entity is the agent in the transaction and reports the transaction net).

ASC 606 did not change the accounting for the majority of the Company’s revenue arrangements and did not have a material impact to the Company’s consolidated financial statements. The following is a summary of the impact from the adoption of ASC 606:

•The majority of the Company’s services are bundled together, and provided and completed for the client on a monthly basis. For these revenue arrangements, the Company continues to recognize revenue on a monthly basis as the client consumes the benefits continuously over time. The timing and recognition of revenues from these arrangements did not change.

Page 7 of 43

•Contracts with new clients or with existing clients for new services generally include implementation fees. These fees are recognized in Information processing and software servicing fees when in connection with investment processing platforms and are recognized in Asset management, administration and distribution fees when in connection with investment operations platforms. The Company concluded that most of the current arrangements for implementation services are a distinct and separate performance obligation from the monthly recurring services. The timing and recognition of fees for most of these arrangements have not changed. However, each new revenue arrangement for implementation fees is analyzed to determine whether or not it is a distinct performance obligation. Implementation fees determined not to be a distinct performance obligation would be required to be recognized over the expected life of the client relationship along with the costs relating directly to satisfying such performance obligation. The Company will evaluate each contract in accordance with the requirements of ASC 606.

•Research services provided by SIDCO, the Company’s broker-dealer subsidiary, to customers in soft-dollar arrangements were determined to be a separate performance obligation. Research services provided by a broker-dealer may be internally generated or provided by a third party and paid directly by the broker-dealer on the customer’s behalf. It was determined that SIDCO is considered an agent since it does not control the research services before they are transferred to the customer. Therefore, fees received for research services should be recorded in revenues net of amounts paid for the soft-dollar arrangement. These amounts paid by the Company were previously recorded gross as an expense and, beginning January 1, 2018, are recorded net of any revenue recognized. The amounts related to soft-dollar arrangements during the three months ended September 30, 2018 and 2017 were $3,265 and $3,297, respectively. The amounts related to soft-dollar arrangements during the nine months ended September 30, 2018 and 2017 were $10,497 and $10,799, respectively.

•Incremental contract acquisition costs related to information processing contracts in the Private Banks segment and investment operations contracts in the Investment Managers segment will be deferred and recognized over the expected client life. These costs primarily consist of sales compensation payments to the Company's sales personnel. As a result, incremental contract acquisition costs are capitalized and subsequently amortized. The Company recorded a cumulative effect adjustment to retained earnings associated with the capitalization of contract costs. For the Company's other sales compensation payments, the Company either applies the practical expedient permitting the expensing of costs to obtain a contract when the expected amortization period is one year or less or there are no contract acquisition costs required to be deferred under the requirements of ASC 606. The Company amortizes deferred contract acquisition costs using the straight-line method.

Cash and Cash Equivalents

Cash and cash equivalents includes $286,824 and $401,292 at September 30, 2018 and December 31, 2017, respectively, primarily invested in SEI-sponsored open-ended money market mutual funds. The SEI-sponsored mutual funds are Level 1 assets.

Restricted Cash

Restricted cash includes $3,000 at September 30, 2018 and December 31, 2017 segregated for regulatory purposes related to trade-execution services conducted by SEI Investments (Europe) Limited. Restricted cash also includes $511 and $505 at September 30, 2018 and December 31, 2017, respectively, segregated in special reserve accounts for the benefit of customers of the Company’s broker-dealer subsidiary, SEI Investments Distribution Co. (SIDCO), in accordance with certain rules established by the Securities and Exchange Commission (SEC) for broker-dealers.

Capitalized Software

The Company capitalized $33,371 and $48,573 of software development costs during the nine months ended September 30, 2018 and 2017, respectively. The Company's software development costs primarily relate to the continued development of the SEI Wealth Platform^SM(the Platform). The Company capitalized $32,526 and $40,604 of software development costs for significant enhancements to the Platform during the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, the net book value of the Platform was $288,010. The net book value includes $38,552 of capitalized software development costs in-progress associated with future releases. The Platform has a weighted average remaining life of 8.4 years. Amortization expense for the Platform was $29,723 and $37,324 during the nine months ended September 30, 2018 and 2017, respectively.

The Company also capitalized $845 and $7,969 of software development costs during the nine months ended September 30, 2018 and 2017, respectively, related to an application for the Investment Managers segment. The application was placed into service during the first quarter 2018 with an estimated useful life of 5 years. The net book value of the application at September 30, 2018 was $22,136. Amortization expense for the application was $3,907 during the nine months ended September 30, 2018.

Page 8 of 43

Earnings per Share

The calculations of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 are:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net income	$	128,319	$	101,739	$	389,834	$	282,245
Shares used to compute basic earnings per common share	156,283,000		157,902,000		157,086,000		158,439,000
Dilutive effect of stock options	4,228,000		3,246,000		4,967,000		3,427,000
Shares used to compute diluted earnings per common share	160,511,000		161,148,000		162,053,000		161,866,000
Basic earnings per common share	$	0.82	$	0.64	$	2.48	$	1.78
Diluted earnings per common share	$	0.80	$	0.63	$	2.41	$	1.74

During the three months ended September 30, 2018 and 2017, employee stock options to purchase 6,183,000 and 11,324,000 shares of common stock with an average exercise price of $53.38 and $37.81, respectively, were outstanding but not included in the computation of diluted earnings per common share. During the nine months ended September 30, 2018 and 2017, employee stock options to purchase 6,153,000 and 11,286,000 shares of common stock with an average exercise price of $53.15 and $37.73, respectively, were outstanding but not included in the computation of diluted earnings per common share. These options for the three and nine month periods were not included in the computation of diluted earnings per common share because either the performance conditions have not been satisfied or would have been satisfied if the reporting date was the end of the contingency period or the option’s exercise price was greater than the average market price of the Company’s common stock and the effect on diluted earnings per common share would have been anti-dilutive.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

New Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), as amended, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will be classified as either operating or finance leases, with the classification affecting the pattern and classification of expense recognition in the income statement. The updated standard is effective for the Company beginning in the first quarter of 2019. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as the date of initial application. As a result, financial information will not be updated and the disclosures required under the new standard will not be provided for periods prior to January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the package of practical expedients which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

As part of its project plan’s preliminary assessment and design implementation phases for the adoption of ASU 2016-02, the Company has adopted implementation controls that allow it to properly and timely adopt ASU 2016-02 on the effective date. While the Company continues to assess all of the effects of adoption, the Company believes the most significant effects relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for office space and certain office equipment and providing significant new disclosures about leasing arrangements. The Company owns its corporate headquarters and leases office space in other locations. The Company has completed the process of cataloging existing lease agreements and is currently calculating the right-of-use asset and lease liability. The Company will make updates to the year-end disclosures, with a focus on both status and internal controls over financial reporting.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 becomes effective for the Company during the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

Page 9 of 43

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). The objective of ASU 2017-04 is to simplify the subsequent measurement of goodwill by entities performing their annual goodwill impairment tests by comparing the fair value of a reporting unit, including income tax effects from any tax-deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds fair value. ASU 2017-04 is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2017-04 on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07) which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for the Company beginning in the first quarter of 2019. The Company does not believe the adoption of ASU 2018-07 will have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company beginning in the first quarter of 2020. The Company is currently evaluating the impact of adopting ASU 2018-13 on its consolidated financial statements and related disclosures.

Statements of Cash Flows

For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents.

The Company adopted ASU No. 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) (ASU 2016-18) on January 1, 2018 which requires that a statement of cash flows explain the change during the period for the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The prior period was retrospectively adjusted to conform to the current period’s presentation. There was no material impact to net cash flows for the nine months ended September 30, 2017 as a result of including restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the accompanying Consolidated Condensed Statement of Cash Flows in accordance with ASU 2016-18.

Page 10 of 43

The following table provides the details of the adjustments to reconcile net income to net cash provided by operating activities for the nine months ended September 30:



	2018			2017
Net income	$	389,834		$	282,245
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	21,515			20,347
Amortization	36,420			38,332
Equity in earnings of unconsolidated affiliate	(123,406		)	(109,213		)
Distributions received from unconsolidated affiliate	138,216			117,447
Stock-based compensation	16,396			19,527
Provision for losses on receivables	(29		)	176
Deferred income tax expense	8,378			1,143
Net loss (gain) from investments	460			(1,036		)
Change in long-term income taxes payable	(9,859		)	—
Change in other long-term liabilities	1,930			106
Change in other assets	(4,214		)	79
Contract costs capitalized, net of amortization	(3,463		)	—
Other	(99		)	1,070
Change in current assets and liabilities
Decrease (increase) in
Receivables from investment products	2,263			10,800
Receivables	(44,878		)	(43,661		)
Other current assets	(5,955		)	(2,962		)
Increase (decrease) in
Accounts payable	3,893			(1,748		)
Accrued liabilities	(9,717		)	(15,856		)
Deferred revenue	213			(409		)
Total adjustments	28,064			34,142
Net cash provided by operating activities	$	417,898		$	316,387

Note 2.
Investment in Unconsolidated Affiliate

LSV Asset Management

The Company has an investment in LSV Asset Management (LSV), a registered investment advisor that provides investment advisory services primarily to institutions, including pension plans and investment companies. LSV is currently an investment sub-advisor for a limited number of SEI-sponsored investment products. The Company's partnership interest in LSV as of September 30, 2018 was 38.9 percent. The Company accounts for its interest in LSV using the equity method because of its less than 50 percent ownership. The Company’s interest in the net assets of LSV is reflected in Investment in unconsolidated affiliate on the accompanying Consolidated Balance Sheets and its interest in the earnings of LSV is reflected in Equity in earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Operations.

At September 30, 2018, the Company’s total investment in LSV was $44,682. The Company receives partnership distributions from LSV on a quarterly basis. The Company received partnership distributions from LSV of $138,216 and $117,447 in the nine months ended September 30, 2018 and 2017, respectively. As such, the Company considers these distribution payments as returns on investment rather than returns of the Company's original investment in LSV and has therefore classified the associated cash inflows as an operating activity on the Consolidated Statements of Cash Flows.

The Company’s proportionate share in the earnings of LSV was $41,726 and $39,333 during the three months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018 and 2017, the Company’s proportionate share in the earnings of LSV was $123,406 and $109,213, respectively.

Page 11 of 43

These tables contain condensed financial information of LSV:



Condensed Statement of Operations	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenues	$	133,921	$	126,723	$	397,750	$	355,996
Net income	107,284		101,130		317,295		280,717



Condensed Balance Sheets	September 30, 2018		December 31, 2017
Current assets	$	150,183	$	155,239
Non-current assets	1,383		1,407
Total assets	$	151,566	$	156,646

Current liabilities	$	79,052	$	46,486
Partners’ capital	72,514		110,160
Total liabilities and partners’ capital	$	151,566	$	156,646

Note 3. Variable Interest Entities – Investment Products

The Company or its affiliates have created numerous investment products for its clients in various types of legal entity structures. The Company serves as the Manager, Administrator and Distributor for these investment products and may also serve as the Trustee for some of the investment products. The Company receives asset management, distribution, administration and custodial fees for these services. Clients are the equity investors and participate in proportion to their ownership percentage in the net income or loss and net capital gains or losses of the products, and, on liquidation, will participate in proportion to their ownership percentage in the remaining net assets of the products after satisfaction of outstanding liabilities.

The Company has concluded that it is not the primary beneficiary of the entities and; therefore, is not required to consolidate any of the pooled investment vehicles for which it receives asset management, distribution, administration and custodial fees under the VIE model. The entities either do not meet the definition of a VIE or the Company does not hold a variable interest in the entities. The entities either qualify for the money market scope exception, or are entities in which the Company’s asset management, distribution, administration and custodial fees are commensurate with the services provided and include fair terms and conditions, or are entities that are limited partnerships which have substantive kick-out rights. The Company acts as a fiduciary and does not hold any other interests other than insignificant seed money investments in the pooled investment vehicles. For this reason, the Company also concluded that it is not required to consolidate the pooled investment vehicles under the voting interest entity (VOE) model.

The Company is a party to expense limitation agreements with certain SEI-sponsored money market funds subject to Rule 2a-7 of the Investment Company Act of 1940 which establish a maximum level of ordinary operating expenses incurred by the fund in any fiscal year including, but not limited to, fees of the administrator or its affiliates. Under the terms of these agreements, the Company waived $6,525 and $6,942 in fees during the three months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018 and 2017, the Company waived $19,551 and $20,620, respectively, in fees.

Note 4.
Composition of Certain Financial Statement Captions

Receivables

Receivables on the accompanying Consolidated Balance Sheets consist of:



	September 30, 2018			December 31, 2017
Trade receivables	$	77,239		$	76,760
Fees earned, not billed	240,538			194,331
Other receivables	10,503			12,310
	328,280			283,401
Less: Allowance for doubtful accounts	(666		)	(695		)
	$	327,614		$	282,706

Page 12 of 43

Fees earned, not billed represents receivables earned but unbilled and results from timing differences between services provided and contractual billing schedules. These billing schedules generally provide for fees to be billed on a quarterly basis. In addition, certain fees earned from investment operations services are calculated based on assets under administration that have a prolonged valuation process which delays billings to clients.

Receivables from investment products on the accompanying Consolidated Balance Sheets primarily represent fees receivable for distribution, investment advisory, and administration services to various regulated investment companies and other investment products sponsored by SEI.

Property and Equipment

Property and Equipment on the accompanying Consolidated Balance Sheets consists of:



	September 30, 2018			December 31, 2017
Buildings	$	154,723		$	153,961
Equipment	125,867			115,546
Land	10,557			10,030
Purchased software	138,565			134,610
Furniture and fixtures	17,971			18,114
Leasehold improvements	18,816			18,017
Construction in progress	10,504			6,105
	477,003			456,383
Less: Accumulated depreciation	(331,138		)	(309,955		)
Property and Equipment, net	$	145,865		$	146,428

The Company recognized $21,515 and $20,347 in depreciation expense related to property and equipment for the nine months ended September 30, 2018 and 2017, respectively.

Accrued Liabilities

Accrued liabilities on the accompanying Consolidated Balance Sheets consist of:



	September 30, 2018		December 31, 2017
Accrued employee compensation	$	68,371	$	88,960
Accrued consulting, outsourcing and professional fees	28,322		29,658
Accrued sub-advisory, distribution and other asset management fees	49,452		42,365
Accrued dividend payable	—		47,179
Accrued income taxes	11,164		5,583
Other accrued liabilities	50,366		51,313
Total accrued liabilities	$	207,675	$	265,058

Note 5. Fair Value Measurements

The fair value of the Company’s financial assets and liabilities, except for the Company's investment funds sponsored by LSV, is determined in accordance with the fair value hierarchy. The fair value of the Company’s Level 1 financial assets consist mainly of investments in open-ended mutual funds that are quoted daily. Level 2 financial assets consist of Government National Mortgage Association (GNMA) mortgage-backed securities held by the Company's wholly-owned limited purpose federal thrift subsidiary, SEI Private Trust Company (SPTC), Federal Home Loan Bank (FHLB) and other U.S. government agency short-term notes held by SIDCO. The financial assets held by SIDCO were purchased as part of a cash management program requiring only short term, top-tier investment grade government and corporate securities. The financial assets held by SPTC are debt securities issued by GNMA and are backed by the full faith and credit of the U.S. government. These securities were purchased for the sole purpose of satisfying applicable regulatory requirements and have maturity dates which range from 2021 to 2041.

The fair value of the Company's investment funds sponsored by LSV is measured using the net asset value per share (NAV) as a practical expedient. The NAVs of the funds are calculated by the funds' independent custodian and are derived from the fair values of the underlying investments as of the reporting date. The funds allow for investor redemptions at the end of each calendar month. This investment has not been classified in the fair value hierarchy but is presented in the tables below to permit reconciliation to the amounts presented on the accompanying Consolidated Balance Sheets.

Page 13 of 43

The valuation of the Company's Level 2 financial assets held by SIDCO and SPTC are based upon securities pricing policies and procedures utilized by third-party pricing vendors.

The pricing policies and procedures applied for our Level 1 and Level 2 financial assets during the nine months ended September 30, 2018 were consistent with those as described in our Annual Report on Form 10-K at December 31, 2017. The Company had no Level 3 financial assets at September 30, 2018 or December 31, 2017 that were required to be measured at fair value on a recurring basis. The Company's Level 3 financial liabilities at September 30, 2018 consist entirely of the estimated contingent consideration of $12,120 resulting from an acquisition (See Note 13). The fair value of the contingent consideration was determined using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model include expected revenues, expected volatility, risk-free rate and correlation coefficient. The Company had no Level 3 financial liabilities as of December 31, 2017 that were required to be measured at fair value on a recurring basis. There were no transfers of financial assets between levels within the fair value hierarchy during the nine months ended September 30, 2018.

The fair value of certain financial assets of the Company was determined using the following inputs:



			Fair Value Measurements at the End of the Reporting Period Using
Assets	September 30, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Equity available-for-sale securities	$	11,326	$	11,326	$	—
Fixed-income available-for-sale securities	72,972		—		72,972
Fixed-income securities owned	28,945		—		28,945
Investment funds sponsored by LSV (1)	5,736
	$	118,979	$	11,326	$	101,917



			Fair Value Measurements at the End of the Reporting Period Using
Assets	December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Equity available-for-sale securities	$	11,250	$	11,250	$	—
Fixed-income available-for-sale securities	76,733		—		76,733
Fixed-income securities owned	21,526		—		21,526
Investment funds sponsored by LSV (1)	6,034
	$	115,543	$	11,250	$	98,259

(1) The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the accompanying Consolidated Balance Sheets (See Note 6).

Note 6. Marketable Securities

Investments Available for Sale

Investments available for sale classified as non-current assets consist of:



	At September 30, 2018
	Cost Amount		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
SEI-sponsored mutual funds	$	7,392	$	107	$	(304	)	$	7,195
Equities and other mutual funds	3,479		652		—			4,131
Debt securities	75,673		—		(2,701		)	72,972
	$	86,544	$	759	$	(3,005	)	$	84,298

Page 14 of 43



	At December 31, 2017
	Cost Amount		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
SEI-sponsored mutual funds	$	7,369	$	110	$	(143	)	$	7,336
Equities and other mutual funds	3,456		458		—			3,914
Debt securities	77,745		—		(1,012		)	76,733
	$	88,570	$	568	$	(1,155	)	$	87,983

The Company prospectively adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) on January 1, 2018 which requires the Company to recognize all changes in fair value of available-for-sale equity securities in current period earnings. Previously, these changes in fair value were recognized as a separate component of comprehensive income. The adoption of ASU 2016-01 did not have a material impact to the Company's consolidated financial statements.

Net unrealized losses at September 30, 2018 and December 31, 2017 of the Company's available-for-sale debt securities were $2,080 (net of income tax benefit of $621) and $779 (net of income tax benefit of $233), respectively. These net unrealized losses are reported as a separate component of Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets.

There were gross realized gains of $1,031 and gross realized losses of $1,520 from available-for-sale securities during the nine months ended September 30, 2018. There were gross realized gains of $428 and gross realized losses of $706 during the nine months ended September 30, 2017. Gains and losses from available-for-sale securities, including amounts reclassified from accumulated comprehensive loss, are reflected in Net gain (loss) from investments on the accompanying Consolidated Statements of Operations.

Investments in Affiliated Funds

The Company has an investment in funds sponsored by LSV. The Company records this investment on the accompanying Consolidated Balance Sheets at fair value. Unrealized gains and losses from the change in fair value of these funds are recognized in Net (loss) gain from investments on the accompanying Consolidated Statements of Operations.

The investment primarily consists of U.S. dollar denominated funds that invest primarily in securities of Canadian, Australian and Japanese companies as well as various other global securities. The underlying securities held by the funds are translated into U.S. dollars within the funds. The funds had a fair value of $5,736 and $6,034 at September 30, 2018 and December 31, 2017, respectively. The Company recognized losses of $298 and gains of $880 during the nine months ended September 30, 2018 and 2017, respectively, from the change in fair value of the funds. There were no material gains or losses during the three months ended September 30, 2018 and 2017 from the change in fair value of the funds.

Securities Owned

The Company’s broker-dealer subsidiary, SIDCO, has investments in U.S. government agency securities with maturity dates less than one year. These investments are reflected as Securities owned on the accompanying Consolidated Balance Sheets. Due to specialized accounting practices applicable to investments by broker-dealers, the securities are reported at fair value and changes in fair value are recorded in current period earnings. The securities had a fair value of $28,945 and $21,526 at September 30, 2018 and December 31, 2017, respectively. There were no material net gains or losses related to the securities during the three and nine months ended September 30, 2018 and 2017.

Note 7. Line of Credit

The Company has a five-year $300,000 Credit Agreement (the Credit Facility) with Wells Fargo Bank, National Association, and a syndicate of other lenders. The Credit Facility is scheduled to expire in June 2021, at which time any aggregate principal amount of loans outstanding becomes payable in full. Any borrowings made under the Credit Facility will accrue interest at rates that, at the Company's option, are based on a base rate (the Base Rate) plus a premium that can range from 0.25 percent to 1.00 percent or the London InterBank Offered Rate (LIBOR) plus a premium that can range from 1.25 percent to 2.00 percent depending on the Company’s Leverage Ratio (a ratio of consolidated indebtedness to consolidated EBITDA for the four preceding fiscal quarters, all as defined in the related agreement). The Base Rate is defined as the highest of a) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.50 percent, b) the prime commercial lending rate of Wells Fargo, c) the applicable LIBOR plus 1.00 percent, or d) 0 percent. The Company also pays quarterly commitment fees based on the unused portion of the Credit Facility. The quarterly fees for the Credit Facility can range from 0.15 percent of the amount of the unused portion to 0.30 percent, depending on the Company’s Leverage Ratio. Certain wholly-owned subsidiaries of the Company have guaranteed the obligations of the Company under the agreement. The

Page 15 of 43

aggregate amount of the Credit Facility may be increased by an additional $100,000 under certain conditions set forth in the agreement.

The Credit Facility contains covenants that restrict the ability of the Company to engage in mergers, consolidations, asset sales, investments, transactions with affiliates, or to incur liens, as defined in the agreement. In the event of a default under the Credit Facility, the Company would also be restricted from paying dividends on, or repurchasing, its common stock without the approval of the lenders. None of the covenants of the Credit Facility negatively affect the Company’s liquidity or capital resources. Upon the occurrence of certain financial or economic events, significant corporate events, or certain other events of default constituting an event of default under the Credit Facility, all loans outstanding may be declared immediately due and payable and all commitments under the agreement may be terminated.

In July 2017, the Company borrowed $40,000 under the Credit Facility for the funding of an acquisition. In October 2017, the Company made a principal payment of $10,000. During the nine months ended September 30, 2018, the Company made additional principal payments of $30,000 to fully repay the remaining outstanding balance of the Credit Facility. The Company was in compliance with all covenants of the Credit Facility during the nine months ended September 30, 2018. As of October 18, 2018, the amount of the Credit Facility that is available for general corporate purposes was $300,000.

Note 8. Shareholders’ Equity

Stock-Based Compensation

The Company has only non-qualified stock options outstanding under its equity compensation plans. All outstanding stock options have performance-based vesting provisions specific to each option grant that tie the vesting of the applicable stock options to the Company’s financial performance. The Company’s stock options vest at a rate of 50 percent when a specified diluted earnings per share target is achieved, and the remaining 50 percent when a second, higher specified diluted earnings per share target is achieved. Options do not vest due to the passage of time but solely as a result of achievement of the financial vesting targets. Options granted in December 2017 include a service condition which requires a minimum two or four year waiting period from the grant date along with the attainment of the applicable financial vesting target. Earnings per share targets are established at time of grant and exclude the impact of stock-based compensation and, for earnings per share targets for the options granted in December 2017, also exclude income tax expense. The targets are measured annually on December 31. The amount of stock-based compensation expense recognized in the period is based upon management’s estimate of when the earnings per share targets may be achieved. Any change in management’s estimate could result in the remaining 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 the Company’s earnings.

The Company recognized stock-based compensation expense in its Consolidated Financial Statements in the three and nine months ended September 30, 2018 and 2017, respectively, as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Stock-based compensation expense	$	5,878		$	7,088		$	16,396		$	19,527
Less: Deferred tax benefit	(1,311		)	(2,517		)	(3,556		)	(6,859		)
Stock-based compensation expense, net of tax	$	4,567		$	4,571		$	12,840		$	12,668

As of September 30, 2018, there was approximately $47,131 of unrecognized compensation cost remaining related to unvested employee stock options that management expects will vest and is being amortized.

The Company issues new common shares associated with the exercise of stock options. The total intrinsic value of options exercised during the nine months ended September 30, 2018 was $123,365. The total options exercisable as of September 30, 2018 had an intrinsic value of $247,517. The total intrinsic value for options exercisable is calculated as the difference between the market value of the Company’s common stock as of September 30, 2018 and the weighted average exercise price of the options. The market value of the Company’s common stock as of September 30, 2018 was $61.10 as reported by the Nasdaq Stock Market, LLC. The weighted average exercise price of the options exercisable as of September 30, 2018 was $29.60. Total options that were outstanding as of September 30, 2018 were 14,040,000. Total options that were exercisable as of September 30, 2018 were 7,857,000.

Common Stock Buyback

The Company’s Board of Directors, under multiple authorizations, has authorized the repurchase of the Company’s common stock on the open market or through private transactions. The Company purchased 4,419,000 shares at a total cost of $289,536 during the nine months ended September 30, 2018, which reduced the total shares outstanding of common stock. The cost of stock purchases during the period includes the cost of certain transactions that settled in the following quarter. As of

Page 16 of 43

September 30, 2018, the Company had approximately $81,102 of authorization remaining for the purchase of common stock under the program.

The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value.

Cash Dividend

On May 30, 2018, the Board of Directors declared a cash dividend of $0.30 per share on the Company's common stock, which was paid on June 22, 2018, to shareholders of record on June 14, 2018. Cash dividends declared during the nine months ended September 30, 2018 and 2017 were $47,139 and $44,264, respectively.

Note 9. Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss, net of tax, are as follows:



	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Investments			Accumulated Other Comprehensive Loss
Balance, January 1, 2018	$	(19,522	)	$	(386	)	$	(19,908	)

Other comprehensive loss before reclassifications	(7,261		)	(1,662		)	(8,923		)
Amounts reclassified from accumulated other comprehensive loss	—			(32		)	(32		)
Net current-period other comprehensive loss	(7,261		)	(1,694		)	(8,955		)

Balance, September 30, 2018	$	(26,783	)	$	(2,080	)	$	(28,863	)

Note 10. Business Segment Information

The Company’s reportable business segments are:

Private Banks – provides outsourced investment processing and investment management platforms to banks and trust institutions, independent wealth advisers and financial advisors worldwide;

Investment Advisors – provides investment management and investment processing platforms to affluent investors through a network of independent registered investment advisors, financial planners and other investment professionals in the United States;

Institutional Investors – provides investment management and administrative outsourcing platforms to retirement plan sponsors, healthcare systems and not-for-profit organizations worldwide;

Investment Managers – provides investment operations outsourcing platforms to fund companies, banking institutions and both traditional and non-traditional investment managers worldwide; and

Investments in New Businesses – focuses on providing investment management programs to ultra-high-net-worth families residing in the United States; developing internet-based investment services and advice platforms; entering new markets; and conducting other research and development activities.

The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. There are no inter-segment revenues for the three and nine months ended September 30, 2018 and 2017. Management evaluates Company assets on a consolidated basis during interim periods. The accounting policies of the reportable business segments are the same as those described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Page 17 of 43

The following tables highlight certain financial information about each of the Company’s business segments for the three months ended September 30, 2018 and 2017.



	Private Banks		Investment Advisors		Institutional Investors		Investment Managers		Investments In New Businesses			Total
	For the Three Months Ended September 30, 2018
Revenues	$	118,449	$	102,550	$	83,466	$	101,275	$	2,942		$	408,682
Expenses	116,471		53,287		40,497		65,296		5,769			281,320
Operating profit (loss)	$	1,978	$	49,263	$	42,969	$	35,979	$	(2,827	)	$	127,362

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$52.57	154	$8,080

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-30	Earnings, Exhibits
8-K	2018-12-11	Other Events, Exhibits
8-K	2018-11-14	Regulation FD, Exhibits
8-K	2018-05-30	Shareholder Vote, Other Events, Exhibits
8-K	2018-01-31	Earnings, Exhibits

CME	CME Group
NDAQ	Nasdaq
EEFT	Euronet Worldwide
WDR	Waddell & Reed Financial
PJC	Piper Jaffray
GBL	Gamco Investors
COWN	Cowen
UEPS	Net 1 UEPS
NHLD	National Holdings
COHN	Cohen

EX-31.1	seic-9301810qex311.htm
EX-31.2	seic-9301810qex312.htm
EX-32	seic-9301810qex32.htm
EX-99.1	seic-earningsreleaseex.htm