SEI Investments Earnings 2019-03-31

SEIC 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q

________________________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10200

________________________________________

SEI INVESTMENTS COMPANY

(Exact name of registrant as specified in its charter)

________________________________________



Pennsylvania		23-1707341
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

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



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	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 the close of business on April 18, 2019:



Common Stock, $.01 par value		152,520,183

SEI INVESTMENTS COMPANY TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.	2
	Consolidated Balance Sheets (Unaudited) -- March 31, 2019 and December 31, 2018	2
	Consolidated Statements of Operations (Unaudited) -- For the Three Months Ended March 31, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Unaudited) -- For the Three Months Ended March 31, 2019 and 2018	5
	Consolidated Statements of Cash Flows (Unaudited) -- For the Three Months Ended March 31, 2019 and 2018	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 4.	Controls and Procedures.	39

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	40
Item 1A.	Risk Factors.	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	41
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)



	March 31, 2019		December 31, 2018
Assets
Current Assets:
Cash and cash equivalents	$	669,323	$	754,525
Restricted cash	3,517		3,514
Receivables from investment products	52,562		49,869
Receivables, net of allowance for doubtful accounts of $633 and $718	333,724		315,336
Securities owned	33,433		30,892
Other current assets	35,049		36,676
Total Current Assets	1,127,608		1,190,812
Property and Equipment, net of accumulated depreciation of $345,129 and $338,206	146,753		145,863
Operating Lease Right-of-Use Assets	45,297		—
Capitalized Software, net of accumulated amortization of $406,871 and $395,171	307,736		309,500
Investments Available for Sale	109,824		111,901
Investments in Affiliated Funds, at fair value	5,339		4,887
Investment in Unconsolidated Affiliate	56,422		52,342
Goodwill	64,489		64,489
Intangible Assets, net of accumulated amortization of $6,011 and $5,090	30,749		31,670
Deferred Contract Costs	24,145		24,007
Deferred Income Taxes	1,877		2,042
Other Assets, net	32,882		34,155
Total Assets	$	1,953,121	$	1,971,668

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)



	March 31, 2019			December 31, 2018
Liabilities and Equity
Current Liabilities:
Accounts payable	$	5,242		$	10,920
Accrued liabilities	173,860			279,634
Short-term operating lease liabilities	8,448			—
Deferred revenue	4,979			5,154
Total Current Liabilities	192,529			295,708
Long-term Income Taxes Payable	803			803
Deferred Income Taxes	56,909			57,795
Long-term Operating Lease Liabilities	41,838			—
Other Long-term Liabilities	24,492			24,215
Total Liabilities	316,571			378,521
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 750,000 shares authorized; 152,276 and 153,634 shares issued and outstanding	1,523			1,536
Capital in excess of par value	1,111,366			1,106,641
Retained earnings	552,381			517,970
Accumulated other comprehensive loss, net	(28,720		)	(33,000		)
Total Shareholders' Equity	1,636,550			1,593,147
Total Liabilities and Shareholders' Equity	$	1,953,121		$	1,971,668

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 March 31,
	2019			2018
Revenues:
Asset management, administration and distribution fees	$	313,944		$	316,209
Information processing and software servicing fees	86,876			89,389
Total revenues	400,820			405,598
Expenses:
Subadvisory, distribution and other asset management costs	43,805			45,205
Software royalties and other information processing costs	8,128			8,718
Compensation, benefits and other personnel	130,335			124,277
Stock-based compensation	5,038			5,195
Consulting, outsourcing and professional fees	50,206			48,707
Data processing and computer related	20,992			20,591
Facilities, supplies and other costs	18,745			17,613
Amortization	12,679			11,854
Depreciation	7,331			7,122
Total expenses	297,259			289,282
Income from operations	103,561			116,316
Net gain (loss) from investments	1,279			(410		)
Interest and dividend income	4,257			2,502
Interest expense	(157		)	(257		)
Equity in earnings of unconsolidated affiliate	37,317			40,607
Income before income taxes	146,257			158,758
Income taxes	32,276			18,920
Net income	$	113,981		$	139,838
Basic earnings per common share	$	0.74		$	0.89
Shares used to compute basic earnings per share	153,310			157,434
Diluted earnings per common share	$	0.73		$	0.86
Shares used to compute diluted earnings per share	156,541			163,424

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 March 31,
	2019			2018
Net income		$	113,981			$	139,838
Other comprehensive gain, net of tax:
Foreign currency translation adjustments		3,397				3,377
Unrealized gain (loss) on investments:
Unrealized gains (losses) during the period, net of income taxes of $(240) and $424	797			(1,357	)
Less: reclassification adjustment for losses (gains) realized in net income, net of income taxes of $(24) and $(15)	86	883		(273	)	(1,630		)
Total other comprehensive gain, net of tax		4,280				1,747
Comprehensive income		$	118,261			$	141,585

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

Page 5 of 43

SEI Investments Company

Consolidated Statements of Changes in Equity

(unaudited)

(In thousands)



	Shares of Common Stock		Common Stock			Capital In Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Loss			Total Equity
	For the Three Months Ended March 31, 2019
Balance, January 1, 2019	153,634		$	1,536		$	1,106,641		$	517,970		$	(33,000	)	$	1,593,147
Net income	—		—			—			113,981			—			113,981
Other comprehensive gain	—		—			—			—			4,280			4,280
Purchase and retirement of common stock	(1,725	)	(17		)	(9,202		)	(79,570		)	—			(88,789		)
Issuance of common stock under employee stock purchase plan	32		—			1,322			—			—			1,322
Issuance of common stock upon exercise of stock options	335		4			7,567			—			—			7,571
Stock-based compensation	—		—			5,038			—			—			5,038
Balance, March 31, 2019	152,276		$	1,523		$	1,111,366		$	552,381		$	(28,720	)	$	1,636,550



	Shares of Common Stock		Common Stock			Capital In Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Loss			Total Equity
	For the Three Months Ended March 31, 2018
Balance, January 1, 2018	157,069		$	1,571		$	1,027,709		$	467,467		$	(19,908	)	$	1,476,839
Cumulative effect upon adoption of ASC 606	—		—			—			14,402			—			14,402
Net income	—		—			—			139,838			—			139,838
Other comprehensive gain	—		—			—			—			1,747			1,747
Purchase and retirement of common stock	(1,122	)	(11		)	(5,461		)	(76,784		)	—			(82,256		)
Issuance of common stock under employee stock purchase plan	16		—			1,005			—			—			1,005
Issuance of common stock upon exercise of stock options	2,027		20			56,864			—			—			56,884
Stock-based compensation	—		—			5,195			—			—			5,195
Balance, March 31, 2018	157,990		$	1,580		$	1,085,312		$	544,923		$	(18,161	)	$	1,613,654

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

Page 6 of 43

SEI Investments Company

Consolidated Condensed Statements of Cash Flows

(unaudited)

(In thousands)



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	113,981		$	139,838
Adjustments to reconcile net income to net cash provided by operating activities (See Note 1)	(54,082		)	(35,664		)
Net cash provided by operating activities	59,899			104,174
Cash flows from investing activities:
Additions to property and equipment	(7,317		)	(5,611		)
Additions to capitalized software	(9,937		)	(12,887		)
Purchases of marketable securities	(43,672		)	(15,466		)
Prepayments and maturities of marketable securities	45,200			18,588
Net cash used in investing activities	(15,726		)	(15,376		)
Cash flows from financing activities:
Repayments under revolving credit facility	—			(10,000		)
Purchase and retirement of common stock	(90,777		)	(87,995		)
Proceeds from issuance of common stock	8,893			57,889
Payment of dividends	(50,760		)	(47,179		)
Net cash used in financing activities	(132,644		)	(87,285		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	3,272			2,541
Net (decrease) increase in cash, cash equivalents and restricted cash	(85,199		)	4,054
Cash, cash equivalents and restricted cash, beginning of period	758,039			747,752
Cash, cash equivalents and restricted cash, end of period	$	672,840		$	751,806

Non-cash operating activities:
Operating lease right-of-use assets and lease liabilities recorded upon adoption of ASC 842	$	44,169		$	—

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

Page 7 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 March 31, 2019, the results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three-month periods ended March 31, 2019 and 2018. 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, 2018.

The Company adopted the requirements of the Accounting Standards Update (ASU) No. 2016-2 Leases (Topic 842) (Accounting Standards Codifications (ASC) 842 (ASC 842)) using the modified retrospective method during the three months ended March 31, 2019. As a result of the adoption of ASC 842, the Company recorded additional lease assets and net lease liabilities of $44,169 as of January 1, 2019. Upon implementation, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed the Company to carryforward the historical lease identification, classification and initial direct cost. ASC 842 did not materially impact the Company’s consolidated net income or consolidated cash flows (see following caption "Leases"). With the exception of the adoption of ASC 842, there have been no significant changes in significant accounting policies during the three months ended March 31, 2019 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Variable Interest Entities

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

Page 8 of 43

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 $7,905 and $6,654 in fees during the three months ended March 31, 2019 and 2018, respectively.

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).

Cash and Cash Equivalents

Cash and cash equivalents includes $269,591 and $315,840 at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018 segregated for regulatory purposes related to trade-execution services conducted by SEI Investments (Europe) Limited. Restricted cash also includes $517 and $514 at March 31, 2019 and December 31, 2018, 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 $9,937 and $12,887 of software development costs during the three months ended March 31, 2019 and 2018, respectively. The Company's software development costs primarily relate to the continued development of the SEI Wealth Platform^SM(SWP). The Company capitalized $9,739 and $12,042 of software development costs for significant enhancements to SWP during the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the net book value of SWP was $288,006. The net book value includes $45,180 of capitalized software development costs in-progress associated with future releases. SWP has a weighted average remaining life of 8.5 years. Amortization expense for SWP was $10,399 and $9,719 during the three months ended March 31, 2019 and 2018, respectively.

Earnings per Share

The calculations of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 are:



	Three Months Ended March 31,
	2019		2018
Net income	$	113,981	$	139,838
Shares used to compute basic earnings per common share	153,310,000		157,434,000
Dilutive effect of stock options	3,231,000		5,990,000
Shares used to compute diluted earnings per common share	156,541,000		163,424,000
Basic earnings per common share	$	0.74	$	0.89
Diluted earnings per common share	$	0.73	$	0.86

During the three months ended March 31, 2019 and 2018, employee stock options to purchase 6,323,000 and 6,054,000 shares of common stock with an average exercise price of $54.81 and $52.73, respectively, were outstanding but not included in the computation of diluted earnings per common share. These options for the three month periods were not included in the computation of diluted earnings per common share because either the performance conditions have not

Page 9 of 43

been satisfied or would not have been satisfied if the reporting date was the end of the contingency period or the options' 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.

Leases

The Company determines if an arrangement is a lease at the inception of the contract. The Company's operating leases are included in Operating lease right-of-use (ROU) assets, Short-term operating lease liabilities, and Long-term operating lease liabilities on the accompanying Consolidated Balance Sheet.

The operating lease ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit interest rate, the Company utilizes an estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. In determining the discount rate used in the present value calculation, the Company has elected to apply the portfolio approach for leases of equipment provided the leases commenced at or around the same time. This election allows the Company to account for leases at a portfolio level provided that the resulting accounting at this level would not differ materially from the accounting at the individual lease level. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company has elected to account for lease and non-lease components separately. Operating lease ROU assets include all contractual lease payments and initial direct costs incurred less any lease incentives. Facility leases generally only contain lease expense and non-component items such as taxes and pass through charges. Only the lease components are included in the ROU assets and lease liabilities. Additionally, the Company has elected not to apply the recognition requirements of ASC 842 to leases which have a lease term of less than one year at the commencement date.

The majority of the Company's leases for corporate facilities and equipment contain terms for renewal and extension of the lease agreement. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company includes the lease extensions when it is reasonably certain the Company will exercise the extension. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants. The Company does not currently have any finance leases.

See Note 15 for information on related disclosures regarding leases.

Reclassifications

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

New Accounting Pronouncements

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.

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 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.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17). The new standard changes how entities evaluate decision-making fees under the variable interest entity guidance. ASU 2018-17 is effective for the Company beginning in the first quarter of

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2020. The Company is currently evaluating the impact of adopting ASU 2018-17 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 following table provides the details of the adjustments to reconcile net income to net cash provided by operating activities for the three months ended March 31:



	2019			2018
Net income	$	113,981		$	139,838
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	7,331			7,122
Amortization	12,679			11,854
Equity in earnings of unconsolidated affiliate	(37,317		)	(40,607		)
Distributions received from unconsolidated affiliate	33,237			45,617
Stock-based compensation	5,038			5,195
Provision for losses on receivables	(85		)	93
Deferred income tax expense	(984		)	2,083
Net (gain) loss from investments	(1,279		)	410
Change in other long-term liabilities	277			579
Change in other assets	1,334			290
Contract costs capitalized, net of amortization	(138		)	(1,234		)
Other	(63		)	450
Change in current assets and liabilities
(Increase) decrease in
Receivables from investment products	(2,693		)	1,757
Receivables	(18,304		)	(25,657		)
Other current assets	574			(3,564		)
(Decrease) increase in
Accounts payable	(5,678		)	3,195
Accrued liabilities	(47,836		)	(43,522		)
Deferred revenue	(175		)	275
Total adjustments	(54,082		)	(35,664		)
Net cash provided by operating activities	$	59,899		$	104,174

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 March 31, 2019 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 March 31, 2019, the Company’s total investment in LSV was $56,422. The Company receives partnership distributions from LSV on a quarterly basis. The Company received partnership distributions from LSV of $33,237 and $45,617 in the three months ended March 31, 2019 and 2018, respectively. As such, the Company considers these distribution payments

Page 11 of 43

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 $37,317 and $40,607 during the three months ended March 31, 2019 and 2018, respectively.

These tables contain condensed financial information of LSV:



Condensed Statement of Operations	Three Months Ended March 31,
	2019		2018
Revenues	$	120,915	$	131,718
Net income	95,948		104,406



Condensed Balance Sheets	March 31, 2019		December 31, 2018
Current assets	$	148,489	$	138,083
Non-current assets	5,047		1,165
Total assets	$	153,536	$	139,248

Current liabilities	$	47,557	$	47,874
Non-current liabilities	5,019		—
Partners’ capital	100,960		91,374
Total liabilities and partners’ capital	$	153,536	$	139,248

Note 3.
Composition of Certain Financial Statement Captions

Receivables

Receivables on the accompanying Consolidated Balance Sheets consist of:



	March 31, 2019			December 31, 2018
Trade receivables	$	83,594		$	76,362
Fees earned, not billed	237,478			226,001
Other receivables	13,285			13,691
	334,357			316,054
Less: Allowance for doubtful accounts	(633		)	(718		)
	$	333,724		$	315,336

Fees earned, not billed represents receivables from contracts with customers 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 an extended valuation process. Billings to these clients occur once the asset valuation processes are completed.

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.

Page 12 of 43

Property and Equipment

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



	March 31, 2019			December 31, 2018
Buildings	$	160,830		$	160,796
Equipment	128,154			126,954
Land	10,772			10,772
Purchased software	139,794			139,245
Furniture and fixtures	18,312			18,103
Leasehold improvements	20,136			18,959
Construction in progress	13,884			9,240
	491,882			484,069
Less: Accumulated depreciation	(345,129		)	(338,206		)
Property and Equipment, net	$	146,753		$	145,863

The Company recognized $7,331 and $7,122 in depreciation expense related to property and equipment for the three months ended March 31, 2019 and 2018, respectively.

Deferred Contract Costs

Deferred contract costs, which primarily consist of deferred sales commissions, were $24,145 and $24,007 as of March 31, 2019 and December 31, 2018, respectively. The Company deferred expenses related to contract costs of $1,126 and $1,816 during the three months ended March 31, 2019 and 2018, respectively. Amortization expense related to deferred contract costs were $988 and $582 during the three months ended March 31, 2019 and 2018, respectively. There was no impairment loss in relation to deferred contract costs during the three months ended March 31, 2019.

Accrued Liabilities

Accrued liabilities on the accompanying Consolidated Balance Sheets consist of:



	March 31, 2019		December 31, 2018
Accrued employee compensation	$	31,825	$	97,603
Accrued consulting, outsourcing and professional fees	33,031		31,000
Accrued sub-advisory, distribution and other asset management fees	42,616		42,583
Accrued dividend payable	—		50,761
Accrued income taxes	28,464		6,559
Other accrued liabilities	37,924		51,128
Total accrued liabilities	$	173,860	$	279,634

Note 4. 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 three months ended March 31, 2019 were consistent with those as described in our Annual Report on Form 10-K at December 31, 2018. The Company had no Level 3 financial assets at March 31, 2019 or December 31, 2018 that were required to be measured at fair value on a recurring basis. The Company's Level 3 financial liabilities at March 31, 2019 and December 31, 2018 consist entirely of the estimated contingent consideration of $12,120 resulting from an acquisition (See Note 12). 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. There were no transfers of financial assets between levels within the fair value hierarchy during the three months ended March 31, 2019.

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	March 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Equity available-for-sale securities	$	11,111	$	11,111	$	—
Fixed-income available-for-sale securities	98,713		—		98,713
Fixed-income securities owned	33,433		—		33,433
Investment funds sponsored by LSV (1)	5,339
	$	148,596	$	11,111	$	132,146



			Fair Value Measurements at the End of the Reporting Period Using
Assets	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Equity available-for-sale securities	$	10,218	$	10,218	$	—
Fixed-income available-for-sale securities	101,683		—		101,683
Fixed-income securities owned	30,892		—		30,892
Investment funds sponsored by LSV (1)	4,887
	$	147,680	$	10,218	$	132,575

(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 5).

Note 5. Marketable Securities

Investments Available for Sale

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



	At March 31, 2019
	Cost Amount		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
SEI-sponsored mutual funds	$	7,429	$	77	$	(384	)	$	7,122
Equities and other mutual funds	3,475		514		—			3,989
Debt securities	99,401		—		(688		)	98,713
	$	110,305	$	591	$	(1,072	)	$	109,824

Page 14 of 43



	At December 31, 2018
	Cost Amount		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
SEI-sponsored mutual funds	$	7,446	$	—	$	(788	)	$	6,658
Equities and other mutual funds	3,434		126		—			3,560
Debt securities	103,518		—		(1,835		)	101,683
	$	114,398	$	126	$	(2,623	)	$	111,901

Net unrealized losses at March 31, 2019 and December 31, 2018 of the Company's available-for-sale debt securities were $530 (net of income tax benefit of $158) and $1,413 (net of income tax benefit of $422), 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 $458 and gross realized losses of $182 during the three months ended March 31, 2018. Gross realized gains and losses from available-for-sale securities during the three months ended March 31, 2019 were immaterial. 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 $5,339 and $4,887 at March 31, 2019 and December 31, 2018, respectively. The Company recognized gains of $452 and losses of $500 during the three months ended March 31, 2019 and 2018, respectively, 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 $33,433 and $30,892 at March 31, 2019 and December 31, 2018, respectively. There were no material net gains or losses related to the securities during the three months ended March 31, 2019 and 2018.

Note 6. 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 aggregate amount of the Credit Facility may be increased by an additional $100,000 under certain conditions set forth in the agreement. The Company may issue up to $15,000 in letters of credit under the terms of the Credit Facility. The Company pays a periodic commission fee of 1.25 percent plus a fronting fee of 0.175 percent of the aggregate face amount of the outstanding letters of credit issued under the Credit Facility.

Page 15 of 43

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.

As of March 31, 2019, the Company had outstanding letters of credit of $13,813 under the Credit Facility. These letters of credit were issued primarily for the expansion of the Company's headquarters and are scheduled to expire during the remainder of 2019. The amount of the Credit Facility that is available for general corporate purposes as of March 31, 2019 was $286,187.

The Company was in compliance with all covenants of the Credit Facility during the three months ended March 31, 2019.

Note 7. 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 and thereafter 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 exclude the impact of stock-based compensation and are established at time of grant. 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 months ended March 31, 2019 and 2018, respectively, as follows:



	Three Months Ended March 31,
	2019			2018
Stock-based compensation expense	$	5,038		$	5,195
Less: Deferred tax benefit	(946		)	(1,103		)
Stock-based compensation expense, net of tax	$	4,092		$	4,092

As of March 31, 2019, there was approximately $62,232 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 three months ended March 31, 2019 was $9,601. The total options exercisable as of March 31, 2019 had an intrinsic value of $170,509. The total intrinsic value for options exercisable is calculated as the difference between the market value of the Company’s common stock as of March 31, 2019 and the weighted average exercise price of the options. The market value of the Company’s common stock as of March 31, 2019 was $52.25 as reported by the Nasdaq Stock Market, LLC. The weighted average exercise price of the options exercisable as of March 31, 2019 was $33.36. Total options that were outstanding as of March 31, 2019 were 15,347,000. Total options that were exercisable as of March 31, 2019 were 9,024,000.

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 1,725,000 shares at a total cost of $88,791 during the three months ended March 31, 2019, 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 March 31, 2019, the Company had approximately $127,088 of authorization remaining for the purchase of common stock under the program.

Page 16 of 43

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.

Note 8. 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, 2019	$	(31,587	)	$	(1,413	)	$	(33,000	)

Other comprehensive gain before reclassifications	3,397			797			4,194
Amounts reclassified from accumulated other comprehensive loss	—			86			86
Net current-period other comprehensive gain	3,397			883			4,280

Balance, March 31, 2019	$	(28,190	)	$	(530	)	$	(28,720	)

Note 9. 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, traditional and non-traditional investment managers worldwide and family offices in the United States; and

Investments in New Businesses – focuses on providing investment management solutions 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 months ended March 31, 2019 and 2018. 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, 2018.

The following tables highlight certain financial information about each of the Company’s business segments for the three months ended March 31, 2019 and 2018.



	Private Banks		Investment Advisors		Institutional Investors		Investment Managers		Investments In New Businesses			Total
	For the Three Months Ended March 31, 2019
Revenues	$	118,259	$	94,761	$	80,113	$	104,649	$	3,038		$	400,820
Expenses	110,962		52,502		38,754		69,066		5,940			277,224
Operating profit (loss)	$	7,297	$	42,259	$	41,359	$	35,583	$	(2,902	)	$	123,596

Page 17 of 43



	Private Banks		Investment Advisors		Institutional Investors		Investment Managers		Investments In New Businesses			Total
	For the Three Months Ended March 31, 2018
Revenues	$	122,164	$	99,192	$	85,491	$	96,855	$	1,896		$	405,598
Expenses	112,202		52,453		41,249		63,338		5,098			274,340
Operating profit (loss)	$	9,962	$	46,739	$	44,242	$	33,517	$	(3,202	)	$	131,258

A reconciliation of the total operating profit reported for the business segments to income from operations in the Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 is as follows:



	2019			2018
Total operating profit from segments	$	123,596		$	131,258
Corporate overhead expenses	(20,035		)	(14,942		)
Income from operations	$	103,561		$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$52.60	152	$8,020

10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
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
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-05-29	Shareholder Vote, Other Events, Exhibits
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

HCA	HCA Healthcare	42,650
ACGL	Arch Capital Group	13,500
MDCO	Medicines	2,350
CRTO	Criteo	1,340
EYES	Second Sight Medical Products	117
SMTX	SMTC	92
APWC	Asia Pacific Wire & Cable	31
GLGI	Greystone Logistics	0
BHAC	Barington/Hilco Acquisition	0
ACXM	Acxiom	0

EX-31.1	seic-3311910qex311.htm
EX-31.2	seic-3311910qex312.htm
EX-32	seic-3311910qex32.htm
EX-99.1	seic-earningsreleaseex9914.htm