SEI Investments Company — Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides investment processing, investment management, and investment operations solutions globally to financial institutions, advisors, institutional investors, investment managers, and high-net-worth families. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
At March 31, 2015, SEI managed or administered $648.1 billion of client assets, including $258.3 billion under management and $389.8 billion under administration. LSV Asset Management, in which SEI held an approximately 39.3% interest, managed $84.1 billion.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $325.4 million | $302.4 million | 8% |
| Income from operations | $93.1 million | $78.4 million | 19% |
| Operating margin | 28.6% | 25.9% | Improved |
| Income before taxes | $131.0 million | $116.7 million | 12% |
| Net income | $84.6 million | $74.8 million | 13% |
| Net margin | 26.0% | 24.7% | Improved |
| Diluted EPS | $0.50 | $0.43 | 16% |
| Effective tax rate | 35.4% | 35.9% | Lower |
| Operating cash flow | $77.9 million | $45.5 million | Up $32.4 million |
Revenue growth was led by asset management, administration and distribution fees, which increased to $246.8 million from $225.1 million. Information processing and software servicing fees increased to $70.7 million from $69.2 million, while transaction-based and trade execution fees declined modestly to $8.0 million from $8.1 million.
Cash and cash equivalents were $643.3 million at March 31, 2015, down from $667.4 million at December 31, 2014. Total assets were $1.522 billion and total shareholders’ equity was $1.284 billion. Total liabilities were $237.7 million. SEI had no borrowings under its $300 million credit facility and was in compliance with all covenants.
Investing activities used $10.3 million, including $7.4 million of capital expenditures and $8.0 million of capitalized software development costs. Financing activities used $85.2 million, including $67.5 million for share repurchases and $40.2 million for dividends, partially offset by $19.2 million of stock-issuance proceeds.
SEI repurchased 1.512 million shares at an average price of $43.21 per share during the quarter. Approximately $37.4 million remained available under the repurchase authorization as of April 17, 2015.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8%, primarily from higher average assets, positive client cash flows, market appreciation, new business, and higher international investment management fees.
- Average assets under management excluding LSV increased 9% to $172.5 billion, while average assets under administration increased 14% to $384.7 billion.
- Operating income increased 19%, reflecting revenue growth and operating leverage, partially offset by higher direct costs, technology-related expenses, amortization, and corporate overhead.
- Equity in earnings from unconsolidated affiliates increased 7% to $34.0 million, primarily reflecting stronger LSV earnings and performance fees.
- Corporate overhead increased to $13.4 million from $11.7 million, partly due to foreign-currency effects on non-U.S.-dollar accounts.
- Amortization increased to $10.4 million from $9.2 million, while capitalized software development declined to $8.0 million from $9.4 million.
- The Private Banks segment’s operating margin improved to 11% from 5%. Investment Advisors’ margin declined to 47% from 48%, while Institutional Investors and Investment Managers improved to 52% and 38%, respectively.
- The $2.8 million gain from the sale of SEI Asset Korea was lower than the $5.6 million gain recognized in Q1 2014.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that operating cash flow, available borrowing capacity, and existing cash are expected to fund ongoing operations, investments in products and equipment, share repurchases, and future dividends.
SEI plans to relocate its London operations to a new facility during 2015. Total improvements are estimated at at least $13.2 million, of which $1.7 million had been spent as of March 31, 2015; completion was expected in the fourth quarter of 2015.
- Key operating risks include capital-market fluctuations, investment performance, LSV performance, client and asset-flow changes, foreign-currency movements, technology and cybersecurity risks, third-party service-provider failures, and operational processing risks.
- SEI faces extensive regulatory oversight and periodic examinations. Remediation, enforcement actions, fines, restrictions, or reputational damage could materially affect results.
- Multiple lawsuits relating to Stanford Trust Company activities remain pending. SEI states that it cannot reasonably estimate potential losses for those matters.
- A shareholder derivative action alleges excessive advisory fees under Section 36(b) of the Investment Company Act; the defendants’ motion to dismiss remained pending.
- Two Irish subsidiaries face a Belgian claim seeking approximately $84 million related to life-settlement policies. The filing states that the subsidiaries believe they have valid defenses, but the outcome is uncertain.
- SEI had an unsecured guaranty related to an LSV employee group term loan. The remaining guaranteed principal was $34.0 million as of April 17, 2015; management expected the borrower to meet its obligations.
- Unrecognized tax benefits totaled $15.6 million, including interest and penalties. The company expected to recognize $4.8 million within the next twelve months, although timing and ultimate amounts remained uncertain.
- New accounting standards concerning revenue recognition and consolidation were under evaluation and were scheduled to become effective in 2017 and 2016, respectively.
Important Facts for Investors to Verify
- Confirm the sustainability of revenue growth tied to market appreciation, client cash flows, and assets under management and administration.
- Assess the recurring versus non-recurring contribution of the single professional-services project and the SEI Asset Korea gain.
- Monitor LSV earnings, distributions, performance fees, and the effect of LSV on consolidated profitability and cash flow.
- Review the ongoing development, capitalization, and amortization profile of the SEI Wealth Platform.
- Evaluate cash deployment among dividends, repurchases, technology investment, and the $300 million undrawn credit facility.
- Track regulatory examinations, the Stanford-related litigation, the Section 36(b) action, and the approximately $84 million Belgian claim, none of which had a clearly estimable ultimate loss in the filing.
- Verify the effect of foreign exchange movements and any changes in tax-credit availability on future margins and earnings.