SEI Investments Company — Q1 2013 Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, investment management, and investment operations solutions to corporations, financial institutions, financial advisors, and ultra-high-net-worth families. The filing reports unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
At March 31, 2013, SEI managed or administered $494.8 billion of client assets, including $206.2 billion under management and $288.6 billion under administration. LSV Asset Management, an unconsolidated affiliate, managed $66.3 billion.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $271.9 million | $237.9 million | 14% |
| Income from operations | $60.0 million | $48.1 million | 25% |
| Operating margin | 22.1% | 20.2% | +190 bps |
| Net income | $72.3 million | $50.2 million | 44% |
| Net income attributable to SEI | $71.9 million | $50.0 million | 44% |
| Diluted EPS | $0.41 | $0.28 | 46% |
| Cash flow from operations | $39.5 million | $39.2 million | 1% |
Revenue growth was led by asset management, administration and distribution fees, which rose to $198.6 million from $173.0 million, and information processing and software servicing fees, which rose to $64.5 million from $56.2 million. Transaction-based and trade execution fees were essentially unchanged at $8.7 million.
Expenses increased 12% to $211.8 million, reflecting higher personnel, consulting, outsourcing, facilities, and software amortization costs. Equity in earnings of unconsolidated affiliates was $27.6 million, primarily from LSV, compared with $27.3 million in the prior-year quarter.
Net income included a $22.1 million gain on the sale of SEI Asset Korea, equivalent to approximately $0.08 of diluted EPS. Excluding this unusual gain, the filing does not present a separately stated adjusted net income or adjusted EPS.
Liquidity, capital resources, and balance sheet
- Cash and cash equivalents were $452.1 million at March 31, 2013, essentially unchanged from $452.2 million at December 31, 2012.
- Free and immediately accessible cash for general corporate purposes was reported at $317.4 million as of April 24, 2013; some subsidiary and foreign cash may be restricted or less readily available.
- SEI had no borrowings under its $300 million revolving credit facility or its Canadian credit facility and was in compliance with applicable covenants.
- Total assets were $1.34 billion and total liabilities were $241.5 million at March 31, 2013.
- SEI repurchased 1.268 million shares for $36.2 million during the quarter, leaving $54.8 million of repurchase authorization.
- No cash dividends were paid during Q1 2013, compared with $26.5 million in Q1 2012; management attributed the difference to dividend payment timing.
Investing cash outflows included $6.0 million of capitalized software development, $1.7 million of property and equipment additions, and $26.7 million related to the sale of SEI Asset Korea, net of cash transferred.
Material changes versus the prior comparable period
- Assets under management and administration increased 16% to $494.8 billion, supported by market appreciation, new business, and positive client cash flows.
- Average assets under management, excluding LSV, increased 17% to $145.0 billion.
- Segment operating profit improved across Private Banks, Investment Advisors, Institutional Investors, and Investment Managers. Private Banks operating profit increased to $2.4 million from $0.5 million, while its reported total profit benefited from the SEI Asset Korea sale.
- Operating margins increased to 43% from 41% for Investment Advisors, 50% from 47% for Institutional Investors, and 35% from 34% for Investment Managers. Private Banks operating margin increased to 2% from 1%.
- Q1 2012 included $2.9 million of gains from structured investment vehicle securities; SEI sold its remaining SIV securities in November 2012 and recorded no comparable gain in Q1 2013.
- Capital expenditures declined to $1.7 million from $12.1 million, while capitalized software spending declined to $6.0 million from $9.3 million.
- The effective tax rate declined to 34.9% from 37.2%, benefiting from the retroactive reinstatement of the research and development tax credit, partly offset by additional foreign taxes on the SEI Asset Korea sale.
Outlook, unusual items, risks, and contingencies
No specific revenue, earnings, or EPS guidance is provided in the filing. Management expects operating cash flow, existing cash, and available borrowing capacity to fund operations, product investment, share repurchases, and future dividend payments.
On April 24, 2013, SEI entered into a settlement related to litigation involving Cheyne Finance LLC securities and expects to receive approximately $43.0 million after fees and expenses in the second quarter of 2013. The filing states that this settlement will be recognized in Q2 2013.
Management expects to recognize approximately $9.3 million of additional stock-based compensation expense over the remainder of 2013, beginning in Q2, because the settlement, the SEI Asset Korea gain, and expected operating earnings changed the estimated timing of stock-option vesting targets.
Material risks include dependence on capital markets and client asset levels, LSV performance, regulatory examinations and changing financial-services regulation, litigation, technology and data-security risks, third-party service-provider failures, operational processing risks, foreign currency fluctuations, and client or employee retention.
SEI and its subsidiaries face litigation involving leveraged ETFs and several Louisiana actions related to Stanford Trust Company and Stanford International Bank certificates of deposit. A Louisiana class was certified, appeals and jurisdictional motions remain pending, and the company states that it cannot reasonably estimate a potential loss.
SEI provided an unsecured guaranty of up to $45.0 million for certain LSV employee-group term-loan obligations. The guaranteed principal balance was $45.0 million as of April 24, 2013; no payment obligation had arisen, and management expected the borrowers to meet their obligations.
Important facts for investors to verify
- Reconcile reported EPS growth with the $22.1 million SEI Asset Korea gain and the expected $43.0 million Q2 litigation settlement.
- Assess the sustainability of revenue growth from market appreciation, client cash flows, and new business versus recurring fee growth.
- Monitor the additional approximately $9.3 million stock-based compensation expense expected in 2013.
- Review litigation developments, including the Louisiana Stanford-related proceedings and leveraged ETF appeal, for potential financial or reputational exposure.
- Verify the availability of cash held by subsidiaries and foreign entities and the continued absence of borrowings under the credit facilities.
- Track LSV earnings, assets under management, ownership dilution, and the company’s subsequent reduction in its LSV interest to approximately 39.3% in April 2013.