SEI Investments Company — 2012 Q2 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 globally. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods.
At June 30, 2012, SEI managed or administered approximately $424.0 billion, including $181.7 billion under management and $242.3 billion under administration. LSV Asset Management, the unconsolidated affiliate, managed approximately $54.9 billion.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Year-over-year change | Six months ended June 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $241.2 million | 1% | $479.1 million | 2% |
| Income from operations | $53.8 million | Flat | $101.9 million | (6%) |
| Net income | $49.7 million | (8%) | $100.0 million | (11%) |
| Net income attributable to SEI | $49.6 million | (8%) | $99.5 million | (11%) |
| Diluted EPS | $0.28 | (3%) | $0.56 | (5%) |
| Operating margin | 22.3% | Not clearly provided for consolidated comparison | 21.3% | Not clearly provided for consolidated comparison |
Revenue growth was led by higher asset management, administration, and distribution fees and by growth in Institutional Investors and Investment Managers. Information processing and software servicing fees increased to $57.3 million in the second quarter and $113.5 million for the first six months. Transaction-based and trade execution fees declined 22% in the quarter and 13% year to date.
Expenses increased 2% in the quarter and 4% year to date. Compensation and personnel costs rose to $80.5 million in the quarter and $159.1 million year to date, reflecting client servicing, sales activity, and infrastructure investments. The company continued developing and supporting the Global Wealth Platform, capitalizing $18.2 million of software development costs in the first six months.
Equity in earnings of LSV declined to $22.7 million in the quarter and $50.0 million year to date, decreases of 23% and 14%, respectively. SEI's LSV ownership declined from approximately 41.2% to 39.8% in April 2012, while LSV's average assets under management declined 8% year to date.
Cash flow, liquidity, debt, and capital allocation
- Cash flow from operations was $75.1 million for the first six months, down from $92.8 million in 2011, primarily due to lower earnings and working-capital changes, including higher receivables.
- Investing activities used $28.2 million, including $16.3 million of property and equipment additions and $18.2 million of capitalized software costs.
- Financing activities used $120.4 million, including $80.9 million for share repurchases and $52.6 million for dividends.
- Cash and cash equivalents were $347.5 million at June 30, 2012, compared with $421.0 million at December 31, 2011.
- SEI had no borrowings under its new $300 million five-year revolving credit facility, which expires in February 2017, and was in compliance with its covenants. The facility may be increased by up to an additional $100 million subject to conditions.
- SEI repurchased 4.098 million shares for approximately $79.9 million during the first six months and had $116.4 million of remaining repurchase authorization at June 30. The quarterly dividend was increased to $0.15 per share from $0.12 per share in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased modestly, but operating income, net income, and diluted EPS declined because expense growth exceeded revenue growth and LSV earnings decreased.
- Average consolidated assets under management increased 2% for the first six months to $183.0 billion, while assets under administration declined 5% to $237.6 billion. Total ending assets under management and administration declined 1% to $424.0 billion.
- Investment Managers was the strongest operating segment, with six-month revenue up 6% and operating profit up 6%. Private Banks, Investment Advisors, and Institutional Investors experienced lower six-month operating profit.
- Net investment gains were $3.9 million year to date versus $5.3 million in 2011. SIV securities produced a $4.0 million gain, compared with a $4.9 million gain in the prior-year period.
- The effective tax rate increased to 36.9% for the first six months from 36.0%, partly because 2011 benefited from research and development tax credits and the Domestic Production Activities Deduction.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that operating cash flow, existing cash, and available borrowing capacity should fund ongoing operations, product and equipment investments, share repurchases, and future dividends.
- SEI entered into an agreement on July 31, 2012 to sell its 56.1% interest in SEI Asset Korea. The transaction requires regulatory and customary approvals. Management expected approximately $5.0 million of U.S. deferred taxes in the third quarter and projected a potential after-tax gain of approximately $8.9 million to $20.6 million if the sale closes.
- The company faces putative class-action litigation involving leveraged ETFs and multiple Louisiana lawsuits related to Stanford Trust Company. SEI states that it has valid defenses, but the outcomes and potential losses cannot reasonably be estimated.
- Trading securities included approximately $49.4 million of Level 3 SIV securities at June 30, 2012, valued using significant unobservable inputs. Their cost was $139.2 million, indicating substantial cumulative unrealized losses and valuation uncertainty.
- Key operating risks include capital-market declines, product-development and Global Wealth Platform execution risk, technology and data-security failures, third-party service-provider risk, regulatory change, litigation, foreign-exchange fluctuations, and client or senior-management retention.
- The new credit facility includes a leverage-ratio covenant capped at 1.75 times EBITDA and restrictions affecting dividends, repurchases, acquisitions, investments, and asset sales if a default occurs.
Important facts for investors to verify
- Whether revenue growth can accelerate while personnel, sales, technology, and client-servicing costs remain elevated.
- The sustainability and market sensitivity of LSV distributions and equity-method earnings following the ownership reduction.
- The valuation, cash collections, and remaining exposure associated with Level 3 SIV securities.
- Regulatory approval, closing timing, tax cost, and final consideration for the SEI Asset Korea sale.
- Developments and potential financial exposure in the leveraged-ETF and Louisiana litigation.
- Actual free and immediately accessible cash, which management reported as approximately $227.0 million at July 31, 2012, versus consolidated cash of $347.5 million at June 30.
- Compliance with the credit facility's leverage and other covenants if earnings weaken or the company increases borrowing.