SEI Investments Company — Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides investment processing, investment management, and investment operations solutions to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. This unaudited report covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods.
As of June 30, 2014, SEI and its significant affiliates managed or administered $601.9 billion of assets, including $249.1 billion under management and $352.8 billion under administration. LSV Asset Management accounted for $82.0 billion of assets under management.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Year-over-Year Change | Six Months Ended June 30, 2014 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $318.8 million | 16% | $621.2 million | 14% |
| Income from operations | $93.6 million | 62% | $172.0 million | 46% |
| Net income attributable to SEI | $82.8 million | (1%) | $157.6 million | 1% |
| Diluted EPS | $0.48 | 2% | $0.91 | 3% |
| Operating margin | 29.4% | Up from 21.1% | 27.7% | Up from 21.6% |
| Effective tax rate | 35.7% | Up from 35.5% | 35.8% | Up from 35.2% |
Revenue growth was led by asset management, administration and distribution fees, which increased to $236.2 million in the second quarter and $461.3 million for the six-month period. Information processing and software servicing fees increased to $75.8 million and $145.0 million, respectively. Transaction-based and trade execution fees declined to $6.8 million in the quarter and $14.9 million for the six months.
Equity in earnings of unconsolidated affiliates, primarily SEI’s approximately 39.3% interest in LSV, increased 24% to $34.2 million in the quarter and 20% to $66.1 million for the six months. LSV earnings benefited from higher assets under management and performance fees.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Operating cash flow was $143.0 million for the first six months of 2014, compared with $123.3 million in 2013.
- Investing activities used $33.7 million, including $18.6 million of capital expenditures and $18.3 million of capitalized software development costs.
- Financing activities used $155.4 million, including $140.3 million for share repurchases and $74.3 million for dividends, partially offset by $51.6 million of proceeds from stock issuance.
- Cash and cash equivalents declined from $578.3 million at December 31, 2013 to $532.2 million at June 30, 2014.
- The company had no borrowings under its $300.0 million revolving credit facility, which expires in February 2017, and was in compliance with its covenants.
- Management reported $392.4 million of cash as free and immediately accessible for general corporate purposes as of July 22, 2014. Cash held by subsidiaries may be subject to operating or regulatory restrictions.
- SEI repurchased 4.261 million shares for approximately $140.6 million during the first six months. Remaining repurchase authorization was $140.5 million as of July 22, 2014.
- The quarterly dividend was $0.22 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16% in the second quarter and 14% for the first six months, primarily from market appreciation, positive client cash flows, new business, and higher assets processed.
- Operating income grew substantially because revenue growth outpaced expense growth and stock-based compensation declined materially. Six-month stock-based compensation expense fell to $5.7 million from $15.9 million.
- All four core business segments improved operating margins for the six-month period: Investment Advisors increased to 49% from 44%, Institutional Investors to 51% from 49%, Investment Managers to 36% from 34%, and Private Banks to 9% from approximately breakeven.
- Private Banks benefited from a $6.0 million non-recurring professional services fee related to a single investment-processing project, while transaction-based fees declined because of lower trading volumes.
- The company recorded a $5.6 million gain from contingent consideration related to the sale of SEI Asset Korea, compared with a $22.1 million gain in the prior-year period.
- The second quarter of 2013 included a non-recurring $43.4 million cash settlement related to Cheyne Finance litigation; no comparable amount was recorded in 2014. This caused reported net income to remain broadly flat despite strong operating improvement.
- Assets under management and administration increased 19% to $601.9 billion at June 30, 2014, compared with $507.2 billion a year earlier.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance. It expected capitalized development costs for the SEI Wealth Platform to remain at similar levels during the remainder of 2014. The company stated that operating cash flow, available borrowing capacity, and existing cash should fund operations, product and equipment investment, share repurchases, campus expansion, and dividends.
- Platform development costs capitalized during the first six months were $18.3 million. The company expects continued platform releases; related amortization increased to $18.6 million from $16.3 million.
- Capital expenditures included approximately $7.0 million for headquarters expansion, expected to be completed in the third quarter of 2014. Total expansion cost was estimated at least $11.0 million.
- SEI and regulated subsidiaries face extensive regulatory examinations and investigations. Potential remediation, enforcement actions, fines, business restrictions, registration consequences, and reputational damage could materially affect results.
- Pending litigation includes Louisiana lawsuits related to Stanford Trust Company and a Section 36(b) shareholder derivative action concerning fees charged by SEI Investments Management Corporation. The company believes it has valid defenses but cannot reasonably estimate potential losses.
- SEI guaranteed up to $45.0 million of LSV Employee Group III’s term-loan obligations. The remaining guaranteed principal was $45.0 million as of July 22, 2014; management expected the borrower to meet its obligations.
- Key business risks include capital-market declines, investment performance, LSV performance, technology and data-security failures, third-party service-provider failures, client and market consolidation, regulatory change, litigation, foreign exchange, interest-rate changes, and accounting or tax developments.
Important Facts for Investors to Verify
- Whether revenue growth and margins can be sustained after excluding the $6.0 million non-recurring professional services fee and other unusual items.
- The sensitivity of fee revenue and LSV earnings to market appreciation, client flows, performance fees, and assets under management.
- The pace and return on continued SEI Wealth Platform investment, including capitalized software and rising amortization.
- Remaining share-repurchase authorization, future dividend commitments, and the effect of ongoing repurchases on share count and EPS.
- The status and potential exposure of the Stanford-related litigation and Section 36(b) lawsuit, for which no loss estimate was provided.
- Regulatory examinations, potential remediation requirements, and any resulting financial or operational consequences.
- Availability of subsidiary cash, covenant compliance, and continued access to the unused $300.0 million credit facility.